Lufthansa soars as investors celebrate roll-back of state aid and U.S. opening borders

The worst of the COVID crisis appears over for German carrier Lufthansa, which can count on fresh demand from Europeans flying to the U.S. just as it begins repaying its $9.8 billion bailout from the German government.

Shares on Monday surged nearly 9% at their peak on Monday after reports the Biden administration finally would lift the travel ban on Europeans, compounding an announcement by the company this weekend that it is rolling back the influence of the German state now that the worst is over.

Precisely one week before country goes to the polls on Sept. 26th, Lufthansa moved forward with a planned rights issue that doubles the amount of stock in issuance in exchange for nearly €2.1 billion (about $2.4 billion) in net proceeds.

The funding will largely go towards cancelling €1.5 billion in hybrid debt owed to the German government, which controls 15.9% of its equity. Early in the pandemic, Germany swooped in to rescue the flagging airline—helping to safeguard the jobs of 100,000 employees. As part of the aid package, the state demanded a punitive interest rate of 4% on the hybrid debt, called Silent Participations, and imposed significant restrictions on management.

“We have always made it clear that we will only retain the stabilization package for as long as it is necessary,“ Lufthansa CEO Carsten Spohr said in a statement on Sunday, ruling out the need to draw upon any further emergency funding from Berlin.  

The airline has been banking on a rebound in profitable transatlantic flights, an increase in business travel, and a reopening of routes to Asia by the end of this year in order to ramp up capacity.

While the net proceeds from the new stock is lower than the €3-€4 billion originally suggested in the media this summer, management wanted to complete the cap hike prior to the election. 

Trading of the subscription rights, which entitles existing shareholders the chance to acquire new shares at a sharp discount to current market prices, is expected to be held between Sept 22 and Sept 30. Demand could prove lively now that the U.S. government is expected to ease travel restrictions for vaccinated Europeans in November. Compared with other European peers, Lufthansa is particularly dependent on transatlantic flights for its profits.

In August, Spohr predicted a short-term boom in demand once the U.S. opened its borders to the EU that would help drive capacity to 60% of pre-COVID levels in the fourth quarter. “I don’t think there’s a single man or woman that does business with the U.S. who doesn’t want to go there in the fall,” he told analysts and reporters at the time

Importantly, he pointed out, these customers tend to be highly lucrative for airlines since they typically are willing to pay a premium for flexibility. 

While Europe briefly opened its borders to unvaccinated Americans, U.S. officials have kept their own borders effectively closed to Europeans since March 2020 with few exceptions for essential business travel.

In order to emerge from the worst crisis in the company’s history, Lufthansa aims to eliminate 10,000 jobs by the end of 2024 to save €1.8 billion annually, cut another €1.7 billion in costs elsewhere, sell at least two subsidiaries and potentially list a third. 

Together this package of measures should recapitalize its sagging balance sheet, return the company to investment grade status and yield an adjusted operating margin of 8% minimum in 2024, finance chief Remco Steenbergen has said.  

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