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Interview

Entry bans by Asian countries slow air recovery: Lufthansa CEO

Pre-COVID travel demand not expected "before 2024"

Lufthansa CEO Carsten Spohr stressed that "it will take at least until 2024 before demand bounces back to where it was in 2019."

FRANKFURT -- The head of Lufthansa said the German airline will not be able to resume pre-COVID flight frequency to Japan and China as quickly as hoped. "We've now realized that it will take a marathon to get through the crisis, not a sprint," CEO Carsten Spohr told Nikkei in an interview.

Demand for air travel remains weak. As of the end of August, the number of Lufthansa flights was around one-third of the pre-pandemic level. Passenger traffic was down by 75%, and the carrier operates roughly half the number of regular routes. Of the 760 planes in its fleet, only 300 are active.

Lufthansa used to operate 45 weekly flights between Japan and Europe, but stood at only five by the end of August. The company plans to increase this to 16 in September with five flights a week between Frankfurt and Tokyo.

But this is far fewer than planned in July, as few reservations are coming in. "We had to reduce because of a sudden slump in demand," said Spohr. "An increase in international air travel will always depend on entry regulations put in place by countries worldwide; be it Japan, China, Singapore or any other country,"

Japanese government announced to lift the reentry ban for foreign residents on Tuesday, allowing those who left the country after coronavirus travel bans were imposed to return. Spohr hopes demand will grow. As for the Frankfurt-Nagoya route frequently used by auto industry business people, he said: "The current demand, unfortunately, doesn't allow for flights between the two cities. Our current planning sees us operating to and from Nagoya by summer next year at the earliest."

China is recovering from the pandemic faster than other nations. But Spohr noted that regulations are curbing demand for air travel.

Passengers traveling from Germany to China are required to quarantine upon arrival even if they test negative at the coronavirus test centers in Germany, which are approved by China. "We of course need the right regulatory framework that allows airlines to meet an increase in demand," Spohr said.

In the interview at his office overlooking Frankfurt am Main Airport, Spohr said, "It will take at least until 2024 before demand bounces back to where it was in 2019," stressing the need for restructuring to cut costs.

Lufthansa aims to downsize its fleet by 100 aircraft by 2023 and slash up to 26,000 jobs. But negotiations with labor unions are hitting a wall, especially with the ground staff union. According to Spohr: "We are currently not able to sign any agreement because their offer is too far away from what we need as a contribution to secure our company's future. Due to the extremely difficult situation, it has become far less likely that we can weather this crisis without any involuntary redundancies." The airline plans to freeze new hires for the foreseeable future.

Catering and financial services subsidiaries may be sold, and even an aircraft maintenance unit could be put up for sale. Spohr again elaborated: "The less close a subsidiary is to our core, the more we are in principle open to these kinds of thoughts. The core is flying. Areas less close to the core are, for example, catering and financial services. Then of course there are areas in between, like maintenance. We have received nine billion euros from European governments, most of it from Germany. We want to pay all of it back over the next three years. This means we will also have to make some decisions concerning our portfolio."

Spohr suggested that Lufthansa will boost ties with existing partners such as All Nippon Airways and United Airlines. "In times of crisis, you need your friends more than ever before. With more contracts and more passengers every year. But the structure of the joint venture itself will not change. So yes: We are deepening our relationship with partners like ANA through this crisis." He denied the possibility of boosting capital through cross-shareholding.

Spohr once described the pandemic as a unique opportunity to stop aiming for "growth at any price." Demand for travel doubled between 2009 and 2019 against the backdrop of competition with Middle Eastern rivals and low-cost carriers. Asked to elaborate, Spohr said: "Part of the growth was fueled by fares that were far too low, for example, by airlines offering tickets to Spain for 9 euros. I call this 'artificial growth,' which is both not sustainable and not responsible; for the environment but also for the people who have to work for airlines offering such tickets. Because of the coronavirus crisis, we will have less demand, a little less globalization, and probably less economic power of the world's large economies. That is why I am convinced that we as an industry need to live with the fact that there will be less growth."

Before the pandemic, the German airline was reportedly considering acquiring rivals, including TAP Air Portugal. "In a few years, consolidation will return to our industry, but for now it's on pause. First of all, a large company like Lufthansa Group is now busy managing the effects of the current crisis. Second, smaller airlines that were ripe for consolidation were saved by their governments and are not for sale."

Lufthansa aims to downsize its fleet by 100 aircraft and cut up to 26,000 jobs.   © Reuters

The COVID-19 crisis has forced Lufthansa to reduce the number of flights by about 95%, and now the carrier struggles with financing. "When the crisis started, it was initially viewed as an operational crisis," Spohr said. "There was a lot to do for the top management: bringing aircraft back home and temporarily grounding them as well as having our crews return to Germany and other European countries. Then came very intense negotiations with the governments of our home countries to stabilize and ensure the future viability of Lufthansa Group."

Lufthansa was so driven to the edge that it considered filing for bankruptcy protection at one time, but got a new lease on life when the German government, the European Commission and the shareholders of Lufthansa approved a 9 billion euro ($10.7 billion) bailout by June.

But the CEO is still on guard. "These were -- and still are -- very challenging times. After the fast-paced decisions we had to make in the first few weeks, we have now realized that it will take a marathon to get through the crisis, not a sprint. The whole situation will remain challenging for our industry."

Although Spohr did not comment, Lufthansa is projected to post an EBIT, or earnings before interest and taxes, loss until at least 2021. With demand uncertain and travel restrictions in flux, the carrier wants to complete restructuring and return to profitability.

Almost all major airlines have received some form of public assistance to pull through the crisis. "As every airline operating on a global scale has received government support, competition will remain as fierce as ever. But we intend to secure a top position," Spohr said.

Additional reporting by Kyra Jaeger.

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