Lufthansa Tracks Air France Traffic as IAG Takeovers Narrow Gap

Deutsche Lufthansa AG and Air France-KLM Group, absorbed with plans to end short-haul losses, saw their lead in European aviation slip last year as British Airways owner IAG SA bulked up by extending a takeover spree.

Deutsche Lufthansa AG, Europe’s second-biggest carrier, boosted passenger traffic 2.3 percent in 2013, the German company said today, just ahead of the 2.2 percent gain at market leader Air France-KLM. IAG grew at more than twice the rate of its closest rivals with a 5.8 percent advance, it said Jan. 7.

As Lufthansa moves European flights outside Frankfurt and Munich to low-cost arm Germanwings and Air France reorganizes short-haul services around the Transavia and Hop! units, IAG has gorged on three years of deals. The London-based company completed the takeover of Spain’s Vueling SA in August following the purchase of U.K. carrier BMI in 2012 and the group’s formation via a merger of BA and Madrid-based Iberia in 2011.

While IAG emerged strongest last year thanks to the Vueling deal and the resilience of BA’s North Atlantic routes, Air France-KLM’s past failures have led it to adopt the most sweeping measures for 2014 in terms of restructuring, capacity restraint and product improvement, said Damian Brewer, an analyst at RBC Capital in London.

“The question is if capacity discipline will be strong enough to support prices and margins,” Brewer added, pointing to planned seating increases at Lufthansa and BA. “Life gets tougher for airlines while the economy gets better.”

Turkish Airlines, building Istanbul into a transfer hub to compete with London, Paris and Frankfurt, said today its full-year traffic rose 23 percent after it poured in capacity.

IAG Surge

Traffic growth at Europe’s big three network operators has been reflected in their share prices, with IAG, as International Consolidated Airlines Group SA is known, boosting its worth by more than 117 percent last year and overtaking Lufthansa and discount specialist Ryanair to become the region’s most valuable carrier. The stock has added a further 6.8 percent in 2014 for a value of 8.71 billion pounds ($14 billion).

Lufthansa rose 8.3 percent last year and has gained almost 12 percent so far in 2014 after an 8.5 percent jump today, giving the Cologne-based company a market capitalization of 7.95 billion euros ($11 billion), while Air France-KLM is up 17 percent this year, twice its advance for 2013, and is valued at

2.66 billion euros.

At Lufthansa, passenger traffic -- the number of customers times the distance flown -- last year reached 209.6 billion revenue passenger kilometers, still about 9 percent lower than at Air France-KLM, where the total was 228.9 billion RPKs.

Early in Cycle

IAG posted 186.3 billion RPKs, about 22 percent lower than at Air France, where the gap was 27 percent at the end of 2012, and 12 percent shy of Lufthansa. The purchase of Vueling allowed the company to maintain traffic growth at twice the rate of its peers even after a near 17 percent drop at Iberia, where it’s wrestling with its own cost and overcapacity issues.

Europe’s major airlines are reviewing their commitment to flights within the region in the face of competition from Ryanair and EasyJet Plc, especially where services don’t feed traffic onto more lucrative long-haul services.

“We are very early in the cycle of upswing for airlines and the network carriers are just mid-cycle through their restructuring,” said Stephen Furlong, an analyst at Davy Holdings in Dublin. “The market wants to see deliverability of these programs.”

Lufthansa carried 104.6 million passengers last year, up 1 percent on 2012, making it the European No. 1 by that measure. Air France-KLM and IAG lured 78.4 million and 67.2 respectively and Dublin-based Ryanair attracted 81.4 million, while lagging behind in traffic terms because of its shorter average flights.

Occupancy Levels

Lufthansa -- where Chief Executive Officer Christoph Franz leaves this year to join Roche Holding AG -- increased capacity just 1 percent in 2013, so that its load factor, a measure of seat occupancy, advanced 1 point to 79.8 percent. IAG added 5.2 percent more seats, with occupancy up half a point to 80.8 percent, and Paris-based Air France-KLM had a 1.5 percent hike, spurring the load factor 0.6 percent to 83.7 percent.

That contrasts with a 21 percent capacity boost at Turkish Airlines, where traffic increased to 92 billion RPKs.

Projections from Lufthansa show the German carrier plans a more rapid expansion this year, with capacity increasing about 5 percent and traffic growth forecast to be higher still. IAG and Air France-KLM, which published 2013 traffic figures yesterday, have not given forecasts.

The Lufthansa Passenger Airlines division, which includes the namesake brand and discount arm Germanwings, lifted traffic

2.3 percent last year, while the Zurich-based Swiss unit posted a 3.8 percent gain. Austrian Airlines suffered a 1.4 percent decline as capacity was cut by 2.7 percent.

Before it's here, it's on the Bloomberg Terminal.