The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the issuer rating of Deutsche Lufthansa AG (Lufthansa) at BBB-. The rating Outlook remains Positive. Concurrently, Scope has affirmed the ratings for senior unsecured debt at BBB-, subordinated (hybrid) debt at BB and short-term debt at S-2.

Rating rationale

The rating action reflects Scope's expectation that Lufthansa will maintain its good credit metrics despite a challenging FY 2024. Geopolitical uncertainties and strikes at the beginning of the year will weigh on the FY 2024 results. However, Scope believes that the Group will be able to overcome the challenging market environment, control rising costs and deleverage in the medium term. All core business segments are on track. Rising passenger airlines revenues, a resilient cargo business and the contribution from maintenance, repair and overhaul activities will ensure future growth.

Lufthansa's business risk profile (assessed at BBB-) continues to be supported by the group's well-diversified portfolio and the individual business segments' strengths. Pent-up demand in home markets has allowed passenger revenues to recover, especially in leisure travel. Strong premium leisure demand has offset the slower recovery of corporate travel demand after the crisis. However, strong demand continues to be counterbalanced by several supply constraints in the form of delayed aircraft and seat deliveries, unplanned engine overhauls, and ongoing labour shortages. Capacity in all of Lufthansa's passenger airlines expanded in 2023, reaching 84% of the pre-crisis level on average and helping to achieve an average load factor of 83%. This momentum has continued into 2024 and is expected to benefit from sustained high air fares (as demand is outstripping supply), the continued strength of transatlantic and intra-European travel, and the progressing recovery of Asia-Pacific. The full-year capacity for 2024 should reach around 92% of the 2019 level. With tight productivity management, the group expects capacity to further improve in 2025.

The robust market positions of Lufthansa Cargo and Lufthansa Technik are key factors in Scope's assessment of Lufthansa's strong market share and diversification. Lufthansa Cargo, which is normalising at a higher level than pre-crisis, is a market leader with a differentiated offering, also specialising in complex transport and benefitting from persistently high demand for airfreight. Technik holds a leading position in the expanding maintenance, repair and overhaul market and is well positioned to capture this growth, supported by a diversified customer base and partnerships with original equipment manufacturers. Lufthansa will also benefit from the especially strong demand for maintenance services as the airline industry continues to expand capacity.

At the same time, the group is executing the transformation from an aviation to an international airline group by finalising the sale of AirPlus in summer 2024 and progressing on the takeover of ITA airways.

The group is making material moves towards improving profitability, as showcased by a 7.6% adjusted EBIT margin for the full year 2023. Unit costs increased by 2% in 2023 despite much higher cost inflation, especially in the areas of fees and charges as well as personnel, and continued investments in operational stability. The strikes in Q1 and the new labour agreement will weigh on Lufthansa's adjusted EBIT margin in 2024, which will be lower than 2023. Unit costs are expected to remain stable compared to the previous year excluding the impact of the strike.

For 2025, Scope expects unit costs to decline, driven by capacity expansion, increasing crew and aircraft productivity, and efficiency gains from fleet renewals and the standardisation of operational processes and systems. The group is targeting an EBIT margin of at least 8% in the medium term, and achieving this will further support Scope's profitability assessment.

Despite a resilient market share and improving profitability, Lufthansa's business risk profile is limited by the risks of cyclical changes to discretionary travel that may result from event risks (such as a pandemic or war) and the fiercely competitive environment.

Lufthansa's financial risk profile is unchanged at BBB, although Scope recognises that there has been some improvement in this category. This is primarily driven by better leverage credit ratios, namely Scope-adjusted debt/EBITDA and Scope-adjusted funds from operations/debt, which have been improving steadily over the past two years. Scope-adjusted debt/EBITDA currently stands at 1.5x. However, leverage will deteriorate to around 2.0x in 2024 due to the labour strikes that will weigh on H1 financial results. Scope expects a leverage ratio improvement to below 1.5x by FY 2025 as the group will strive to stabilise costs after concluding several long-term collective wage agreements this year and redefining strategic priorities.

Debt protection as measured by Scope-adjusted EBITDA/interest cover will likely remain strong at around 10x, supported by Lufthansa's increased use of cheaper financing in the high interest rate environment (such as the use of JOLCO aircraft financing). At the same time, free operating cash flows are constrained by considerable capital expenditure related to new aircraft, which will be partly offset by inflows from sale and leaseback transactions. Cash flow cover as measured by Scope-adjusted free operating cash flow/debt is forecasted in the range of 5%-15% in the medium term.

Additionally, Scope estimates that Lufthansa will maintain a significant level of cash on its balance sheet each year. Coupled with access to EUR 2.5bn in undrawn revolving credit, this will result in internal and external liquidity coverage ratios adequate to sufficiently cover borrowings maturing in 2024 (EUR 2.5bn) and 2025 (EUR 2bn).

In terms of supplementary rating drivers, financial policy continues to be neutral for the rating. Management has a disciplined strategy as well as a commitment to deleveraging and keeping the investment grade level. Dividend payments were resumed in 2024.

Scope's sees labour management, CO2 emissions and indirect sustainability challenges as the main ESG challenges facing the airline industry (credit-negative ESG factors).

One or more key drivers of the credit rating action are considered ESG factors.

Outlook and rating-change drivers

The Outlook is Positive and incorporates Scope's expectation of an improving financial risk profile, exemplified by Scope-adjusted debt/EBITDA moving below 2.0x.

A rating upgrade could be considered if Scope's expectations materialise and Lufthansa's leverage (Scope-adjusted debt/EBITDA) solidifies at a level below 2.0x. This could be the consequence of successful efforts to lift profitability despite the increasing costs that were incurred in 2024.

Scope could revise the Outlook back to Stable if Scope-adjusted debt/EBITDA remains at or above 2.0x in 2025. This could be triggered by an inability to control increasing costs, or a sudden and unexpected negative change in discretionary travel (business and leisure).

Long-term and short-term debt ratings

Senior unsecured debt has been affirmed at BBB-, in line with the issuer rating.

Outstanding subordinated debt (hybrid) remains two notches below the issuer credit rating, at BB.

The affirmed short-term rating of S-2 is based on the BBB-/Positive issuer rating and backed by strong short-term liquidity cover and conservative liquidity management. The rating is further supported by well-established bank relationships and good standing in the capital markets, evidenced by the revolving undrawn credit line.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology The methodology
used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 16 October 2023), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in 'Rating Definitions – Credit Ratings, Ancillary and Other Services', published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings' definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings and Outlook were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Azza Chammem, Associate Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The issuer Credit Rating/Outlook, the short term Credit Rating and the senior unsecured debt Credit Rating were first released by Scope Ratings on 4 November 2016. The Credit Ratings/Outlook were last updated on 24 May 2023.
The subordinated (hybrid) Credit Rating/Outlook was first released by Scope Ratings on 6 June 2018. The Credit Rating/Outlook was last updated on 24 May 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope's ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope's ratings, rating reports, rating opinions, or related research and credit opinions are provided 'as is' without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope's ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will independently assess the suitability of each security for investment or transaction purposes. Scope's credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.