Lufthansa Fares Under Pressure as It Struggles With Revamp

Updated on
  • Shares tumble as yields suffer biggest drop in four years
  • Revenue also down, Ebit loss narrows on fuel savings

Deutsche Lufthansa AG said passenger fares are set to erode further this year as it grapples with unions over a restructuring of European operations aimed at stemming the flow of customers to discount rivals. The stock fell as much as 7.1 percent.

Lufthansa’s yield, a measure that reflects average ticket prices, suffered the biggest drop in at least four years in the first quarter, while airline revenue declined almost 4 percent, the German carrier said in a statement Tuesday.

Europe’s third-largest airline, which is seeking to build its Eurowings discount arm into a rival for low-cost leaders Ryanair Holdings Plc and EasyJet Plc, said the intensity of competition and price pressure shows no sign of easing. It reiterated that earnings will rise only “slightly” this year as weaker fares erode the bulk of 1 billion euros in savings from lower fuel expenses.

“We’re looking into every single cost item and also ongoing projects,” Chief Financial Officer Simone Menne said on a conference call, adding that Lufthansa also has “less visibility” over second-quarter bookings as people delay travel in the aftermath of the Brussels terror attacks. Union talks have been more constructive recently, though there has been no breakthrough yet, she said.

Stock Slides

Shares of Lufthansa fell as much 97 cents to 12.76 euros and were trading down 6.6 percent as of 10:03 a.m. in Frankfurt, extending their decline this year to 12 percent and valuing the group at 5.92 billion euros.

Lufthansa has split airline operations into two, separating its generally profitable network brands from the short-haul flights it aims to turn around with the expansion of Eurowings. Labor groups have stood in the way of that plan, with walkouts holding back group profit for the past two years.

A 237 million-euro fuel saving linked to the lower oil price helped the company pare its adjusted loss before interest and tax to 53 million euros ($61 million) in the first quarter, from 167 million euros a year earlier. Analysts had forecast a 71 million-euro loss, according to figures provided by the company.

Capacity Curb

Yields declined 6.3 percent, the most since Lufthansa began breaking out the figure on a quarterly basis in 2012, while group revenue slipped 0.8 percent. Capacity growth in 2016 will be cut to 6 percent from the 6.6 percent announced earlier, and the group could trim growth further, Menne said.

The Eurowings result was 33 million euros below the prior-year level, reflecting start-up costs for inter-continental flights, according to the company, while the main Lufthansa brand lifted earnings by 244 million euros. A long-haul occupancy rate of 94.2 percent nevertheless shows that the expanded discount arm is “off to a successful start,” with customer feedback “very positive,” Menne said.

The restructuring is also bearing fruit in terms of savings, with unit costs down 4 percent in the quarter, she said, attributing half the gain to sustainable measures and suggesting the company has “turned the trend” on expenses.

Lufthansa benefited from the absence of a year ago expense of 100 million euros attributable to strike costs and write-downs on the Venezuelan bolivar.

The impact of March’s Brussels bombings has been felt most in declining Asian and U.S. group bookings, the CFO said. Lufthansa’s cargo operations, among the industry’s largest, have been hit by overcapacity and won’t now improve profit this year, she said.

European airlines frequently post losses in the first quarter, which falls between the Christmas and New Year period and the summer high season, though British Airways owner IAG SA, which is more advanced in its short-haul restructuring, said last week that operating profit increased more than six-fold to 155 million euros.

(Updates with comments from CFO in fourth paragraph.)
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