Lufthansa seeks government support amid coronavirus hit

Deutsche Lufthansa AG is looking into government support amid the “immense” fallout from the coronavirus, which could burden travel demand for months.

To avoid layoffs after slashing capacity by as much as 50%, the airline is examining the implementation of so-called short-time work, the company said in an emailed statement to Bloomberg on Sunday. The program, known as “Kurzarbeit” in German, involves the government offsetting wages lost when companies are forced to temporarily halt work.

With some countries restricting flights from Germany, which has more than 800 cases, “the impact on our booking situation is immense,” Chief Executive Officer Carsten Spohr said in an internal memo to employees obtained by Bloomberg. “We must assume that it may take months before we will see first signs of stability,” he said in the message recorded on Friday.

Italy’s decision to restrict movement for a quarter of its population comes on top of the cancellation of large events such as the Geneva Motor Show and the ITB tourism fair in Berlin. The International Air Transport Association estimated carriers may lose as much as $113 billion in ticket sales this year.

Coalition Strategy

Chancellor Angela Merkel’s ruling coalition is meeting Sunday evening in Berlin to map out a strategy to mitigate the damage from the epidemic on Europe’s largest economy. Looser rules for Kurzarbeit, which would make it easier for companies to apply and could increase payouts, are on the agenda.

Economy Minister Peter Altmaier also proposed expanding government loans and guarantees and implementing additional measures if demand and supply disruptions intensify because of the global epidemic. The government is also considering accelerating a planned tax cut.

The fallout from the virus risks damaging Germany’s export-oriented economy, which narrowly avoided recession last year and is expected to struggle in 2020. China is Germany’s largest trading partner and German manufacturers, especially in the automotive industry, have deep ties with suppliers in northern Italy, the epicenter of the crisis in Europe.

On Friday, Lufthansa cited “drastic declines in bookings and numerous flight cancellations” in recent days, saying all of its traffic is now affected. The company acted after investors started to question its ability to withstand the downturn. The company’s five-year credit default swaps, which bondholders buy to protect their holdings against a potential default, more than tripled in the last 10 trading days to the most expensive level in seven years.

In his message to employees, Spohr said that Lufthansa has taken steps in the last few days to increase liquidity with the banks. The airline is in talks with governments in Germany, Belgium, Austria and Switzerland, as well as European Union officials, to “reduce burdens on our industry,” he said, without elaborating.

Poor Ratings

Lufthansa has a credit rating of BBB at Standard & Poor’s, the second-lowest investment-grade rating, and Baa3 at Moody’s, one level above junk.

The German airline group said on Sunday that it’s seeking ways to keep all employees on board during the crisis and is in talks with unions and its partners to avoid layoffs.

Proposals include potential short-time work and part-time models. Lufthansa has already offered its employees voluntary measures, including unpaid leave and bringing forward vacation time.

“Our primary goal is to minimize losses and to secure the company’s liquidity,” said Spohr, adding that “numerous insolvencies” could hit the airline sector in the fallout from the virus.