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Business

Catering Unit Poses New Worries for Lufthansa

As the current crisis in the global aviation industry continues to take its toll on Deutsche Lufthansa AG, the Sky Chefs catering business is increasingly causing headaches for Germany's national carrier.

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"Chicken or beef?"

As the current crisis in the global aviation industry continues to take its toll on Deutsche Lufthansa AG, the Sky Chefs catering business is increasingly causing headaches for Germany's national carrier.

With turnover of 3 million euro ($ 2.7 million), Sky Chefs is the world leader in airline catering.

Lufthansa acquired its U.S. parent, Onex Foods Services, on July 1, 2001 for a consideration of 1.3 billion euro ($ 1.17 billion).

But aviation analysts now foresee a contraction in the market for airline catering, particularly in the United States, where the market is seen generating 50% less sales revenue in 2002 than in 2001.

And Lufthansa insiders were saying on Thursday that the prospects for Sky Chefs were causing considerable worry within the group.

A Lufthansa spokeswoman confirmed on Thursday that the group's catering business had seen massive declines. But she said the group had reacted promptly and initiated the necessary counter-measures already.

In other words, the situation was not a new one. But certainly, Lufthansa has now ruled out an initial public offering for Sky Chef, insiders say.

The airline catering industry has been one of the most notable victims of a series of cut-backs in the aviation industry in the wake of September 11.

For example, American Airlines, formerly Sky Chefs' major source of revenue, has simply stopped serving in-flight meals on domestic services.

As a result, Lufthansa has closed around 50 of its 150 catering sites in the United States and laid off more than 4,000 of its 17,000 workers.

"The crisis won't last for ever, but the outlook remains poor," said Stefan Kick, an analyst at BHF-Bank.

He sees a danger that Lufthansa will have to take a write-down of up to 2.4 billion euro ($ 2.16 billion) on Onex at the end of the year, which will impose a further burden on its already strained balance sheet.

Ratings agency Moody's Investors Service on Thursday responded to the growing uncertainty surrounding Lufthansa's business by downgrading the debt rating of Lufthansa Finance, its Netherlands-based finance subsidiary, by two full notches from A2 to Baa1.

A downgrading of this magnitude is a drastic move, but it's by no means unprecedented.

Only in autumn, car makers Ford and General Motors saw their credit ratings similarly downgraded.

Moody's said the Lufthansa downgrading was prompted by an increase in the group's debt levels caused by the acquisition of a 100% ownership in Sky Chefs.

At the same time as Moody's revised its Lufthansa ratings, Standard & Poor's today announced that it had assigned its triple-'B'-plus long-term corporate credit rating to the group.

This means its creditworthiness is seen falling within the medium range, but it also means the outlook for the group is judged to be highly stable.

According to Standard & Poor's analyst Virginie Casin, the rating would have been a notch higher (i.e. A-) without the increased debt caused by the Sky Chefs takeover.