Lufthansa Falls Most Since 9/11 as Gulf Rivals Hit Prices

Deutsche Lufthansa AG fell the most since the 9/11 terror attacks after cutting earnings forecasts for this year and next as a capacity splurge at Gulf competitors hurts prices and its own pilots protest against cost cuts.

The stock fell as much as 16 percent in Frankfurt after Lufthansa said in a statement that operating profit will amount to about 1 billion euros ($1.35 billion) in 2014 and 2 billion euros in 2015. That’s lower than prior forecasts of 1.3 billion euros to 1.5 billion euros and 2.65 billion euros respectively.

Chief Executive Officer Carsten Spohr, who took over on May 1, is grappling with the challenge posed by carriers such as Dubai-based Emirates, whose hubs are stripping traffic away from traditional European bases. Gulf airlines have become a “major concern” as fares come under pressure, while a pilot strike and currency changes are also weighing on earnings, Lufthansa said.

“It’s a tough competitive landscape, but these are not new things and its something Lufthansa has no choice but to handle,” said John Strickland, an aviation specialist and director of JLS Consulting Ltd. in London. “This is a moment in history for the Gulf carriers and it’s not going to go away.”

Lufthansa fell as much as 3.21 euros, or 16 percent, to 16.70, the steepest drop since the Sept. 11, 2001, attacks on New York and Washington, when the stock tumbled 25 percent. Today’s decline clips this year’s gain to 11 percent.

Yield Implications

Prices are under most pressure on European and American routes, with Gulf carriers “advancing ever further” into Europe and also beginning to invest in its airlines, Chief Financial Officer Simone Menne said in the statement. Etihad Airways PJSC of Abu Dhabi has taken stakes in carriers including Air Berlin Plc, one of Lufthansa’s biggest rivals.

“This is clearly surprisingly negative,” Investec analyst James Hollins said in a note to investors. “The implications on future Europe and North America yields are that trading will remain poor through the second half of 2014.”

Lufthansa’s European competitors also fell, with Air France-KLM Group down as much as 6.8 percent in Paris and British Airways parent International Consolidated Airlines Group SA sliding 5.6 percent in London.

Both carriers have sought cuts to streamline operations, with IAG on track to reach a 1.8 billion-euro operating profit target by 2015 after scrapping weaker routes and pushing through 3,000 job losses at Spanish arm Iberia. Air France also expects to meet earnings goals after narrowing its first-quarter loss.

Restructuring Update

A pilot strike in early April trimmed Lufthansa’s earnings by 60 million euros, with bookings only recently recovering, the carrier said. Venezuelan moves curbing repayment of dollar debt also cost the equivalent of 60 million euros in bolivar receivables, with Caracas flights halted for a few days.

The airline, which is seeking to respond to the Gulf challenge by lifting service levels with new seats and enhanced catering, will “noticeably reduce” capacity next winter, Menne said. CEO Spohr will unveil a more comprehensive restructuring plan next month, with “everything on the table” in terms of possible cost reductions, she said.

“We are achieving a sustainable reduction of our unit costs and now aim to stabilize the revenue trends, in order to counteract an ever intensifying competitive situation,” she said in the release.

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