Lufthansa Plans to Triple Earnings on Short-Haul Revamp

Deutsche Lufthansa AG (LHA), Europe’s second-largest airline, reinstated dividend payments and maintained a target to triple operating profit within two years after European operations returned to profit.

Lufthansa plans to pay a dividend of 45 euro cents a share after scrapping the payout for 2012, and said it earned 697 million euros ($972 million) in operating profit for 2013, a decline of 17 percent after adjusting the prior-year figure for a change in accounting for pensions. That exceeded the 662 million-euro average of analyst estimates compiled by Bloomberg.

“We have strengthened the earnings power again last year,” and the trend “is sustainable,” Chief Executive Officer Christoph Franz said in a statement. “Lufthansa and its employees will continue to successfully hold their own in an industry which will continue to change rapidly and consolidate further.”

Lufthansa rose as much as 7.8 percent to 19.32 euros and was trading up 6.5 percent at 3:09 p.m. in Frankfurt. The stock has gained 23 percent this year.

The company reiterated a goal to lift operating profit by 1.5 billion euros by 2015. Adjusting for a change in the depreciation method for aircraft, operating profit will amount to 2.65 billion euros by then, the Cologne, Germany-based airline said today. The passenger business in Europe was profitable for the first time in five years, Lufthansa said, without providing details.

CEO Shift

Franz, 53, is leaving Lufthansa to become chairman of drugmaker Roche Holding AG and will be succeeded on May 1 by Carsten Spohr, who currently runs the company’s main passenger-airline unit. His departure coincides with Lufthansa’s biggest efficiency push, which includes shifting European routes that aren’t tied to its two German hubs to the Germanwings unit and cutting more than 3,500 job as it targets record operating profit while refurbishing planes and rejuvenating the fleet.

Air France-KLM (AF), Europe’s largest airline, is also in the midst of an earnings recovery. Earnings before interest, taxes, depreciation and amortization surged 34 percent in 2013 as Air France joined Lufthansa and International Consolidated Airlines SA in scaling back. Air France returned its passenger business to profit in 2013, it said Feb. 20.

Unit Results

Lufthansa’s passenger-airline business generated an operating profit of 495 million euros, a decline of 11 percent, Lufthansa said. Profit at the cargo unit fell 27 percent to 77 million euros. Both the maintenance-division, where earnings rose 23 percent to 404 million euros, and the catering unit, which posted 4 percent higher earnings at 105 million euros, had record results.

Yields, a measure reflecting ticket prices, declined 2.3 percent last year, fueled by a drop of 4 percent in the fourth quarter, when they fell 7.8 percent in the Asia/Pacific region and 4.3 percent in Europe. Regional yield trends will probably continue this year, Chief Financial Officer Simone Menne said.

For this year, Lufthansa forecast operating profit of 1.3 billion euros to 1.5 billion euros. That includes a lift of about 340 million euros as Lufthansa switches to depreciating planes over 20 years to a residual value of 5 percent, from 12 years currently to a residual value of 15 percent. The lower annual depreciation cost means Lufthansa’s 2015 target for operating profit is lifted accordingly to 2.65 billion euros, from 2.3 billion euros earlier.

Currency Effect

A weaker Japanese yen was among the factors that restrained the benefits of Lufthansa’s efforts to cut costs, the company said.

Fuel costs fell 4.5 percent last year to 7.06 billion euros, and will decline to about 6.8 billion euros this year, the company said. Unit costs, a measure of expenses per seat offered, will decline by about 4 percent this year, an improvement from the 2 percent decline forecast in November, as the new depreciation method for aircraft is applied.

Lufthansa today said it will carve out its loyalty program Miles & More, adding it has no intention to sell the unit. It plans to conclude the sale of the infrastructure services portion of its systems unit by the end of the year, with a tender in April. The carrier may raise surcharges or introduce new ones to lift ancillary revenue and is considering an integration of the Austrian unit’s maintenance operations with the parent company.

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net Tom Lavell, David Risser

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