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| Pack your bags |
| Fiona Maharg-Bravo / Jul 06, 2009, 00:45 IST |
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European airlines: European airlines aren’t living within their means. For some, weak cash flow will not be sufficient to fund their heavy capital expenditure commitments. But capital raisings could help make ends meet. Air France has already issued a ¤660m convertible bond. Lufthansa and British Airways could soon follow.
Lufthansa may look financially strong, with ¤5.2bn in cash and cash equivalents at the end of March. But the German carrier plans to spend E8bn on new aircraft and acquisitions in the next three years, including buying out the remainder of UK airline BMI. It also wants to keep a minimum ¤2.5 billion cash cushion.
Assume the expenditure is spread evenly, and it draws down existing cash. That creates an annual shortfall of at least ¤1.8 billion if Lufthansa sticks to its programme. Organic cash generation will not bridge the gap. This year, it may be about ¤500m short, according to analysts’ estimates of operating cashflow.
The airline moved this week to address the issue for the short term, by issuing a ¤750m bond. But that lifted its gross debt to ¤5.9 billion or 3.8 times ebitda. Moody’s, the rating agency, says the multiple needs to be within 3.5 times for the airline to maintain an investment-grade credit rating. It put the airline on negative credit watch last month.
An equity issue would head off a potential downgrade. Indeed, Lufthansa has tapped shareholders pre-emptively before, selling ¤750m of stock in 2004 when its needs were less pressing than they are currently. But precisely how much it would raise today depends on its ability to identify further cost-cuts.
As for BA, its spending plans are less ambitious and it has cut its capex plans. The UK carrier has learned to live with the occasional junked credit rating. But the airline’s gross debt may balloon to close to eight times ebitda by the end of the current financial year – and that is before assuming any lump sum payment to close its estimated £3 billion pension deficit. Even after netting off cash balances, BA may soon have the leverage of a boom-time buyout.
One way for BA to alleviate the stress would be a long planned merger with Iberia, which has net cash of ¤1.6 billion. But the situation is Catch-22. The Spanish are put off by the pension problem. If BA wants to get share of the synergies from the combination, its investors may probably have to repair its balance sheet first.
But shareholders won't be easy to convince. Before they put more money in, they will need persuading that every penny of cost has been cut, and every penny of capital expenditure is justified.
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