S&P Lufthansa analysis, 5. May 2015

Transcription

Deutsche Lufthansa AG
Primary Credit Analyst:
Olli Rouhiainen, London (44) 20-7176-3769; [email protected]
Secondary Contact:
Izabela Listowska, Frankfurt (49) 69-33-999-127; [email protected]
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
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
MAY 5, 2015 1
THIS WAS PREPARED EXCLUSIVELY FOR USER KATE MADUREIRA.
NOT FOR REDISTRIBUTION UNLESS OTHERWISE PERMITTED.
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Business Risk: SATISFACTORY
CORPORATE CREDIT RATING
Vulnerable
Excellent
bbb-
bbb-
bbbBBB-/Stable/A-3
Financial Risk: SIGNIFICANT
Highly leveraged
Minimal
Anchor
Modifiers
Group/Gov't
Rationale
Business Risk: Satisfactory
Financial Risk: Significant
• 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.
• 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.
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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 2015-2016. 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 2015.
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 2016. 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 2016.
• 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 2016.
• 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 2016.
• Capital expenditure (capex) of about €3 billion in
2015 and about €2.5 billion in 2016.
Key Metrics
Return on Capital
FFO to debt
Debt to EBITDA
2014A
2015F
2016F
9.3%
9-10%
9-11%
19.7%
22-23% 23-25%
4.0x 3.5-4.0x
3.0-4.0
*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.
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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 2015.
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.
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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 2016. 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 2015-2016 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
Rating as of April 30, 2015
BBB-/Stable/A-3
British Airways PLC Delta Air Lines Inc. Turk Hava Yollari A.O.
BB/Stable/--
BB/Positive/--
BB+/Negative/--
--Fiscal year ended Dec. 31, 2014-(Mil. €)
Revenues
30,011.0
15,098.8
33,349.8
9,146.8
EBITDA
3,079.0
2,579.4
5,401.3
1,339.6
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Table 1
Deutsche Lufthansa AG -- Peer Comparison (cont.)
Funds from operations (FFO)
Net income from cont. oper.
2,423.5
2,018.4
3,729.4
1,180.3
55.0
883.8
544.5
698.2
Cash flow from operations
2,413.5
2,216.8
5,035.0
983.6
Capital expenditures
2,832.0
1,922.3
1,831.0
389.2
Free operating cash flow
(418.5)
294.5
3,203.9
594.5
Discretionary cash flow
(640.5)
294.5
2,996.5
594.5
684.5
812.7
1,652.5
149.1
12,299.8
5,575.5
22,550.3
5,329.5
4,035.0
3,116.3
7,281.9
3,263.8
EBITDA margin (%)
10.3
17.1
16.4
14.8
Return on capital (%)
9.3
16.0
9.8
8.4
EBITDA interest coverage (x)
4.6
7.6
3.5
7.1
FFO cash int. cov. (X)
7.6
15.9
10.9
10.9
Debt/EBITDA (x)
4.0
2.2
4.1
3.9
FFO/debt (%)
19.7
36.3
16.8
22.3
Cash flow from operations/debt (%)
19.6
39.8
22.6
18.6
Free operating cash flow/debt (%)
(3.4)
5.3
14.5
11.3
Discretionary cash flow/debt (%)
(5.2)
5.3
13.6
11.3
Cash and short-term investments
Debt
Equity
Adjusted ratios
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, 2015 6
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Table 2
Deutsche Lufthansa AG -- Financial Summary
Industry Sector: Air Transport
--Fiscal year ended Dec. 31-2014
Rating history
2013
2012
2011
2010
BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3 BBB-/Stable/A-3
(Mil. €)
Revenues
30,011.0
30,028.0
30,135.0
28,734.0
26,459.0
EBITDA
3,079.0
3,080.0
2,991.5
3,167.5
3,273.5
Funds from operations (FFO)
2,423.5
2,264.2
2,326.4
2,516.9
2,455.8
EBIT
1,505.0
1,318.7
1,113.7
1,335.4
1,517.4
55.0
313.0
954.0
272.0
1,283.0
Cash flow from operations
2,413.5
3,535.2
3,466.4
3,052.9
3,675.8
Capital expenditures
2,832.0
2,490.0
2,465.0
2,524.0
2,334.0
Free operating cash flow
(418.5)
1,045.2
1,001.4
528.9
1,341.8
Discretionary cash flow
(640.5)
1,031.2
870.4
232.9
1,323.8
Net income from continuing operations
Cash and short-term investments
684.5
1,174.0
1,241.5
999.5
1,345.0
12,299.8
9,415.7
10,965.5
9,834.6
9,424.2
4,035.0
6,110.0
4,494.0
6,101.5
7,512.0
Annual revenue growth (%)
(0.1)
(0.4)
4.9
8.6
18.7
EBITDA margin (%)
10.3
10.3
9.9
11.0
12.4
Return on capital (%)
9.3
8.4
7.0
7.9
9.3
EBITDA interest coverage (x)
4.6
4.3
4.1
4.7
4.6
FFO cash int. cov. (x)
7.6
6.7
6.6
7.0
7.0
Debt/EBITDA (x)
4.0
3.1
3.7
3.1
2.9
19.7
24.0
21.2
25.6
26.1
Cash flow from operations/debt (%)
19.6
37.5
31.6
31.0
39.0
Free operating cash flow/debt (%)
(3.4)
11.1
9.1
5.4
14.2
Discretionary cash flow/debt (%)
(5.2)
11.0
7.9
2.4
14.0
Debt
Equity
Adjusted ratios
FFO/debt (%)
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 2016.
MAY 5, 2015 7
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Principal Liquidity Sources
Principal Liquidity Uses
• 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.
• €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: bbbModifiers
• 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, 2015 8
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Table 3
Reconciliation Of Deutsche Lufthansa AG Reported Amounts With Standard & Poor's Adjusted Amounts (Mil.
€)
--Fiscal year ended Dec. 31, 2014-Deutsche Lufthansa AG reported amounts
Reported
Debt
Shareholders'
equity
5,958.0
EBITDA
Cash flow
from
operations
Capital
expenditures
242
2,279.0
1,977.0
2,859
EBITDA
Operating
income
Interest
expense
3968
2279
767
Standard & Poor's adjustments
Interest expense
(reported)
--
--
--
--
--
(242.0)
--
--
Interest income
(reported)
--
--
--
--
--
166.0
--
--
Current tax expense
(reported)
--
--
--
--
--
(156.0)
--
--
Operating leases
2,970.3
--
385
204.0
204.0
181.0
181.0
--
Postretirement benefit
obligations/deferred
compensation
5,512.0
4
(46)
(46.0)
192.5
(238.5)
269.5
--
(2,053.5)
--
--
--
--
--
--
--
Capitalized interest
--
--
--
--
27.0
(27.0)
(27.0)
(27)
Dividends received from
equity investments
--
--
137
--
--
137.0
--
--
Non-operating income
(expense)
--
--
--
256.0
--
--
--
--
Reclassification of
interest and dividend
cash flows
--
--
--
--
--
--
13.0
--
Noncontrolling
interest/minority interest
--
63
--
--
--
--
--
--
(87.0)
--
--
--
--
--
--
--
EBITDA - Gain/(Loss)
on disposals of PP&E
--
--
150
150.0
--
150.0
--
--
EBITDA - Fair value
changes of contingent
consideration
--
--
180
180.0
--
180.0
--
--
EBITDA - Valuation
gains/(losses)
--
--
2
2.0
--
2.0
--
--
EBITDA - Other
--
--
(8)
(8.0)
--
(8.0)
--
--
6,341.8
67
800
738.0
423.5
144.5
436.5
(27)
Funds from
operations
Cash flow
from
operations
Capital
expenditures
2,423.5
2,413.5
2,832
Surplus cash
Debt - Derivatives
Total adjustments
Standard & Poor's adjusted amounts
Adjusted
Debt
Equity
EBITDA
EBIT
Interest
expense
12,299.8
4,035
3,079
1,505.0
665.5
PP&E--Property, plant, and equipment.
MAY 5, 2015 9
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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, 2012
2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Business And Financial Risk Matrix
Financial Risk Profile
Business Risk Profile
Minimal
Modest
Intermediate
Significant
Aggressive
Highly leveraged
Excellent
aaa/aa+
aa
a+/a
a-
bbb
bbb-/bb+
aa/aa-
a+/a
a-/bbb+
bbb
bb+
bb
a/a-
bbb+
bbb/bbb-
bbb-/bb+
bb
b+
Strong
Satisfactory
Fair
bbb/bbb-
bbb-
bb+
bb
bb-
b
Weak
bb+
bb+
bb
bb-
b+
b/b-
Vulnerable
bb-
bb-
bb-/b+
b+
b
b-
Ratings Detail (As Of May 5, 2015)
Corporate Credit Rating
BBB-/Stable/A-3
Junior Subordinated
BB
Senior Unsecured
BBB-
Corporate Credit Ratings History
30-Nov-2010
BBB-/Stable/A-3
27-Aug-2009
BBB-/Negative/A-3
22-Jun-2009
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, 2015 10
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MAY 5, 2015 11
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S&P Lufthansa analysis, 5. May 2015

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