Lufthansa in surprise rights issue

LONDON - Lufthansa, the German flag-carrier, stunned the airline industry yesterday by springing a €750million ($1.47billion) rights issue on its shareholders.

The rights issue, thought to be the biggest ever by an airline, follows a loss at Lufthansa of nearly €1bn last year. The proceeds will be used to help finance the €4.7bn cost of buying and introducing 15 new Airbus A380 super-jumbos.

The surprise announcement sent Lufthansa shares into a tailspin, the price falling by 7 per cent at one stage before recovering slightly to end the day 5 per cent lower at €11.50, valuing the company at €4.4bn.

Lufthansa's move will raise speculation that other large carriers will be forced into capital-raising exercises in the face of continued uncertainty in the airline market, savage price-cutting and soaring fuel prices.

Wolfgang Mayrhuber, chief executive of Lufthansa, stressed that it had launched the rights issue from a position of strength, and not because it needed to shore up its balance sheet.

At the end of last year, it had net debt of just €519m - a tenth of the borrowings of British Airways. The ratings agency Standard & Poor's said the rights issue would not affect its rating or outlook for the company, adding that it reflected the "conservative financial policy of the management".

Nevertheless, analysts were guarded about the move. David Haysey of Deutsche Bank said: "We are sceptical about new capital in the airline business because airlines haven't been able to earn the cost of capital. It's not a good idea."

Mr Mayrhuber said that Lufthansa expected to post a profit this year, saying: "The airline industry is experiencing a significant upturn. The industry is in a better position than in the crisis year 2003."Lufthansa's €984m loss last year was caused by huge goodwill write-downs in its catering business Skychef.

In the first quarter of this year, it made an operating profit of €62m after a one-off €292m gain from the sale of a stake in the Amadeus travel reservation system. On an underlying basis, its performance also improved with an operating loss for the three months of €116m against €419m for the same period last year.

Under the terms of the rights issue, Lufthansa is offering investors 76.3 million shares at a minimum price of €9.85 on the basis of one share for every five held. This is a 19 per cent discount to Lufthansa's closing share price last Friday.

The rights issue was kept under wraps to avoid a further decline in the Lufthansa share price. It has already slipped some 13 per cent this year.

Mr Mayrhuber said the introduction of the 555-seater A380 would give Lufthansa a "huge competitive advantage" and provide it with a return on investment because its operating costs were 20 per cent lower than those on a Boeing 747 jumbo.

The German airline is due to start taking delivery of its fleet of A380s in 2006. The €4.7bn investment programme includes €2.7bn of payments still due to Airbus, with the rest to be spent on terminals, hangars and other infrastructure and service improvements to support the introduction of the giant aircraft.

Last week Virgin Atlantic, another launch customer for the A380, announced it was delaying its order for 18 months, blaming the lack of preparation for the aircraft at hub airports such as Los Angeles.

- INDEPENDENT