Lufthansa: Ditching The Green Growth New Normal (OTCMKTS:DLAKF)

In the early days of the pandemic, many airlines were promising to operate a more environmentally friendly fleet going forward. Many airlines did not exactly know how to transform the fleet, but it was clear that resizing the fleet would cut the most cost inefficient aircraft would be cut. We are now two years later and we see airlines walking back on those plans. One of those airlines is Deutsche Lufthansa (OTCQX:DLAKF). In this report, I will discuss how the airline’s “new normal” plan has changed.

Big Changes Envisioned Last Year

Lufthansa envisioned big changes by the start of 2020 with 97 aircraft scheduled for retirement and another 18 temporarily decommissioned. The airline was positioning for a future with lower demand for aircraft and growth should primarily be realized with new fuel-efficient jets. In the regional and single aisle ranks, 68 retirements were envisioned while another 44 retirements and decommissions were focused on the more-than-two-engine aircraft such as the MD-11F, Boeing 747 and Airbus A380.

Aircraft	Fleet	Scheduled for retirement or decommission	Retired	Added	Net change
Airbus A220	29	0	0	1	1
Airbus A319	106	-40	19	0	-19
Airbus A320	235		22	12	-10
Airbus A321	91		1	10	9
Airbus A330	52	-4	6	0	-6
Airbus A340	43	-19	7	0	-7
Airbus A350	17	0	0	4	4
Airbus A380	14	-14	0	0	0
Boeing 747	29	-2	2	0	-2
Boeing 767	6	-3	3	0	-3
Boeing 777	18	0	0	0	0
Boeing 777F	13	0	0	7	7
Boeing 787	0	0	0	2	2
Boeing MD-11F	5	-5	5	0	-5
Bombardier CRJ	35	-7	7	0	-7
Bombardier Q Series	21	-21	21	0	-21
Embraer	43	0	1	0	-1
Total	757	-115	94	36	-58

Click to enlarge

In the regional and single aisle segment we see that the original Bombardier fleet was indeed reduced as planned while one Embraer was retired which was not part of the initial fleet transformation plan. For the Airbus A320 family, it was observed that 42 aircraft had been retired whereas 40 retirements were guided for. The reductions for the Airbus A320 family were offset by 22 deliveries. So, retirements for the regional and single aisle segment exceeded the initial plan and indeed we are seeing that growth is being realized with more fuel-efficient aircraft.

For twin engine wide bodies, the Boeing 767 fleet was reduced as planned and the number of Airbus A330 aircraft was reduced by another two units on top of the planned reductions while 4 Airbus A350s and two Boeing 787s were added to the fleet.

What Lufthansa had envisioned is going from 13 wide body types to 7 and from 6 more-than-two engine types to one. In the freighter fleet, the simplification did happen. In the small intercontinental fleet it has yet to happen. The Airbus A340-300s are still there and so are the Airbus A330s and the Boeing 767. Similarly, in the medium-widebody fleet the Boeing 777-200 and Airbus A340-600 are still there. The Airbus A340 fleet was expected to be reduced by 9 aircraft permanently with another 10 in deep storage. However, only 7 have been decommissioned. The airline had a fleet of 17 Airbus A340-600s. Seven have been decommissioned as was planned. From the 10 remaining aircraft that were in deep storage, Lufthansa started bringing back aircraft last year and they are now operating five aircraft.

The Airbus A380 had eight aircraft in deep storage and Lufthansa already hinted that these would be reactivated for the 2023 summer season. So, what we are seeing is that of the objective to reduce complexity, costs and emissions not a lot is left. Some aircraft have indeed been decommissioned permanently, but the new normal for wide body fleets against all odds is not really materializing at this point. There even are rumors that Lufthansa will refurbish the cabins of the Airbus A380 and make those aircraft a long-term solution contrary to the stop-gag reactivation of the Airbus A340-600.

Reasons for New Normal Deviation

There are several reasons for a deviation from the new normal roadmap that Lufthansa stipulated and there is one reason that we saw quite a lot at the start of the pandemic. So at the start of the pandemic, practically airlines could not have survived and access to alternative funding was limited which made the airlines highly reliant on government bailout packages. In return, many airlines promised they would contribute to emission reduction goals. So, that is why we saw Lufthansa for instance coming up with fancy slides presenting a new normal. In part, they have delivered by growing the fleet more efficiently but bringing back fuel inefficient aircraft runs directly against the new normal, low emissions policy.

Now, it is not just the case that airlines such as Lufthansa promised things in return for a bailout package. Demand has ramped up better than expected. For long-haul operations, recovery runs roughly a year ahead of schedule for some airlines as pent-up demand is extremely strong. Demand is so strong that even fuel inefficient aircraft can be operated profitably despite high fuel prices. Obviously, if you can support demand with fuel efficient aircraft those profits could be even higher. However, the introduction of fuel efficient aircraft requires final delivery payments to Boeing and Airbus while the fleet that is being reactivated has no similar cash costs associated. More importantly, the supply chain issues in the aircraft manufacturing industry are a forcing function in the reactivation of older jets. Boeing and Airbus cannot build and deliver the aircraft fast enough and even last week we saw that Boeing reduced Dreamliner output temporarily due to supply chain issues. So the reactivation is driven by a strong demand environment for air travel and weak supply environment for new technology aircraft.

The Airbus A380, on the other hand, is becoming more of a long term solution while the Airbus A340-600 seems like a short-term solution as Lufthansa awaits medium wide body deliveries in the form of the Airbus A350-900 and Boeing 787-9. Lufthansa envisioned the Boeing 777-9 to become its Airbus A380 replacement, but that aircraft is not yet certified and its certification and delivery schedule has been sliding to the right and that slide is so severe that airlines are simply not counting on the Boeing schedule indications any longer.

What likely also plays a role is the debt maturity profile. Demand is currently strong and we can expect that strength to continue despite some recession fears. Towards 2024 the debt maturities will ramp up significantly. Lufthansa has been able to reduce its net debt to €6.2 billion meaning that is debt maturities are covered until somewhere in 2025. The company is now aiming to reduce that net debt position by exploiting the strong market environment which even allows the less fuel-efficient aircraft to be operated profitably.

Conclusion: Deviation From New Normal Makes Sense

In the early stages of the pandemic, we saw the airline and aerospace industry make rosy projections on environmental goals and environmental impact of their fleet transformations which made it more appealing for governments to provide aid next to saving economic strength and retain jobs.

Fastforwarding to today, we see demand strength exceeding expectations making the less efficient aircraft valuable assets to generate value despite high fuel prices. This is further amplified by the inability of original equipment manufacturers to meet aircraft demand in support of air travel demand and as a result airlines are returning aircraft to the fleet of which it previously was expected that they would never return.

So, we are seeing how a combination of circumstances is leading to a partial walk back from the new normal lines that companies such as Lufthansa introduced during the pandemic where the closest non-zero probability was attached to the return of these aircraft.

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