Generation of strong free cash flows is a principal goal of financial management

As a result of the coronavirus pandemic and the stabilisation measures necessary because of it, the Company’s net debt has risen significantly. One prerequisite for the prompt repayment of this funding is to generate strong free cash flows. As well as increasing the operating result, the main instruments for achieving this are strict working capital management and an investment focus on projects with the highest value creation.

Adjusted free cash flow in 2020 came to EUR –3,669m (previous year: EUR 203m).

Primary, secondary and financial investments in mio. EUR 1)

1) Excluding acquisition of shares.

Improvements in working capital management support cash flow generation

In strengthening and intensifying working capital management even once the acute crisis is past, the aim is to improve cash flow. The focus is on optimising the capital committed to the short-term operating business. Specifically, measures may include strict receivables management, improving or extending the payment targets for suppliers and optimising inventories. In view of the crisis, options such as requiring advance payments from customers or deferring payments may be examined and used in special cases.

Focused investing activities to maximise return on capital employed

As a rule, the Lufthansa Group endeavours to concentrate its capital expenditure on projects with the highest value creation. Investments planned in all segments for 2020 and 2021 have been reviewed and postponed – whenever possible and economically viable – in order to minimise short-term cash outflows. Capital expenditure was thus reduced in 2020 from the more than EUR 3bn originally planned to EUR 1.3bn.

Capital expenditure should remain lower than before the coronavirus pandemic. However, the Lufthansa Group will continue to invest in the renewal of its fleet, in-flight and ground products and infrastructure. The aircraft on order serve mainly to replace older, less efficient models. The allocation of new aircraft to the different airlines and bases is constantly optimised according to value-based criteria. This makes the investment profile more balanced and increases focus on the deployment of capital.

Gross capital expenditure (without expenditure on equity investments) fell by 64% to EUR 1,273m in 2020. This was primarily achieved by restructuring the payment plans for aircraft investments. Advance and final payments for aircraft and aircraft components along with aircraft and engine overhauls account for most of the capital expenditure.

Reducing capital expenditure compared with the original budget made a major contribution to limiting the fall in free cash flow.

Cashflow and capital expenditure in €m

1) Without acquisition of equity investments.
2) Since 2018: Adjusted free cash flow.

Free cash flow used to reduce debt

Before the coronavirus pandemic, the Lufthansa Group’s dividend policy was to distribute to shareholders 20% to 40% of net profit, adjusted for non-recurring gains and losses. The crisis prompted the Annual General Meeting in 2020 to suspend the dividend for 2019, however.

In the long term, shareholders are expected to once again participate directly in the Company’s success. However, the stabilisation measures of the Economic Stabilisation Fund (WSF) currently rule out the payment of dividends. This applies until the stabilisation measures come to a complete end, i.e. all loans and silent participations have been repaid, and the WSF has sold all its shares in the Company. Following successful repayment of the loans and silent participations, the WSF is obliged to sell the shares it still holds in Deutsche Lufthansa AG. The sale must take place no later than year-end 2023. If the silent participations are sold after this date, the obligation must be met directly. On condition that the net profit for the year in the individual financial statements prepared in line with German commercial law for Deutsche Lufthansa AG permits a distribution of this amount, dividend payments would again be possible in the year following the end of the stabilisation measures. Until then, the Group will use its free cash flow primarily for repaying its financial liabilities, including the state stabilisation measures.