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I AGREE
20 May 2016
London, 20 May 2016 -- Moody's Investors Service, ("Moody's") has
today affirmed the Ba1 corporate family rating (CFR) of Deutsche Lufthansa
Aktiengesellschaft (Lufthansa), the Ba1-PD probability of
default rating (PDR), the NP short term rating, the (P)Ba1/(P)NP
senior unsecured rating of the company's MTN programme and the Ba1
(LGD4, 57%) rating of the senior unsecured notes.
The outlook on all ratings remains positive.
"We recognise Lufthansa's material earnings improvement in 2015,
and expect a further gradual increase in its operating profit this year,"
says Sven Reinke, a Moody's Vice President - Senior Credit
Officer and lead analyst for Lufthansa. "However, a ratings
upgrade requires further evidence of a sustainable improvement of Lufthansa's
financial profile alongside progress towards a successful conclusion of
the negotiations with key stakeholders such as the pilot union Vereinigung
Cockpit."
RATINGS RATIONALE
Today's rating action reflects improvements to Lufthansa's
key credit metrics in 2015 and Q1 2016, driven by a material improvement
in EBIT generation of EUR1,676 million in 2015 from EUR1,000
million in 2014, and a reduction in seasonal loss in Q1 2016 to
EUR49 million from an EBIT loss of EUR144 million in Q1 2015. Lufthansa's
Moody's-adjusted gross leverage improved to 4.0x in Q1 2016,
from 5.6x at FYE2014 and its retained cash flow/net debt ratio
increased to 27.8% in Q1 2016 from 18.9% at
FYE2014. The company's leverage is close to the guidance
for a Baa3 rating but further improvements are needed to consider Lufthansa's
financial profile sufficiently strong for an investment grade rating.
Lufthansa's credit metrics have improved despite strike-related
costs of EUR231 million in FY2015, which the rating agency does
not adjust for, as well as slightly higher adjusted debt.
A key driver for Lufthansa's adjusted debt is the large pension
deficit, which has increased from EUR4.7 billion at the end
of 2013 to EUR6.6 billion at the end of 2015 despite cash injections
into the pension fund of EUR1,458 million in total over these two
years. Moody's notes that the magnitude of Lufthansa's
pension deficit is strongly correlated to the material decline in the
discount rates.
Lufthansa made material changes to its point-to-point short-haul
strategy to improve its cost competitiveness in a market segment where
it faces challenges from successful low-cost airlines such as EasyJet
Plc (Baa1 stable) and Ryanair (not rated). In 2013 and 2014,
Lufthansa migrated its point-to-point short haul operations
to Germanwings, which had a lower cost base than the traditional
Lufthansa airline. However, it continued to face a cost disadvantage
compared to its low cost rivals, partially due to its pilots'
remuneration, which was at a similar level as for Lufthansa pilots.
In autumn 2015, the company started to replace Germanwings with
Eurowings which has a more competitive cost base as the employees are
not part of the Lufthansa group-wide labour agreement. In
addition, by 2017 Eurowings will have a homogenous short-haul
fleet of Airbus 320 aircraft, resulting in a cost base comparable
to other low-cost airlines.
The company continues to address its cost disadvantage in other areas
as well. For example, Lufthansa and the union ver.di
agreed in November 2015 to the gradual phase-out of the defined
benefit pension scheme. One key obstacle remains the ongoing dispute
with key stakeholders such as the pilots which has so far prevented Lufthansa
from achieving more sustainable progress towards its goal of becoming
more cost competitive. Further developments in Lufthansa's
rating trajectory will depend on the firm's ability to address its
cost structure, which remains driven by its former status as a state-owned
company. Moody's notes that other legacy carriers such as
Iberia (not rated) and British Airways, Plc (Baa3 stable) have to
date improved their cost competitiveness at a faster pace.
For FY2016, Lufthansa targets an adjusted EBIT of slightly above
the EUR1,817 million achieved in 2015. Significantly lower
fuel costs, which the company currently estimates to be EUR1 billion
below the EUR5.8 billion level of last year, will be largely
offset by yield pressure due to the pass-on of lower fuel prices
as well as the planned growth of Eurowings, which has lower yields.
However, Moody's notes that the forecast excludes any potential
strike-related costs which cost the company a total of EUR463 million
in 2014 and 2015 -- strike cost could materially impact Lufthansa's
operating performance in 2016 as well.
Lufthansa's Ba1 ratings also reflect its leading position in the
European airline sector, its diversified route network, the
diversity of its business segments and its solid liquidity position.
In particular, Lufthansa's maintenance and catering segments
-- which generate the majority of their revenues from third party
customers - provide diversification to the group, which distinguishes
it from other airlines. These segments partially mitigate the exposure
to the more volatile passenger airlines and logistics (cargo) segments.
However, the rating also reflects the exposure to external shock
events that are characteristic for the passenger airlines industry.
Moody's considers that Lufthansa has strong liquidity, with a balance
of cash and equivalents of EUR3.4 billion, undrawn committed
short-term credit lines of EUR780 million and short-term
debt of EUR1,3 billion as at the end of Q1 2016. Moody's
notes that Lufthansa retains a minimum liquidity target of EUR2.3
billion.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive rating outlook reflects improved credit metrics in 2015,
improved operating performance in Q1 2016 and Moody's current expectation
that Lufthansa over the next 12-18 months will be able to continue
to grow its earnings thereby improving Moody's Adjusted Debt/EBITDA
metric to below 4.0x. Key drivers for the anticipated improvement
are lower fuel costs and the cost benefits of the transformation of the
point-to-point short-haul traffic.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure could be exerted on the rating if Lufthansa continues
to improve its operating profit resulting in a stronger financial profile
on a sustainable basis. Quantitatively, for positive pressure
on the rating, we would expect to see:
1) gross adjusted leverage at 4.0x or below; and
2) a retained cash flow (RCF)/net debt metric of at least 25%
A successful conclusion of the negotiations with key stakeholders such
as the pilot union leading to an improving cost competitiveness would
also support a higher rating.
Although not expected in light of today's rating and outlook affirmation,
the rating could come under negative pressure if gross adjusted leverage
were to trend back to above 5.0x on a continued basis. Given
the company's current strategy, Moody's believes that
a deterioration in metrics would likely be the result of external competition
or significantly higher fuel costs that cannot be fully forwarded to passengers.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Passenger Airlines
published in May 2012. Please see the Ratings Methodologies page
on www.moodys.com for a copy of this methodology.
Deutsche Lufthansa Aktiengesellschaft, headquartered in Cologne,
Germany, is the leading European airline in terms of revenues.
In FY2015 it reported revenues and an EBIT of EUR32.1 billion and
EUR1,676, respectively.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
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credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
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structure and terms have not changed prior to the assignment of the definitive
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information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
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Exceptions to this approach exist for the following disclosures,
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to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
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review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sven Reinke
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Patrick Mispagel
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms Lufthansa's Ba1 rating with positive outlook
No Related Data.
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