April 2, 2015 / 3:31 PM / 5 years ago

Germanwings crash another burden in Lufthansa's financial battle

* Analysts cut forecasts for 2015 earnings

* Lufthansa reduces investments in 2016, 2017

* Germanwings crash cuts short talks on hybrid bond

* Ticket prices set for a further fall this year

By Victoria Bryan

BERLIN, April 2 (Reuters) - Lufthansa’s Germanwings crash intensifies the airline’s battle to keep up with rivals and find the money to invest in its planes, but is unlikely to bring about its demise in the way that Lockerbie did for Pan Am.

Lufthansa is fighting stiff competition from low cost and Middle Eastern airlines that have eaten away at its market share both in Europe and on long-haul flights. The airline is trying to cut costs to offer lower ticket prices without sacrificing profits, but that has prompted its pilots to go on strike.

On Thursday, brokerage Raymond James cut its estimate for Lufthansa’s 2015 earnings before interest and tax to 1.3 billion euros ($1.42 billion) from 1.5 billion, saying it expected strikes, the Germanwings crash and further competition from low cost carriers to hurt profits this year.

It’s one of many industry experts to do so: In the last 30 days, 15 out of 29 analysts have revised earnings per share estimates down by an average of 10.3 pct, according to StarMine.

Lufthansa is also struggling with big debts. In 2014 the airline - one of few worldwide with an investment grade rating from Standard & Poor’s - saw its net debt double and free cash flow turn negative as a result of new aircraft costs and rising pension liabilities.

In order to improve its finances, Lufthansa exchanged a bond convertible into JetBlue shares ahead of time and will cut investments for 2016 and 2017, setting aside 2.5 billion euros for each year, compared with 2.9 billion for 2015.

Investors appear to have no immediate fears about its ability to service debt: Lufthansa’s bonds are still trading at tight levels.

The company’s 750 million euro 6.5 percent 2016 bond is bid at a cash price of 107.3 to yield just 0.57 percent, according to Tradeweb, while is longer-dated 500 million euro 1.125 percent 2019 bond meanwhile is bid at 100.3 to yield 1.1 percent.

But plans for a debut hybrid bond to improve its balance sheet and defend its investment grade rating had to be shelved once news of the crash came in and talks with investors on the subject ended early.

“It’s certainly not going to emerge in the near term,” one banker close to the deal told Reuters.

Lufthansa shares dropped 3 percent on Thursday, hitting their lowest level in over four months after a downgrade from Barclays due to what its analysts see as heightened uncertainties for the airline.


U.S. carrier Pan Am was left reeling from the Lockerbie disaster in 1988, and went bankrupt in 1991 when the first Gulf War pushed fuel prices higher.

Two successive disasters for Malaysia Airlines - the loss of flight MH370 en route to China and then the destruction of flight MH17 over Ukraine - resulted in a collapse in passenger numbers and average fare yields that pushed it to its worst quarterly loss last year since late 2011. The airline has since been taken private.

Lufthansa and Germanwings say the crash has not had an impact on booking numbers and many analysts expect only a brief short-term hit and then demand to recover quickly.

More concerning, though, are the airline’s ongoing problems with yields - a measure of ticket prices - that dropped 3.1 percent in 2014, equating to lost revenue of around 700 million euros. Chief Financial Officer Simone Menne expects another “significant” fall in 2015, though she said this would not be more than around 4-5 percent.

Despite this, the airline plans to offer 6 percent more seats on long-haul routes this year, spread across all regions. That has taken some analysts by surprise, who say that Lufthansa needs to be more disciplined with how many seats - or how much capacity - it puts into the market.

Europe’s largest airline by revenues is due to take delivery of 263 aircraft with a list price of 37 billion euros by 2025, though it will have negotiated discounts on the official price.

“The core problem for Lufthansa - that underlying yields are falling faster than ex-fuel costs, with further inflationary pressures looming, and a management that is reluctant to cut capacity - remains challenging,” the Barclays analysts wrote. ($1 = 0.9185 euros) (Additional reporting by Robert Smith, Helene Durand and Tricia Wright; Editing by Sophie Walker)

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