Lufthansa slashes budget in response to downturn from coronavirus

Big jet takes off from Hong Kong.

(Updated 12:05 with details on Delta)

When airlines began suspending service to China and Hong Kong last month because of the coronavirus outbreak it was understood their finances would be dinged in some way. Now, the dings are becoming visible.

On Tuesday, Deutsche Lufthansa AG said it is implementing a range of cost-reduction measures to counter the lost revenue associated with COVID-19, the technical name for the coronavirus, as it begins to spread more widely to Europe and other parts of the world. 

The airline group had previously canceled all Lufthansa, SWISS and Austrian Airlines flights to China through March 28 and dialed back service to Hong Kong. Thirteen of its planes are now parked.

Lufthansa said its planned budget is being immediately reduced by instituting a hiring freeze, offering employees unpaid leave and expanding part-time work options where allowed under union contracts. All training classes for flight attendants and airport personnel will end in April and current trainees will not be hired for the time being. At flagship carrier Lufthansa, funding for projects and materials will be slashed 10% and 20%, respectively.

The news follows United Airlines announcement late Monday that it is pulling back full-year guidance for 2020 because of the uncertainty associated with the flu-like virus, which has sickened about 80,000 people and killed more than 2,700. United (NASDAQ: UAL) said about 15% of its business comes from China and Asia. China service is canceled through late April and its Asia flights are 75% empty.  

On Tuesday, Cathay Pacific (OTCUS: CPCAY) added yet another destination – Kolkata, India – to its schedule blackout because of low demand.

When widebody passenger planes don’t fly the cargo side of the business also doesn’t make money.

The Dow Jones Average lost more than 3% on February 25 and has declined nearly 2,000 points over two days as fears grow of a global pandemic. U.S. bond yields also fell to record lows.

The number of confirmed COVID-19 cases in South Korea now number in the hundreds, and if the government imposes travel restrictions Korean Airlines would be severely harmed. Helane Becker, airline equity analyst at Cowan investment bank, noted that Delta Air Lines would be the most impacted of U.S. carriers under such a scenario because of its 11% investment in Korean Airlines and their network connections.

Delta on Tuesday said it is reducing the number of weekly flights between the U.S. and Seoul-Incheon Airport due to health concerns related to the COVID-19 virus. It is suspending service between Minneapolis/St. Paul and ICN from Feb. 29 through April 30 and reducing to five times weekly its service between ICN and Atlanta, Detroit and Seattle through April 30. The airline’s new service from Incheon to Manila, previously scheduled to begin March 29, will now start on May 1.

Delta (NYSE: DAL) also is offering travel waivers to Italy and United and American are expected to do the same, which could further reduce revenues.

Leasing companies might try to help struggling customers by purchasing aircraft from them and shifting assets to other parts of the world where demand remains strong, Becker suggested.

Air cargo operators should probably renegotiate leases, which can run about $1 million per month for modern aircraft, for easier terms or deferred payments while cash flow is weak, Vladimir Zubkov, secretary general of The International Air Cargo Association, told FreightWaves by email. 

As previously reported, freighter companies have cutback scheduled flights to China and have little outbound volume while government restrictions and logistical challenges minimize manufacturing output. Inbound rates for dedicated charters have jumped in recent weeks because of medical missions, but outbound demand and rates have fallen dramatically. 

That could soon change because the national and local governments are relaxing criteria for factories to resume operations and millions of migrant workers continue to return to job sites, according to Chinese officials. Dedicated charter aircraft are one option companies are considering to get around expected bottlenecks in the coming weeks and months, logistics industry professionals say.