Deutsche Lufthansa AG (OTCQX:DLAKF) Q2 2020 Results Earnings Conference Call August 6, 2020 4:00 AM ET

Company Participants

Dennis Weber – Head of IR

Carsten Spohr – Chairman of the Executive Board & CEO

Wilken Bormann – CEO of Lufthansa Hub München

Conference Call Participants

Muneeba Kayani – Bank of America

Daniel Roeska – Bernstein Research

James Hollins – Exane BNP Paribas

Andrew Lobbenberg – HSBC

Jamie Rowbotham – Deutsche Bank

Johannes Braun – MainFirst

Malte Schulz – Commerzbank

Jarrod Castle – UBS

Dennis Weber

Yes. Thank you, operator, and good morning, ladies and gentlemen. Thank you for your interest in today’s call. Let me briefly outline the format of today’s conference call, which we have again set up as a joint call for analysts and investors as well as the press. Our CEO, Carsten Spohr, will present you our first half year results and give an update on how we are addressing the effects of the corona crisis. I would also like to introduce Wilken Bormann, Executive Vice President, Finance; and William Willms, our Executive Vice President, Corporate Strategy and M&A. Both will be happy to help answering your questions later on.

The presentation slides, which they will refer to, are available in the Investor Relations section of our lufthansagroup.com website in case you haven’t downloaded them already. The management presentation will be followed by 2 separate Q&A sessions: one for our analysts in English language, and the second one for journalists in German language.

We kindly ask all participants to stick to this order. Thank you very much.

I’d now like to hand over to Carsten Spohr, who will discuss our quarterly results.

Carsten Spohr

Yes. Thank you very much, ladies and gentlemen. Welcome also from my side for this, and to this conference call. I hope you all doing well, are healthy in these extraordinary times. It’s now seven months after the beginning of the corona pandemic, and we are obviously working hard on the recovery of the Lufthansa Group.

And like any other airline around the world, we face enormous challenges and, therefore, are forced to make hard and painful cuts. Currently, customer demand is only improving on a low base. And especially long-haul bookings are still challenged. Just a few days ago, the World Health Organization warned that the effects of the pandemic are likely to be felt for decades to come.

And at this point, I think nobody is able to predict for certain when we will have a vaccine against COVID-19 and how long the current situation will last. And therefore, we share the view of our industry association, IATA: for aviation, a return to pre-corona pandemic levels cannot be expected before 2024. And as the Chairman, current Chairman of IATA I can only confirm there’s the same concern around the world and view on this issue, whenever we convene our CEOs around the world in IATA.

We are convinced that our whole industry needs to adapt to a new normal. The pandemic provides aviation with a unique opportunity to recalibrate. An opportunity to question the status quo and change for the better, to use resources more efficiently, and commit even stronger to sustainability goals and to stop aiming for growth at any price and instead, create value, both in a sustainable and responsible way.

And let me assure you that Lufthansa Group is determined to use this opportunity. Therefore, we developed a comprehensive restructuring program called ReNew, and I will go into detail on the program later today.

But first, let’s take a quick look back on the past quarter. Capacity offered by the Network Airlines was down 96% in the second quarter and 61% year-to-date. In April and May, we just flew a minimum schedule at Lufthansa and Swiss. In June, we started to ramp up again and also Austrian Airlines and Brussels Airlines were flying again, whose fleets had been grounded since March. At the end of June, the Network Airlines capacity reached around 10% of the prior year level. We significantly reduced our cost, which resulted in operating expense decline of 64% in the second quarter. But obviously, these reductions were not enough to offset the revenue shortfall. As a result, the Network Airlines adjusted EBIT amounted to negative €1.5 billion in the second quarter and negative €2.4 billion in the first half year.

Let’s talk about Eurowings, where the trends were very similar to those of the Network Airlines, with a comparable reduction of capacity and cost. As a result, adjusted EBIT amounted to negative €183 million in Q2 and negative €358 million in the first half year. In March, we announced a comprehensive set of measures to adjust our cost base to the current market situation. Fixed cash costs usually accounts for 30% of our airline cost base. And therefore, we set the target to reduce those fixed cash costs by 1/3. And we achieved this target with a reduction of 34% in the second quarter.

The implementation of short-time work contributed the most to this decrease. Including other personnel measures such as the expansion of part-time work and the offer of unpaid leaves, staff costs declined by a good third at the Network Airlines and almost halved at Eurowings in the second quarter. In addition, the postponement and cancellation of projects and the shift of aircraft maintenance drove the reduction of fixed costs. As a result, the group’s average monthly cash burn in the second quarter amounted to around €550 million. That was lower than expected because of better than forecast performance in our non-airline businesses, the successful ramp-up in June and lower-than-expected losses from overhedging.

Looking at our non-airline business in more detail, especially our Logistics business recorded a stellar performance in the second quarter. The almost complete grounding of the world’s passenger aircraft fleet caused a shrinkage of global airfreight capacity. Lufthansa Cargo normally generates around half of total sales in the bellies of the group’s passenger aircraft fleet, which was obviously largely grounded. The effect led to higher yields industry-wide. Yields at Lufthansa Cargo doubled so that the adjusted EBIT reached €299 million, a new record level.

We are confident that our logistics business is uniquely positioned to benefit from the structural changes that come with the current crisis. It is located in the center of Europe and the export nation of Germany, and serves the need of a global economy by making sure that goods obviously are where they are needed. And Lufthansa’s Cargo’s current performance confirms our decision to continue operating a dedicated freighter fleet, even though we will get smaller, as you know. Our non-airline businesses, however, suffered significantly from the indirect effects of the pandemic. The operating result at Lufthansa Technik was burdened by 2 factors, in particular: the slump in demand for aircraft maintenance and the financial challenges which many of our airline customers are facing.

The latter caused receivables write-downs in about an amount of €104 million in the first 6 months. This explains a large part of the total operating loss of €122 million in the first half at Lufthansa Technik.

Let’s talk about the catering business, which was hit not just by the widespread cancellation of flights but also by the corona-induced restrictions of onboard services. Here, adjusted EBIT amounted to negative €195 million. Finally, adjusted EBIT in the other businesses and group functions improved to a negative €122 million in the first half year.

Last year, this figure amounted to minus €135 million. The reason for the improvement was a strict cost discipline in the central overhead functions. In sum, the group’s adjusted EBIT declined to negative €1.7 billion in the second quarter, and negative €2.9 billion in the first half year. Adjustments, which explain the difference between EBIT and adjusted EBIT, amounted to €569 million. €300 million were due to aircraft impairments following the decision to retire 65 planes.

The vast majority of these impairments were already made in the first quarter. The same is true for the impairment of goodwill at Eurowings and LSG North America. Total goodwill impairments reached €219 million in the first half year, and this sum includes €63 million of impairment charges made for two engine maintenance joint ventures at Lufthansa Technik in the second quarter.

Other adjustments, including the write-down of LSG Europe assets accounted as held for sale, amounted to €50 million. Here, we are still confident to close the deal with the gategroup within the third quarter. Below the EBIT line, the loss related to the overhedging of fuel purchases amounted to €782 million in the first half year.

This is €205 million below first quarter levels, and primarily reflects the recent oil price increase. The higher oil price reduced the negative value of options for the hedging of fuel costs in the coming quarters. Taking the positive tax result of almost €800 million into consideration as well, the group’s net loss amounted to €3.6 billion in the first half year.

Let me now turn to our cash flow performance, which was markedly better than earnings suggest. We reduced our investment to just €897 million, which is less than half of the prior year level. This reflects our absolute focus on preserving cash and our commitment to adjusting the size of our operations to the new market reality as quickly as possible.

In the first step, the negotiations with our aircraft suppliers focused on 2020 and ’21 deliveries. In this regard, we agreed with the postponement of 5 deliveries originally planned for 2020, and of 24 aircraft scheduled for delivery in 2021. This leaves us with just 23 aircraft deliveries in 2020, 9 of which were already received in the first half year, and only 12 deliveries in 2021.

As a result, group investments will amount to around €1.3 billion in 2020. This is significantly less than our pre-crisis expectations of more than €3 billion.

In 2021, investments are targeted to remain at a similar low level. In the second step, we will reassess our fleet planning for the years after 2020 in the context of the ReNew program. This will potentially lead to a further stretch of plant deliveries and associated investments over a longer period. In doing so, we remain committed to continue modernizing our fleet, to keep our products competitive, to generate fuel and cost efficiencies, and to improve our environmental footprint. This is why we plan the acquisition of up to 80 new aircraft until the end of ’23. In addition, we will retire around 1/4 of our current fleet. This will shrink our total fleet by 100 aircraft compared to pre-crisis levels.

In addition to lower investments, we managed working capital very tightly. The significant decline of receivables reflects the ramp down of our business as well as our collection efforts. We also benefited from the expansion of payment terms with suppliers, an initiative which we had started even long before the crisis.

As a result, the working capital contribution to operating cash flow remains on the prior year level. We also implemented balance sheet measures aimed at protecting liquidity in the short term. For instance, we concluded repurchase agreements for unused emission certificates. Finally, the nonrecurrence of prior year tax payments limited the decline of adjusted free cash flow to just €510 million in the first half year. Consequently, net debt was only up 10% compared to the year-end 2019 level, amounting to €7.3 billion at the end of June.

Pension provisions increased 11% to €7.4 billion. This was caused by the negative performance of plan assets, which outweighted the benefits from the 10 basis point discount rate increase. Leverage, defined as a sum of net debt and pension provisions over adjusted EBITDA in the past 12 months, increased by 7.5 points to, correct, sorry, 10.3, increased by 7.5 to 10.3.

Strict cash management ensured that liquidity still amounted to €2.8 billion at the end of June, enough to prevent an insolvency, but insufficient to ensure the group’s going concern in light of the current crisis. The €9 billion stabilisation package ensures that the group is fully funded for at least the next 12 months.

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It brings total available liquidity to €11.8 billion at the end of June. And please note that this includes the financial support measures we negotiated in Austria, Belgium and Switzerland. They will be netted with the KfW loan and the silent participation which we agreed with the German Economic Stabilisation Fund. Supported by the stabilisation package, the group has started to successfully tap public credit markets again. In July, we took out two loans amounting to €167 million, secured by aircraft.

More transactions of this nature will follow in the next few weeks and months. The financial stabilisation measures also play an important role in ensuring that the group remains competitive on a global level and continues to have the necessary means to invest. However, I cannot stress often enough that this is not a gift. The complete repayment of the loans and investments, including interest, will place an additional burden on the companies for years to come. We are determined to achieve maximum payback as quickly as possible. But we need the contribution of all stakeholders involved. And we are, for instance, very grateful that with one exception, which is Frankfurt, all other hub airports of our multi hub network have already offered or announced significantly lower charges. And of course, this is where we mainly now position our growth.

Repaying all funds will also include the refinancing of parts of the package, at least in the first step, as market conditions normalize. We have also been clear about our intentions to actively manage our portfolio, potentially including the divestiture of noncore assets, in part or in full. However, these measures will not be able to replace a thorough restructuring of our company. Our program ReNew, we aim to maintain our global competitiveness and to secure future viability. It is supposed to create an even better Lufthansa Group, one that is smaller, but also leaner, less complex and more efficient.

With ReNew, we set ourselves ambitious targets. By the end of 2023, the group’s portfolio and organizational structure are to be aligned even more closely with our core airline businesses. The individual restructuring plans of our business units are to be implemented and contribute significantly to improved margins. As said before, our fleet is to be permanently reduced by 100 aircraft. However, we strive to offer a capacity in ’24 that corresponds to that of 2019. In order to reach last year’s ASK level with less resources, it will increase our productivity by 15% until 2023.

The bundling of flight operations will contribute to their target. We will reduce the number of our AOCs to 10. We already started this process by announcing the shutdown of Germanwings. And we have high hopes for strategic objective, which we have already begun in 2019 to expand the long-haul leisure traffic from our hubs in Frankfurt and Munich. I mentioned it before. The future of the Lufthansa Group will be a smaller one than today. That implies adapting to this new size also in terms of personnel. ReNew includes arrangements for the cut of 22,000 full-time jobs.

This affects the various boards, which are to be downsized. This affects a number of leadership positions, which are to be reduced by 20%. And this affects the 100 positions in the 1,000, it affects 1,000 positions in the administration of Lufthansa AG, which are to be cut. We have reduced the number of employees by 8,300 already. And even though we always wanted to avoid redundancies as far as possible, this goal is no longer realistically within reach for Germany either. Reasons for that are the recent market developments in global air traffic and its outlook, and the current disappointing course of the negotiations on necessary agreements with the collective bargaining partners in Germany.

Ladies and gentlemen, even the best restructuring program won’t create a future for our company if we cannot restore the confidence in flying around the world. And we will, therefore, focus even stronger on our customers. To protect both our passengers and our staff, we have introduced hygiene measures across the entire travel chain. However, the slowly returning customer demand shows that people are still cautious and insecure about planning their next flight. One of the main reasons for that are the various travel restrictions. Only with more consistency and stability, more customers will be willing to book their flights.

In this regard, we welcome the expansion of COVID-19 tests for passengers. And we will, of course, support the implementation of the new regulations, together with all other parties involved. We believe that persons who test negative for COVID-19 should always be allowed to travel, regardless of their origin and regardless of their passport.

Restoring customer confidence also means restoring customer satisfaction. Especially when it comes to ticket refunds, airlines worldwide have to win back trust, including us. And therefore, the Lufthansa Group has increased the capacities to enable faster processing of inquiries. In July alone, we paid out refunds of €1 billion to customers of our group airlines.

Including the month of July, we refunded €2 billion year-to-date. And refunds in the amount of slightly less than €1 billion are still pending and will be paid out by the end of August.

Ladies and gentlemen, since the beginning of July, we have further expanded our flight program, focusing especially on touristic short-haul routes. We were able to offer around 20% of the previous year’s levels last month. On European short-haul flights, we reached a load factor of over 70%.

Regarding longer-term bookings, our customers remain cautious. Also, we can still only fly a very limited number of long-haul routes due to ongoing global travel restrictions. Nevertheless, we will continue to gradually and flexibly expand our flight schedule, following the recovery of customer demand but also triggering customer demand.

By the end of the year, we expect to reach about 50% of our last year’s capacity. However, we will still record substantial adjusted EBIT losses also in the second half of 2020. I already mentioned this in our last call, the corona pandemic hit us earlier and harder than other industries, and it will surely take us longer to recover from it. But aviation has bounced back before.

We can and will do so again, and we may and must change for the better in the process. Lufthansa Group is determined to use this unique situation as an opportunity to become leaner, more agile and even more competitive.

Thanks for your attention, and I look forward to your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] The first question is from the line of Muneeba Kayani from BofA.

Muneeba Kayani

My first question is on the capacity ramp-up planned. So for your yearend target, what are you expecting in terms of the lifting of U.S. travel restrictions in the second half of this year? And also in terms of next year, you’d initially mentioned parking 300 aircraft in ’21 and 2022. Is that still the plan? And then on CapEx, how much of the CapEx reduction is related to the change in funding from owned versus leased aircraft?

Carsten Spohr

Yes. Thank you. I will take the first two and hand over to our EVP Finance, Wilken Bormann for the third. On the U.S., as many other things in the U.S., that’s hard to predict. I’m planning to take my family to California in October and definitely hope to be able to do so. But I think in September, it’s not very likely to see a lift so that’s somewhere where we are adjusting our capacity.

And when it comes to the number of aircraft grounded, the 300 for ’21 and the 200 for ’22 are still in our plans, probably on the lower end, with the outlook being somewhat less positive than maybe a few months ago. But for both of your questions, who knows? I don’t, I think nobody else does. But we do know about our investments. So I hand over to Mr. Bormann.

Wilken Bormann

Yes. I mean, as mentioned in the numbers, so we have reduced our CapEx for this year to €1.3 billion and for next year to €1.3 billion as well. And there is a slight amount included here for leasing of aircraft. But this is still dependent on the negotiations we are going to do in the next period of time. But there is a small portion included here as well, but that needs to be finalized over the next month.

Muneeba Kayani

Just to clarify. So the €1.3 billion includes the leased portion of the fleet financing?

Wilken Bormann

Yes. So if there is an operating lease, for example, for 6 years, so we are currently negotiating one A350 for a lease period of 6 years, and this lease period is included in the €1.3 billion.

Operator

The next question is from the line of Daniel Roeska with Bernstein Research.

Daniel Roeska

Three, if I may. First, reducing and refinancing the government debt is your first priority. But how are you thinking about your overall net debt position, and how that relates to the sale of subsidiaries you just mentioned? Have you considered any scenario in which the operational improvements from ReNew would be sufficient to kind of forgo the full or partial sale of Lufthansa Technik, which likely has the largest price tag here. So is there any, kind of any way out of this without actually tackling quite a substantial amount of sales of subsidiaries?

Secondly, as you’re thinking about the 15% productivity improvement, how much of that is aircraft productivity? And how much of that is aircraft configuration? So are you changing the layout of new aircraft to higher density, or also reconfiguring kind of aircraft out of the existing fleet? And then lastly, maybe a little bit broader topic. The VFF contract stipulates a limit on bonus and pay. Could you elaborate kind of how you’re thinking about this, what measures you’re putting in place? And what your current thinking is on how this will impact your ability to retain key talent, and maybe also more visibly, attract a new CFO?

Carsten Spohr

I’ll start with the last one. We only lost 1 key talent recently, who went to become an analyst, so, but he didn’t. Besides that, I think we can retain our talents because this is a unique industry. It’s, I think, fascinating as ever before. And especially for key performers, the accelerated change the company is going through, for example with the ReNew program, it’s actually something very attractive to the top players in management. And we all know there is an end to this, eventually we will be able to repay. You all know the mechanism, mechanics that we don’t even need the agreement with the government. We can unilaterally take both the shareholding out and repay the government.

So I think everybody in this company knows that this is just a period of time. You all know, we want to repay back in ’23. So I don’t think that is that much an issue as somebody might suggest. On your first question, on the assets, our view has not changed. We are in the middle, and you hope to close the sale of LSG Europe in the third quarter. We have paused, but only pause, the sale of the rest of the world business of MSG. We indeed are looking for ideas for Lufthansa Technik when the market is back. I mean, right now, timing is terrible, and that’s why we have received sufficient funds to not to be forced into fire sales, which I think is very important, both on aircraft, as Wilken pointed out, but also on assets.

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But eventually, we believe there could be solutions for also the Technik, with a minority IPO, with strategic partnering, or other ideas, and we will pursue those. And also we look at the assets on the edge of our portfolio. As I mentioned, we’ll be focusing more on the core in the program ReNew, and whatever is on the edge of the universe could be up for sale if the price is there. And that all together, I think, will contribute to our ability to pay back. But of course, also operationally, we’re looking to positive cash flows again in ’21. In the end, that’s where the money has to come from as well.

On your second question, it will be both. We’re increasing profitability of our operations, reducing of AOCs, more efficient labor contracts. But also, we are looking at configuration of aircraft where it makes sense. You know that there’s various aircraft in the Lufthansa fleet which can be reconfigured. The 350 has 2 versions in Lufthansa, the 744 has even 3 versions. But of course, which aircraft are we retiring and which are we keeping in the fleet also has a significant effect on the productivity of the fleet, by obviously retiring those aircraft which are less productive, faster, which I think is being helped by corona. We will clean up our fleet a lot faster than we were able without corona and COVID impacts.

Operator

The next question is from the line of James Hollins with Exane BNP Paribas. Please go ahead.

James Hollins

Hi, guys. Good morning. Three from me, please. The first one on free cash flow in 2021. I think your statement says you’ll be free cash flow positive in the course of 2021. I was wondering if you could confirm whether you’d be free cash positive for the year as a whole. Secondly, I don’t know if you said anything on Q3 pricing. Clearly at Q2’s — yields are very strong in Network Airlines.

But I was wondering if directionally you could give us an indication on Q3 pricing, whether it’s significantly down, down, even up? And then finally, I think when we last spoke, we were quite concerned about Herr Thiele, your major shareholder. I was wondering where we are on that. Is he putting a lot of influence on your strategy in the business as a whole or has he sort of gone away? Thank you.

Carsten Spohr

I’ll start with the third one, and I hand over to Dennis. Well, actually, I can do the first one, sorry. So the cash flow positive is for part of ’21, not for the whole year. At this point, who knows, but that’s where the planning is. Mr. Thiele, I must say, be it our biggest shareholder, the government, or seventh biggest, Mr. Thiele, I have not seen and heard anything from them, be it in public or in private, which I’m not in line with. So I think they both support of what we are doing.

And so I think that can give some stability to the Lufthansa shareholding. And there’s no reason to be concerned at this point at all about either one as a shareholder. And the second one I would ask Dennis to answer.

Dennis Weber

Right. That was on the yield outlook for the third quarter. We commented on performance in July, especially when it comes to load factors in European short-haul, that was a positive performance. Load factors exceeded 70%. So that was clearly encouraging. We also had a good yield performance. But it continues to be our expectation that yields and also loads will remain under pressure in the coming months.

So they will clearly continue to be below pre-crisis levels because of low customer demand and also quite a lot of capacity returning to the market.

Operator

The next question is from the line of Andrew Lobbenberg, HSBC. Your question please.

Andrew Lobbenberg

Good morning. Can I ask about the labor situation? Because I think you announced that there was an agreement with — for the cabin crew. I don’t know that it’s gone through. And where are we with cockpit and ground staff? And then on the same issue, and I suspect the answer is linked. But how much restructuring costs should we be thinking about in terms of P&L and in terms of cash.

And then a final question would be cost, when you speak about cleaning up and simplifying the business with fewer AOCs, but the first measure we’ve had is a new 1 just founded with Ocean. I kind of see the logic of where you’re going, but how is this — how is this going to work? What is the point of it? And I appreciate it’s a step in the opposite direction. But yes, where are we going with Ocean?

Carsten Spohr

Andrew, good morning to you. On labor, with UFO, cabin crew, Mainline, we have an agreement. It is now up for vote with the staff. I think it’s supposed to end August 14. So there, we still have our hopes up that, that will be approved, and we can avoid unvoluntary layoffs in the cabin according to that agreement. On cockpit, for the mainline, we, I think, not I think, we had more than 60 days of negotiation, so almost every day. And we had an agreement, and then they had to pull it back because of internal union issues. So there, unfortunately, we are nowhere, and we’ll probably need to go into unvoluntary playoffs in cockpit, both in the mainline and in Germanwings. On ground, very slow process.

So that is one of the reasons that we were shifting our also announcement today towards the staff this morning. They all received a letter around the world. That it’s not any more realistic to avoid unvoluntary payout layoffs in Germany either. We have done so in the U.S., done so in other parts of the world, but unfortunately, also for Germany, that is something I don’t believe in anymore, and we told that to our staff this morning.

When it comes to AOCs, we will go down to 10, and Ocean is not only AOC. Ocean is just the organizational setup by which we want to tap the touristic leisure markets, both short-haul and long haul. And we have not yet decided which AOC will be used for Ocean. It could be a new one, and then we have to take at least 2 others out, or it could be the existing one. So that is not to be mixed up.

It’s consolidating our tourist-oriented long-range flying, which currently is spread out over 3 AOCs, 14 aircraft, but they are over 3 AOCs CityLine, SunExpress, Deutschland, Germany, and as in Brussels and Dusseldorf, we’ll bring that down to 1 either way. And it, put on top of that probably some of our short-haul touristic operation as well.

So I think it’s more the way how we organize that segment, which we believe will be recovering faster, and not necessarily yet decided which AOC we’ll use. The lowest-cost one in the end. On structuring costs, I look over to Wilken. The only ones which is in the numbers already is the restructuring of Brussels Airlines. The others are not in the numbers. I think it’s too early, Andrew, to make a guess here.

That’s probably for our next quarter discussion when we have, until today, basically, we were hoping to find ways with the unions to avoid those layoffs in Germany as I mentioned. That is not realistic anymore, both due to the slow progress and due to the outlook for the industry. So I think when we reconvene in 3 months, we’ll be definitely giving you more detail on the now unvoluntary layoff scheme which we have to introduce.

Andrew Lobbenberg

Can I just ask one on the Ocean on the leisure thing, where are you going with the branding? Because previously, I mean, it was partly branded Eurowings and it was branded, Lufthansa. But then you were saying you didn’t want to say Lufthansa because the product was going to be different.

Carsten Spohr

No, Andrew, it has always been branded Eurowings. To be exact, of these 14 aircraft we’re talking about, 11 are branded Eurowings and 3 are branded Lufthansa, which are the ones which are operating in Cityline. And I think this is not the time to invent new brands. We have other worries here. So we will be using the Eurowings brand for right now.

Operator

The next question is from the line of Jaime from Rowbotham.

Jaime Rowbotham

Jamie Rowbotham from Deutsche Bank. Carsten, three from me, please. The first on the working capital. Within that very positive development in the first half, obviously, part of it was an increase in your contract liabilities from unused flight documents or deferred ticket revenues of about €430 million. I think at IAG, that balance had declined by €860 million in the first half. Can you just talk a bit about that increase and the extent to which we might see a reversal in the second half? I think you may have mentioned a figure of €1 billion going out in August, but any comments on that?

And also the extent to which you can retain some of the benefits you’ve got on trade receivables, excluding the ticket-related stuff, in the full year would be helpful. Secondly, on capacity, are you, I think Air France was saying next year, they’d run AFK at 20% below 2019. IAG said 24% below 2019. What’s the Lufthansa plan, if you can disclose it, for 2021? Perhaps you want to split it between Continental and intercontinental? And then thirdly and finally, after that very strong second quarter, how do you see the outlook for Cargo in the second half, please?

Carsten Spohr

I’ll take number 2 and 3, and Dennis will come back, do number 1. Again, the outlook is very, very difficult, I’m sure both for my big competitors and also for myself. But the current planning we are going for is that we will see only 2/3 of last year’s capacity in ’21. But don’t forget, we have this German scheme of kudzerweile, which allows us to be very flexible both ways. Because we don’t need to fire the people or furlough the people like in other parts of the world and Europe.

We keep them on in the company, it’s just that their salaries are to the largest part paid by the government, and then we can reactivate those people at short notice or also the other way around, we can put active people back into the short-term scheme at short notice. So we probably have a little bit more flexibility than my 2 biggest competitors. And it’s 2/3 of the capacity we’re shooting for at this point for ’21, obviously, 1/3 less than to refer to your examples.

On Cargo, I mean, that has been an extraordinary quarter, but I think there will be a strong future for cargo in the short and midterm because there will not be all the belly capacity coming back that quickly. Unfortunately for the passenger business, but good for the cargo business. So there will be a squeezed capacity situation. Freighters are very profitable right now. And the global economy, as you know, when it comes to the supply chains and so on, just needs that airfreight, especially in market like Germany with our strong export focus. It’s probably the #1 export nation in the world, maybe 1 or 2 with China, depending on how you look at it. So that is optimism on my side to your third question. And now Dennis, on the first question please.

Dennis Weber

Let me discuss working capital in a bit more detail. So first of all, we’ve been very successful in collecting receivables. We’ve had a strong decline there. So this decline of receivables was even stronger than the decline of trade payables, because of the overall rampdown of the business. In other words, we have also been very successful in renegotiating supplier contracts. And as we mentioned earlier, this was something which we had started long before the crisis, because we believed that we continue to have an upside here. When it comes to refunds, also this is something that we’ve discussed extensively in the last few weeks and months.

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You know that our systems are not geared, are nowhere close to be able to cope with the current amount of refunds. By now, we have adjusted to that, which means that customer refunds, which we paid out over the course of the second quarter were limited. Now that we are capable to process much more, we have done so. We’ve talked about €1 billion, which we have paid out to customers in July. There’s a similar amount going to follow in the near future. So what was obviously supportive to working capital in the second quarter will result in outflows in the third quarter. So both clearly has to be seen in combination.

Operator

The next question is from the line of Johannes Braun, MainFirst. Your question please.

Johannes Braun

Yes, thank you. Good morning. I have two questions. Firstly, can you talk about breakeven load factor on cargo-heavy routes versus non-cargo-heavy routes? I guess the breakeven load factor, obviously, on cargo-heavy routes is much lower currently, given the profitability in cargo. But maybe some quantification from your end would be helpful.

And then secondly, you talked about airport fees being reduced in your network. Can you quantify the savings there that you will have, I guess, in 2021? And also in relation to that, what is the consequence of, obviously, Frankfurt Airport not lowering fees, but rather going I guess, into the other direction?

Carsten Spohr

Johannes, [Foreign Language]. There’s an interesting answer, I think, interesting for your first question. We currently have passenger routes where the load factor is 0. Break-even, because the cargo alone carries the variable cost. We’re never — I’ve been in the industry 30 years, I’ve never seen that. Uncertain days, of course, but not on the whole route. So we actually have — we even had some routes Swiss was operating, where we blocked passengers, but we have changed that now.

So we’re accepting passengers on all of our flights, I think different than our competitors. But indeed, some of these routes are breaking even with even 0 passengers on board, because of the high cargo revenues. And of course, from there on, you have other routes where it’s all the way down to normal break-even load factors, because cargo could be minimum. On airports?

Johannes Braun

Can you give an example of routes or …?

Carsten Spohr

No, I can’t do that because my competitors are probably listening. But obviously, German home market helps on that one. But — and again, we are accepting passengers on all of these routes because of additional revenues. It’s almost the other way around and we all learned it in network school, where you fill the passenger network first, and then you add cargo revenues on top. This is sometimes now the other way around. And again, it’s unique, but maybe also unique to our home market, Germany and Switzerland. I’m not saying it’s the same in other markets. I wouldn’t know. But yet your question is answered the right way. But I cannot give you routes again because of my competitors.

On airports, as I said, we have already published lower fees by Zurich Airport. We’re talking double-digit savings by Vienna Airport as part of our negotiations. We are in negotiations with Munich. And also in Brussels, part of the package are double-digit lower airport fees.

And it’s only Frankfurt, which even have announced higher airport fees, which I couldn’t believe when I read it, but — unless it was a misprint. That, of course, means when we allocate our traffic streams, we take — if you know, infrastructure costs right now are higher than fuel cost. So that is our prime driver of allocating our hub operations, our infrastructure cost.

Johannes Braun

But linking that back to my first question, isn’t the cargo contribution out of Frankfurt much higher than at your other hubs?

Carsten Spohr

Yes. In general, yes, Zurich has the rest of the cargo. [Where you put] cargo, pharma and that is high in Zurich. But of course, that’s why we pay our network people so well, because they have to put all these parameters into an optimization mechanism, and then they allocate our, especially long range, depending on revenue, where cargo indeed out of Frankfurt is positive, and cost, where Frankfurt is the worst. So that’s why we are operating still out of Frankfurt, as you note.

Operator

The next question is from the line of Malte Schulz with Commerzbank.

Malte Schulz

I’ve got three questions from my side. First of all, how do you now position Brussels Airlines going forward? Will it be a little bit more monitored on Austrian or a little bit similar even to like Swiss or Lufthansa from your positioning? Second question would be, even now with your state aid, would there be a possibility in the near future that you would even tap the general market for an equity capital raise also to partly refinance in your state aid package?

And my final question would be, can you give us any idea how much of the vouchers are already used for new bookings so far? And how that will affect kind of your cash going in for the next quarter? Or are people just using the vouchers and not paying new cash?

Carsten Spohr

Yes. On the first question, I’m not quite sure if I read that question correctly. As you know, we have decided to look at Brussels Airlines as part of our multi hub model. So they are in line with putting traffic flows across our five hubs, as I explained before, in optimum way. That’s what we are, the last years, have been doing more and more efficiently. And, but of course, by size and magnitude and performance and profitability, it’s indeed closer to Austria and then to Swiss or Lufthansa, if that was your question.

State aid and our look at the capital increase, we just think this is not the right time for a capital increase because the share price is so low. So we have the long breath to wait for the right time for a capital increase, which surely will come at a certain point.

But again, with that liquidity buffer we have, no need to do either a fire sale when it comes to assets, the question of Mr. Reska, or your question to go into an equity, capital increase now. We can optimize our timing on both, which I think is part of the solution we found with the 4 governments, which we negotiated now for weeks. And Dennis, you have something on the refunds.

Dennis Weber

Right, yes, I should have mentioned that before that it’s, of course, our target to also issue vouchers instead of refunding customers in cash. And this has gained a lot of acceptance, and this has been taken up well. So at this stage, we’ve been able to convert low to mid triple-digit million euro amount into vouchers. And of course, we’ll continue doing that also going forward.

Malte Schulz

Yes. But if I may, how many of them are already used for flights, so actually flown, of the vouchers? So is it kind of also the users’ uptake of the vouchers, not just in receiving them, but also using them? It would be interesting to hear.

Dennis Weber

The vast majority is still for bookings which are sometime out, many of them only in 2021. So just a minority has been flown already.

Operator

The next question is from the line of Jarrod Castle from UBS.

Jarrod Castle

Three as well. Any commentary in terms of how you’re thinking about business travel? And obviously, the leisure is going to taper off in Q3. Any comments from the German corporates about winter business travel? Secondly, you kind of said ’21, you expect cash flow positive at some point. But I guess from ’22, your CapEx will ramp up. So could we still be expecting a positive contribution, I guess, from ’22 calendar-wise? And then lastly, can you say anything in terms of what the current cash burn rate is? You kind of put the €550 million, but considering everything, what is the total burn? Hello?

Carsten Spohr

Yes. Sorry, I just forgot to push the button. This is Carsten. I’ll do the first two, and Wilken Bormann will do the third one. Outlook on business is very difficult to do. The German corporates are definitely sending us signals that there will be short-haul recovering before long-haul, because there’s less restrictions. But I think they are very much driven by travel restrictions, where can they send their people without putting them in quarantine when they come back, blah, blah, blah.

So I think that is part of the business where outlook is even more difficult than on the leisure side, which basically is a formula, yes? Leisure will improve faster than corporate and short-haul will resume faster than long-haul. These are the 2 elements we have in our planning. Cash flow, as we mentioned before, in ’21 will turn positive. During the year and ’22, ’23, we haven’t made our investment commitments, because we’re still negotiating with the OEMs and others. So once we have positive cash flow, I’m not willing to give it up. Maybe I can answer your question in that way.

And again, we have this government package which allows us to optimize, maybe I’ll repeat that 1 more time, not based on short-term optimization, where we can really optimize the business, which I think any business should do on a more mid and long-term basis, both on selling assets, which I said before, both on investments, and that why this package, I think, works so well. And even with that package, our government, first the price we had to accept for their package was a 20% shareholding, but still we have less government shareholding than any of our global competitors, with the exception of North America.

Both European competitors have a higher government share, in London and in Paris. Obviously, on the Gulf, Bosporus, China, Singapore. So you look at all our global competitors, they all have higher government shares than we do. So I think the price we had to pay by accepting that, for giving us the flexibility to optimize the business, not short-focused, but mid and long-term focused, I think, was a deal we were, in the end, believing was right to do for Lufthansa.

Wilken Bormann

And let me add something to the question with regard to your cash burn. So during Q2, there was a cash burn of roughly €550 million per month, which is excluding extraordinary effects like the tax issues we mentioned before. And for the upcoming year, we expect a lower cash burn, or for the rest of the year, we expect a lower cash burn from €400 million to €500 million per month. But this is highly dependent on the travel bans and how this is going to change over the next month. But according to our higher production, we expect reduced cash burn per month.

Operator

There are no further questions from analysts at this time, and I hand back to Dennis Weber.

Dennis Weber

Yes. Thank you very much. So this concludes the Q&A session with analysts. We’ll now switch to German language. Of course, analysts and investors are still invited to stay on the line and listen.



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