Lufthansa Profit Falls on Pilot Strike, Decline in Fares

Deutsche Lufthansa AG (LHA), Europe’s second-largest carrier, said second-quarter profit fell and predicted travel markets will remain weak in the second half as overcapacity persists, causing the stock to slide.

A capacity glut in North and South America, Europe, and more recently in Asia-Pacific depressed prices in the passenger and cargo segments, the company said in a statement today. Second-quarter sales fell 2.1 percent to 6.3 billion euros ($8.4 billion), with operating profit down 17 percent to 359 million euros, missing the estimate of 394 million euros in an analyst survey conducted by the airline.

“The second quarter has absolutely not been satisfactory, both as far as one-time effects and pressure on fares goes,” Chief Financial Officer Simone Menne said on a conference call. “We have catching up to do over the summer.”

Carsten Spohr, who took over as chief executive officer in May, six weeks into the job cut the target for operating profit amid competition from low-cost carriers and as airlines from the Persian Gulf add capacity with their wide-body fleets. Lufthansa today reiterated its forecast for operating profit of about 1 billion euros for this year and 2 billion euros next.

Pilot Strike

Lufthansa fell as much as 67 cents, or 4.6 percent, to 13.66 euros in Frankfurt, the most since July 10. The stock has lost about 10 percent in value this year, compared with a 6.5 percent decline of the Bloomberg EMEA Airlines Index.

Yields in the second quarter, a measure of average fares, declined 3.8 percent, Menne said, deteriorating from a decline of 3.2 percent in the first quarter.

A pilot strike in April trimmed earnings by 60 million euros, with bookings taking about 6 weeks to recover, the company said earlier. To date, forward bookings “remain weak,” the company said today. Funds trapped in Venezuela also cost Lufthansa the equivalent of 61 million euros. The country owes airlines about the globe $4.1 billion, the International Air Transport Association has said.

“Lufthansa remains locked into its remaining summer timetable, with overcapacity and prices progression below that the company had originally budgeted likely continuing into the peak profit season of the year,” Damian Brewer, an analyst at RBC Capital Markets in London, said in a note. Performance in the third quarter will likely “worsen,” he said.

Falling Demand

Global conflicts have also dented demand, with Lufthansa’s Austrian unit suffering declines on routes to Russia and Ukraine, and being forced to pause services to Damascus in Syria, Tripoli in Libya, and Baghdad. Austrian’s first-half operating loss widened 26 percent to 44 million euros.

Spohr this month announced the creation of a long-haul discount arm by potentially expanding its existing SunExpress joint venture with with Turkish Airlines. (THYAO) The company will also build out its Eurowings brand as a low-cost unit within Europe, and trade its fleet of Bombardier Inc. (BBD/B) CRJ900s into bigger Airbus A320s by next year.

Air France-KLM Group (AF) on July 8 trimmed its full-year profit forecast, saying earnings before interest, tax, depreciation and amortization will be 2.2 billion euros to 2.3 billion euros, compared with a previous target of as much as 2.5 billion euros. British Airways parent company International Consolidated Airlines Group SA (IAG) reports earnings tomorrow.

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

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