Lufthansa Plans Far-Reaching Restructuring to Repay Bailout

(Bloomberg) -- Deutsche Lufthansa AG signaled sweeping job cuts and said it plans to sell off assets to help repay a 9 billion-euro ($10 billion) coronavirus bailout from the German government.

Europe's biggest airline will slash employee expenses and look at spin-offs to bolster cash flow as the coronavirus crisis depresses revenue, it said in a statement Wednesday. The group reported a 2.1 billion-euro net loss in the first quarter, fed by fuel-hedging expenses that accounted for almost half the total.

“In view of the very slow recovery in demand, we must now take far-reaching restructuring measures to counteract this,” Chief Executive Officer Carsten Spohr said in the release.

The pledge to target labor costs is likely to lead to a struggle with Germany's powerful unions, which prior to the pandemic used pilot and cabin-crew strikes to thwart efforts to trim expenses. While other European carriers are also cutting back, Lufthansa's situation may be complicated by the state's pending 20% holding in the airline. The deal will bring government representatives onto its board.

Lufthansa shares were up 5.6% as of 4:49 p.m. in Frankfurt. The stock has fallen around 39% since the start of the year.

Labor Battle

Lufthansa wouldn't be the first German company to run up against labor resistance as it tries to pare costs. Industrial conglomerate Thyssenkrupp AG -- once a symbol for German engineering prowess -- is selling off or closing entire divisions after years of failed attempts to put the business on a sustainable footing. If Spohr's cost-cutting drive falls short, he won't be able to pay down debt and dislodge the state as a shareholder.

Spohr said that Lufthansa's eventual job losses could exceed 10,000 as the airline grapples with permanently lower demand for business travel once the crisis lifts. Across Europe and the Middle East, more than 60,000 airline jobs are poised for elimination.

“The scale of the restructuring is immense, and agreement with unions on drastic reductions in staff numbers, wages or both will be difficult to achieve,” said Daniel Roeska, an analyst with Sanford C Bernstein.

Unit Sales

Spohr's bid to sell non-core units won't be easy either, judging by Lufthansa's past spin-off attempts. A push to divest its LSG Sky Chefs catering arm met with repeated delays before an agreement was reached to sell the European division to Gate Group Holding AG. Lufthansa earlier this year abandoned an auction process for the international unit.

The airline group has looked at a partial listing of its Lufthansa Technik aircraft maintenance and refit business, people familiar with the matter said previously. While a listing of the unit would give Lufthansa funds to pay down debt, unshackling the division could take years and would deprive the airline group of a reliable income stream. Technik had a pre-crisis enterprise value of 7.5 billion euros, according to Bloomberg Intelligence analysts.

Speaking on a press call Wednesday, Spohr said the company would look at a minority listing of Technik, but added the depressed market meant it wasn't the right time to launch a spin-off.

Cuts Elsewhere

The company set out more precise cuts for its foreign airline units, where labor-protection laws are less stringent than in Germany. Austrian Airlines will see staff costs pared by 20%, with Brussels Airlines suffering a 25% reduction in the workforce and a 30% cut to its fleet. Spohr said he's meeting this week with Austrian Chancellor Sebastian Kurz to finalize a state-aid package.

Lufthansa has said its liquidity position is becoming “urgent,” and while the company didn't give details, Spohr said it had enough cash to last until a June 25 shareholder vote on the bailout. The deal will dilute the holdings of current investors, though they're expected to back it rather than risk insolvency.

Airlines worldwide are reeling as the Covid-19 pandemic brings decades of travel growth to a shuddering halt. Industry executives are cutting back the workforce given demand could take several years to return to previous levels.

Biggest Bailout

Lufthansa, previously regarded as among the most stable and successful airlines, is negotiating a bailout that's the biggest for the industry so far. The deal with Germany will weigh on the carrier, with limits on how many planes it can purchase and a requirement that it give up lucrative landing slots in Munich and Frankfurt.

The adjusted loss before interest and taxes widened to 1.22 billion euros from 336 million euros a year earlier. The imposition of travel lockdowns from mid-February led to an 18% drop in sales, with fuel-hedging losses also hurting results.

The picture will be far worse in the current quarter, during which almost all of the carrier's 760 planes have been grounded. Spohr said it's impossible to provide full-year guidance, beyond saying the result will be significantly worse.