Deutsche Lufthansa AG

Transcription

1 Primary Credit Analyst: Olli Rouhiainen, London (44) ; Secondary Contact: Izabela Listowska, Frankfurt (49) ; Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Business Risk Financial Risk Liquidity Other Credit Considerations Ratings Score Snapshot Reconciliation Related Criteria And Research MAY 5,

2 Business Risk: SATISFACTORY Vulnerable Excellent CORPORATE CREDIT RATING bbb- bbb- bbb- Financial Risk: SIGNIFICANT BBB-/Stable/A-3 Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Satisfactory Strong market position in Frankfurt, Munich, Zurich, and Vienna. Higher cost base than some peers. Diversity of operations outside the passenger airline business offering more stability than if it were solely an airline. Good exposure to long-haul and premium traffic. Exposure to the volatile airline industry. Financial Risk: Significant Significant financial risk profile with our view that the company will be able to improve and maintain adjusted funds from operations (FFO) to debt of about 23%. Significant and volatile pension obligations that can lead to material differences in financial ratios if key assumptions around pensions change. The pension volatility is offset by Lufthansa's credit-supportive actions, including stopping dividend payments for 2014, repaying debt, and the planned hybrid capital issuance. MAY 5,

3 Outlook: Stable The stable outlook reflects our view that Deutsche Lufthansa AG will be able to maintain its weighted-average Standard & Poor's-adjusted FFO to debt at about 23% in However, in our view the company has limited headroom under the rating for further negative developments at this time. Downside scenario We could lower the ratings if weighted-average adjusted FFO to debt was to remain below 23% in 2016 or if we saw weakness in operating performance affecting our view of the company's competitive position. We could consider operating performance to be weak if revenues decline by more than 3% or if the company's EBITDA margin does not improve despite the lower oil prices in Upside scenario An upgrade is currently unlikely due to the pressure on Lufthansa's financial risk profile from its pension liabilities. We could take a positive rating action if these liabilities fell, and the weighted-average adjusted FFO-to-debt ratio increased to more than 30%. In our view, a higher rating as a result of operating performance alone is unlikely. Standard & Poor's Base-Case Scenario Our base-case scenario for Lufthansa reflects our economic forecast for GDP growth in the eurozone (European Economic and Monetary Union) of 1.5% in 2015 and 1.7% in For more information, see "Credit Conditions: The Eurozone Is Looking Up, For Now," published March 31, 2015, on RatingsDirect. Assumptions We anticipate that Lufthansa's capacity as measured in available seat kilometers (ASK) will increase by 1%-2% in 2015 and 2%-3% in Ticket sales as measured by revenue per passenger kilometers (RPK) will increase in the same range as capacity. Average ticket prices will decrease by 2%-4% in 2015 and be flat to negative in Oil prices will be about $55/barrel in 2015 and $65/barrel in 2016 (see "Standard & Poor's Revises Its Crude Oil And Natural Gas Price & Recovery Assumptions," published March 26, 2015). Nonfuel costs per ASK to increase by up to 1% in 2015 and grow by 1%-2% in Capital expenditure (capex) of about 3 billion in 2015 and about 2.5 billion in Key Metrics 2014A 2015F 2016F Return on Capital 9.3% 9-10% 9-11% FFO to debt 19.7% 22-23% 23-25% Debt to EBITDA 4.0x x *Fully Standard & Poor's-adjusted. Key adjustments for 2014 include adding 3.0 billion of operating leases and 5.5 billion pension obligations to debt, and netting off approximately 2.1 billion in surplus cash. Major adjustments to EBITDA include 385 million added due to operating leases, 137 million added as dividends from equity investments, and 180 million of fair value changes. A--Actual. F--Forecast. MAY 5,

4 Business Risk: Satisfactory The "satisfactory" business risk profile reflects our opinion of Lufthansa's "excellent" competitive position, driven by its strong market positions, the diversity in its operations, and its good exposure to high-yield premium traffic. Our view of Lufthansa's competitive position reflects its scale as one of the largest global network carriers and one of two leading airline groups in Europe. It has strong market positions at its Frankfurt, Zurich, Vienna, and Munich hubs and offers one of the world's largest route networks. The group has balanced exposure to high-yielding, premium long-haul traffic across its route portfolio. It also has a leading domestic market position in Germany, and its regional brands are well-established. Lufthansa's good geographic diversification reduces its dependency on local economies and forms a buffer against localized event risks, in our opinion. Furthermore, Lufthansa's leading market position in aircraft MRO (maintenance, repair, and overhaul) and airline catering businesses adds stability to group earnings through the lower and different-stage cyclicality of these operations. We consider that these strengths are partly offset by Lufthansa's cost position, which we view as a competitive disadvantage, and which could lead to changes in our analysis if this is not addressed. Lufthansa faces difficulties reducing staff costs, with the pilots union likely to continue striking during In our view, the company's competitive position is also affected by the high-risk, cyclical airline industry, which is capital-intensive and subject to volatile fuel costs. MAY 5,

5 S&P Base-Case Operating Scenario In our view, Lufthansa's capacity (measured in available seat kilometers) will increase by 1%-2% in 2015 and 2%-3% in Our 2015 forecast aligns with management plans but includes the effect of strikes we expect the company to face. The main capacity growth driver will be more seats per aircraft, helped by upgrading seats on the short-haul fleet and the introduction of new aircraft with more seats than the planes they have replaced. Ticket sales as measured by revenue per passenger kilometers will increase in the same range as capacity under our base case, although sales may increase slightly faster given the company's focus on increasing load factors. We believe that Lufthansa will focus on selling the new capacity, and will be willing to allow lower average ticket prices to sell seats. Although our base case is for economic conditions to improve, we expect that average ticket prices will reduce by 2%-4% due to the competitive environment, with several airlines adding significant capacity to the markets served by Lufthansa and lower fuel costs, part of the savings from which we believe will be passed onto the consumers. We also expect flat to negative growth in ticket prices in 2016 as we do not expect significant growth in oil prices for that year. Oil prices of about $55/barrel in 2015 and $65/barrel in 2016 (see "Standard & Poor's Revises Its Crude Oil And Natural Gas Price & Recovery Assumptions," published March 26, 2015). This and our expectation of a more-efficient use of the fleet we expect Lufthansa's total fuel bill to reduce by 15%-18%. Nonfuel costs per ASK to increase between 0%-1% in 2015, as the increased number of seats per aircraft and the benefits of Lufthansa's efficiency program are offset by additional costs linked to strikes and a small increase in operating costs. In 2016, we expect the improving economic environment to lead to increased pressures on costs, and we anticipate nonfuel costs per ASK to increase by 1%-2%. Lufthansa's capex for is mainly related to its fleet renewal program. During this period, Lufthansa will take delivery of 50 new aircraft, including 17 A320s and 10 B747-8s. Peer comparison We view the other full-service airlines as Lufthansa's main peers. In terms of revenues, Lufthansa is one of the largest airline companies we rate globally. We consider the company to have a better competitive position than many of its peers due to its geographic and business diversification. While Lufthansa's profitability is trailing some of its peers due to its higher cost base, we also believe that the EBITDA margin is held back by Lufthansa's other less asset-intensive divisions such as airline catering and MRO activities. In terms of return on capital, Lufthansa compares well with its peers. Table 1 Deutsche Lufthansa AG -- Peer Comparison Industry Sector: Air Transport Deutsche Lufthansa AG British Airways PLC Delta Air Lines Inc. Turk Hava Yollari A.O. Rating as of April 30, 2015 BBB-/Stable/A-3 BB/Stable/-- BB/Positive/-- BB+/Negative/-- --Fiscal year ended Dec. 31, (Mil. ) Revenues 30, , , ,146.8 EBITDA 3, , , , MAY 5,

6 Table 1 Deutsche Lufthansa AG -- Peer Comparison (cont.) Funds from operations (FFO) 2, , , ,180.3 Net income from cont. oper Cash flow from operations 2, , , Capital expenditures 2, , , Free operating cash flow (418.5) , Discretionary cash flow (640.5) , Cash and short-term investments , Debt 12, , , ,329.5 Equity 4, , , ,263.8 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash int. cov. (X) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) (3.4) Discretionary cash flow/debt (%) (5.2) Financial Risk: Significant The "significant" financial risk profile reflects our view that the company will proactively manage its debt to maintain adjusted FFO to debt above 20%. We have noted that Lufthansa has taken several creditor-friendly actions in 2015 in response to the higher pension obligations caused by the change in the discount rate for the pension liabilities. The positive actions include stopping dividend payments, repaying the JetBlue convertible bond issue early and the planned hybrid debt issuance. These action partly mitigate the increase in debt-like pension obligations and help to support financial ratios. We continue to view the pension obligation as the main weakness, which is likely to cause further impact to Lufthansa's financial risk profile. We see potential for the pension obligation to decrease in importance over time if Lufthansa is able to renegotiate its pension arrangement with its staff. This would be an important factor for ratio stability. Our current view is that Lufthansa's pension obligations could increase further over the next two years, reflecting our projections that the 10-year government bond yield could reduce from the rates in December 2014, mainly due to the monetary stimulus taken by the European Central Bank. Financial summary MAY 5,

7 Table 2 Deutsche Lufthansa AG -- Financial Summary Industry Sector: Air Transport --Fiscal year ended Dec Rating history BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3 (Mil. ) Revenues 30, , , , ,459.0 EBITDA 3, , , , ,273.5 Funds from operations (FFO) 2, , , , ,455.8 EBIT 1, , , , ,517.4 Net income from continuing operations ,283.0 Cash flow from operations 2, , , , ,675.8 Capital expenditures 2, , , , ,334.0 Free operating cash flow (418.5) 1, , ,341.8 Discretionary cash flow (640.5) 1, ,323.8 Cash and short-term investments , , ,345.0 Debt 12, , , , ,424.2 Equity 4, , , , ,512.0 Adjusted ratios Annual revenue growth (%) (0.1) (0.4) EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash int. cov. (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) (3.4) Discretionary cash flow/debt (%) (5.2) Liquidity: Strong We view Lufthansa's liquidity as "strong" under our criteria. We project that the company's sources-to-uses ratio will exceed 1.5x in 2015 and 1x in MAY 5,

8 Principal Liquidity Sources Company reported cash of 2.7 billion; 755 million of committed credit line availability with maturity beyond 12 months; and About 1.9 billion of cash flow from operations under our base case scenario over the next 12 months. Principal Liquidity Uses 3.0 billion of capex; and 750 million of debt repayments. Other Credit Considerations No modifiers affect the rating. Ratings Score Snapshot Corporate Credit Rating BBB-/Stable/A-3 Business risk: Satisfactory Country risk: Low Industry risk: High Competitive position: Excellent Financial risk: Significant Cash flow/leverage: Significant Anchor: bbb- Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Neutral (no impact) Reconciliation MAY 5,

9 Table 3 Reconciliation Of Deutsche Lufthansa AG Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. ) Deutsche Lufthansa AG reported amounts Debt Shareholders' equity EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Capital expenditures Reported 5, , , ,859 Standard & Poor's adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) (242.0) (156.0) Operating leases 2, Postretirement benefit obligations/deferred compensation 5, (46) (46.0) (238.5) Surplus cash (2,053.5) Capitalized interest (27.0) (27.0) (27) Dividends received from equity investments Non-operating income (expense) Reclassification of interest and dividend cash flows Noncontrolling interest/minority interest Debt - Derivatives (87.0) EBITDA - Gain/(Loss) on disposals of PP&E EBITDA - Fair value changes of contingent consideration EBITDA - Valuation gains/(losses) EBITDA - Other (8) (8.0) -- (8.0) Total adjustments 6, (27) Standard & Poor's adjusted amounts Debt Equity EBITDA EBIT Interest expense Funds from operations Cash flow from operations Capital expenditures Adjusted 12, ,035 3,079 1, , , ,832 PP&E--Property, plant, and equipment. MAY 5,

10 Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Transportation Cyclical Industry, Feb. 12, 2014 Group Rating Methodology, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, Corporate Criteria: Rating Each Issue, April 15, 2008 Business And Financial Risk Matrix Business Risk Profile Financial Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of May 5, 2015) Deutsche Lufthansa AG Corporate Credit Rating Junior Subordinated Senior Unsecured Corporate Credit Ratings History 30-Nov Aug Jun-2009 BBB-/Stable/A-3 BB Weak bb+ bb+ bb bb- b+ b/b- BBB- BBB-/Stable/A-3 BBB-/Negative/A-3 BBB/Watch Neg/A-3 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; [email protected] MAY 5,

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