July 26 (Bloomberg) -- Deutsche Lufthansa AG, Europe's second-biggest airline, said second-quarter net income more than doubled after the carrier added seats and flew more people. The shares fell the most in seven weeks as cargo earnings dropped.

Net income rose to 438 million euros ($603 million), or 95 cents a share, from 183 million euros, or 40 cents, a year earlier, the Cologne, Germany-based company said in a statement today. Sales climbed 3.6 percent to 5.39 billion euros.

The airline boosted first-half passenger traffic 7.7 percent by expanding capacity to confront rivals such as Air France-KLM Group, Europe's biggest airline, and discount carrier Air Berlin Plc. Lufthansa expects 2007 operating profit of ``significantly'' more than 1 billion euros, the highest in seven years.

Lufthansa published a ``positive set'' of figures, Robert Heberger, an analyst at Merck Finck, said in a note to investors. ``On the negative side,'' yields, a measure of average fares, and the cargo unit's earnings were ``below our expectation.''

Shares of Lufthansa fell 65 cents, or 3.1 percent, to 20.32 euros in Frankfurt in the biggest drop since June 6. The stock has fallen 2.5 percent this year, valuing the company at 9.31 billion euros.

Net income beat a 315 million-euro median estimate of nine analysts surveyed by Bloomberg News. Operating profit, or sales minus operating expenses and costs from asset disposals, rose 21 percent to 450 million euros, exceeding the 415 million-euro estimate. Operating profit totaled 845 million euros in 2006, and the figure was 1.04 billion euros in 2000.

Consensus Expectations

Analyst expect Lufthansa's 2007 operating profit to be between 1 billion euros and 1.3 billion euros and the German carrier anticipates to end up ``within this range,'' Chief Financial Officer Stephan Gemkow said in an interview today.

Yields fell 1.7 percent in the first six months of the year, matching the previous year's decrease, Lufthansa said. The passenger division almost doubled operating profit to 278 million euros as the airline carried more travelers and demand for business and first-class tickets was ``high.''

The logistics division, which includes the Lufthansa Cargo brand, posted a 38 percent slump in first-half operating profit to 29 million euros as prices for carrying freight declined.

Fuel Surcharge

The carrier has protected earnings from rising fuel costs with ticket surcharges. Lufthansa raised the surcharge on intercontinental tickets 19 percent on July 20 following oil- price increases in recent weeks. The average price of jet fuel in northwest Europe rose about 18 percent in the first six months of the year.

Lufthansa's fuel bill will probably rise to 3.9 billion euros this year from 3.4 billion euros in 2006, boosted by the July 1 consolidation of the Swiss International unit, the airline said. First-half spending on kerosene was unchanged at 1.6 billion euros.

Earnings in the second quarter were helped by a 71 million- euro gain after WAM Acquisition SA, a venture including Lufthansa that owns the Amadeus Global Travel Distribution travel- reservation service, bought some of the German airline's stake in the partnership.

The airline's increased 2007 forecast includes second-half operating earnings from Swiss International. The German airline agreed to buy Basel, Switzerland-based Swiss International in 2005 and then had to wait for traffic rights to be renegotiated before taking full control earlier this month.

Thomas Cook Gain

Lufthansa earlier this year sold its half of the Thomas Cook travel company to former partner KarstadtQuelle AG, the German retailer now called Arcandor AG, booking a gain of 503 million euros. Lufthansa has in the past allowed investors to ``share in the profits from such divestments and we will continue to do that,'' Gemkow said today, without giving details.

Lufthansa wants to increase adjusted operating profit as a percentage of sales and achieve the best margins of any European network airline, Gemkow said, without giving a target or timeframe. The 2006 operating margin, adjusted to include gains from releasing provisions, was 4.9 percent less than British Airways Plc's 7.1 percent margin in the year ended March 31.

Carriers are jockeying for access to routes between the U.S. and the European Union under an ``open skies'' treaty taking effect in March that will allow European carriers to fly from any airport in the EU to any destination in the U.S.

SAS Disposals

SAS Group, owner of Scandinavian Airlines, announced last month that it plans to sell the Spanair division and a 20 percent stake in U.K. airline BMI to focus on flights serving northern Europe. Lufthansa, which owns one share less than 30 percent in BMI, hasn't yet been approached about acquiring SAS's stake, Gemkow said. He described media reports about a possible Lufthansa bid for Madrid-based Spanair as ``rumors.''

Traffic, measured as the number of passengers multiplied by the distance flown, has risen the most on Lufthansa's European routes this year after the carrier introduced round-trip fares of as low as 99 euros to counter rising competition from Dublin- based Ryanair Holdings Plc; Luton, England-based EasyJet Plc; and Air Berlin, Europe's three biggest low-cost carriers.

Industrywide passenger traffic is expected to rise by between 6 percent and 7 percent and cargo traffic by 4 percent, and Lufthansa ``will overall match or slightly exceed these growth figures,'' Gemkow said.

Lufthansa started non-stop flights to Kolkata, India, in December and added services to Denver and Detroit in March. The airline boosted first-half seating capacity 4.6 percent.

The company published group first-half earnings late yesterday. Net income in the period rose to 992 million euros from 85 million euros a year earlier and sales gained 5.2 percent to 10.1 billion euros. Operating profit increased 64 percent to 486 million euros.

To contact the reporter on this story: Jann Bettinga in Frankfurt at jbettinga@bloomberg.net.

Last Updated: July 26, 2007 13:26 EDT