Lufthansa Targets Growth as Strong Start Offsets Slump

  • Airline has ‘buffer’ from start of year to offset weak months
  • Lufthansa open to potential merger to shore up Eurowings

Deutsche Lufthansa AG stuck to its forecast for higher earnings this year as a strong start to 2016 will help the German carrier offset a series of headwinds to travel demand.

“The guidance remains what it is,” Chief Executive Officer Carsten Spohr said Monday at a briefing in Frankfurt. “We have a little bit of a buffer from the first months of the year, when performance was better than planned.”

Lufthansa forecast that adjusted earnings before interest and taxes this year will be “slightly higher” than 2015’s 1.82 billion euros ($2 billion). Analysts have lowered their expectations for the company in recent weeks and are now predicting adjusted Ebit to fall to 1.77 billion euros, according to estimates compiled by Bloomberg. In addition to tourists wary after recent terror attacks, the U.K.’s vote to leave the European Union has raised concerns about recession hitting travel demand.

Airlines have been hard hit by the uncertainty surrounding Brexit because of the volatility of demand. Ryanair Holdings Plc CEO Michael O’Leary last week said the discount carrier would “keep lowering fares to keep people flying” following the pound’s drop. Immediately after the vote, British Airways owner IAG SA cut its 2016 earnings outlook because of the likely impact of exchange-rate changes.

Labor Deal

After Lufthansa flew 3.3 percent fewer passengers in May, “June was in line with expectations, not super,” said Spohr, who cut financial forecasts twice in 2014, his first year as CEO.

After reaching a “satisfactory” result in a mediation with its cabin crew union, Spohr said he is “optimistic” Lufthansa will reach a deal with pilots by the end of this month in a conflict that has caused strikes since 2014. The labor disputes have been significant hurdles to restructuring efforts.

Lufthansa shares rose as much as 4.3 percent and were up 2 percent to 11.12 euros as of 4:16 p.m. in Frankfurt. The stock has tumbled 24 percent this year, valuing the company at 5.19 billion euros.

“Lufthansa’s biggest issue is the negotiations with the pilots, and Spohr sounded fairly confident on those today,” said Jochen Rothenbacher, an analyst at Equinet Bank AG in Frankfurt. “Reiterating the profit guidance is also a positive.”

Eurowings Plans

Lufthansa is in the midst of restructuring the airline to face increasing competition and overcapacity. The efforts center around expanding the Eurowings low-cost arm, which has progressed more slowly than planned. Spohr said that Eurowings’s capacity rose 19 percent in May. That’s below its latest forecast for growth between 25 percent and 30 percent this year. In January, Lufthansa targeted expanding the discount unit by 43 percent.

To bolster Eurowings, Spohr expanded his range of options at the briefing on Monday, saying the unit could be merged with a partner with Lufthansa giving up full ownership. Other options the executive has previously discussed include cooperating with other airlines in a franchise model and buying an ownership stake in the partner.

Lufthansa is currently discussing a deeper collaboration between Eurowings and Brussels Airlines, which is 45 percent owned by the German airline. Spohr also raised the possibility of a broad partnership with tour operator Thomas Cook Group Plc, saying any potential talks about cooperation need not be limited to the British company’s Condor charter airline unit, which Lufthansa used to own.

(Corrects Eurowings growth figure in ninth paragraph.)
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