Lufthansa’s Quarterly Loss Narrows on Higher Fares, Freight

Deutsche Lufthansa AG (LHA), Europe’s second-biggest airline, said its first-quarter operating loss narrowed as demand for goods and passenger transport outweighed higher fuel and tax costs.

The Lufthansa Cargo unit almost doubled profit from a year earlier to 64 million euros ($95.3 million), and a 5.1 percent increase in average fares helped earnings at the passenger divisions, the company said today. The group operating loss shrank to 227 million euros from 330 million euros.

Passenger traffic grew 6.9 percent in the quarter amid a continuing recovery in the world economy, helping to lift sales 12 percent to 6.4 billion euros. Lufthansa is seeking to offset higher fuel costs by shaving expenses elsewhere, Chief Executive Officer Christoph Franz told shareholders on May 3 in Berlin.

“It’s a very solid set of numbers, with a strong logistics business making up for some shortfalls on the passenger side,” said Jochen Rothenbacher, a Frankfurt-based analyst at Equinet AG who recommends buying the carrier’s shares.

Lufthansa stock has declined 12 percent this year, valuing the company at 6.57 billion euros. The shares retreated as much as 1.8 percent to 14.23 euros and were trading 1.1 percent lower as of 11:44 a.m. in Frankfurt.

Analysts had predicted a 247 million-euro operating loss, based on the average of nine estimates. Lufthansa defines its operating result as profit before interest and tax adjusted for gains and losses related to assets and financial investments.

Net Loss

The net loss widened to 507 million euros from 298 million euros after a 292 million-euro reduction in the book value of hedging options mainly related to fuel purchases.

“This adjustment really doesn’t reflect the economic reality” Chief Financial Officer Stephan Gemkow said in a conference call with reporters. “It’s purely an accounting effect, while in actuality these hedging options are taking a lot of pressure off our operating result.”

Traffic gains have been held back as unrest in Arab countries curbed demand on routes served by the Austrian Airlines and British Midland units and as Lufthansa modified its Japanese schedule following the March 11 earthquake and tsunami.

“For the whole year, we expect fluctuations in demand, in particular from the crisis regions,” Gemkow said. Ticket pricing levels in Europe remain “enormously challenging,” he said.

A German government tax on air travel, which went into effect at the beginning of the year, hurt profit at the main brand and Germanwings low-cost units.

Fuel Squeeze

Margins are also being squeezed by fuel costs, with crude touching a 2 1/2-year high May 2. Kerosene expenses rose 28 percent to 1.4 billion euros in the quarter, including a positive effect from hedging activities of 177 million euros.

Still, Lufthansa has cut its forecast for fuel costs this year to 6.6 billion euros from an earlier estimate of 6.8 billion euros, Chief Financial Officer Stephan Gemkow said, adding that a weakening US dollar is helping the airline reduce expenses. It benefits from hedging at an oil price of at least $92, according to the CFO.

Lufthansa aims to shave 1 billion euros off annual costs from 2008 through 2011, with at least 350 million euros of savings due this year, the company said in March. It also plans to make Austrian Air profitable in 2011, while Gemkow said British Midland will still suffer a loss.

Austrian Air

Some units may face “short-term adjustments” to lift earnings, the company said today. The Austrian unit, whose loss narrowed 3 percent to 64 million euros in the quarter, is reducing staff at the management level, slashing travel budgets by 50 percent and placing a ceiling on wage costs, Gemkow said. British Midland’s shortfall rose 40 percent to 63 million euros.

Lufthansa, which competes with Air France-KLM (AF) Group and International Consolidated Airlines Group SA in Europe, last year reported net income of 1.1 billion euros, the best full- year result since 2007.

The company today reaffirmed forecasts for an increase in sales and operating profit this year. It declined to further quantify the target, citing the events in Japan and North Africa and their effect on the oil price.

Airline earnings will fall by almost 50 percent this year as higher oil prices limit the impact of an economic recovery, the International Air Transport Association predicted March 2. Air cargo services bucked a trend of slowing traffic growth in the airline industry in March, gaining 3.7 percent after a 1.8 percent increase a month earlier, IATA said this week.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Chad Thomas in Berlin at cthomas16@bloomberg.net

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