Lufthansa Group Survival Depends On State Aid

Yesterday, European airline conglomerate Lufthansa Group published its preliminary results for the first quarter, also providing its outlook on “liquidity development”. The results show a drastic decrease in the airline group’s revenues. Thus, it does not expect to be able to cover its capital requirements and is looking to governments of its airline’s home countries for assistance.

Lufthansa tails getty images
Lufthansa is the main airline in the Lufthansa Group. However, other airlines such as SWISS, Austrian and Brussels Airlines are part of the group. Photo: Getty Images

A bleak situation

The release begins by explaining that its current situation is the result of “travel restrictions implemented as a consequence of the global spread of the coronavirus”. The result has been seen significant impact on the Lufthansa Group’s earnings in the first quarter of 2020.

Here are the main numbers released by the group:

  • In the first quarter, group revenues fell by 18 percent to 6.4 billion euros
  • The previous year’s first quarter saw a revenue of 7.8 billion euros
  • In March alone, revenues declined by almost 1.4 billion euros or 47 percent.
Lufthansa, Coronavirus, Airbus A380
Lufthansa will be retiring its Airbus A380 fleet far earlier than it initially planned to. Photo: Getty Images

The airline group also notes that it has been negatively impacted by fuel hedges. Airlines routinely engage in the practice of fuel hedging, negotiating and securing a future price for their fuel to protect against sharp spikes in prices. However, since the pandemic emerged, we’ve seen prices fall to an 18-year low.

Part of this has been the result of an oil price war between Russia and Saudi Arabia, both of which refused to reduce production amid the global decline in air travel and other fossil-fuel-consuming activities. An OPEC deal has since been arranged to cut production. However, this has done little to improve the situation.

Intensive negotiations with governments

Lufthansa Group says it still has existing multibillion-euro liabilities. These are due to “trade payables and refunds of canceled tickets as well as upcoming repayments of financial liabilities.”

“The Group does not expect to be able to cover the resulting capital requirements with further borrowings on the market. The Group is therefore in intensive negotiations with the governments of its home countries regarding various financing instruments to sustainably secure the Group’s solvency in the near future.”

Looking at the airlines that are part of the Lufthansa Group, we can see that the “governments of its home countries” refers to those of Austria, Germany, Switzerland, and Belgium. Given the fact that the aviation industry is responsible for employing thousands in each country, it is in each nation’s best interest to ensure Lufthansa Group’s survival.

The press release adds that its Management Board is confident that the talks will lead to a successful conclusion.

Lufthansa group
The Lufthansa Group is made up of a number of European airlines. Photo: Lufthansa

Conclusion

Lufthansa Group is not alone in being dependent on government assistance. Airlines of the United States have been supported through the CARES Act. This will provide $29 billion in loans and loan guarantees for air carriers as well as $32 billion in payroll protection grants for air carriers and their contractors.

The current situation highlights the role of governments in ensuring the survival of crucial businesses during unforeseen circumstances and catastrophes.

Do you think Lufthansa Group will receive what it needs from the governments of its airlines? Let us know in the comments.

 

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