Lufthansa Predicts Difficult Second Half as Terror Damps Demandby
Unit revenue fell 4.1% in second quarter; drop to double in 2H
2016 Ebit to exceed adjusted figure, making dividend possible
Deutsche Lufthansa AG predicted further declines in ticket prices this year and deepened a loss forecast for its Eurowings low-cost brand, as a demand slowdown stemming from terrorist attacks in Europe was met by too much seating across the airline industry.
Yields excluding currency shifts, a measure of average fares, fell 0.8 percent from a year earlier in the second quarter, Chief Financial Officer Simone Menne told journalists Tuesday on a conference call. The airline’s cargo division will also post a loss this year because of “massive overcapacities” among air-freight carriers, she told analysts on a separate call.
“Terrorist attacks are worrying people around the world,” Chief Executive Officer Carsten Spohr said on the analysts’ call. “Yields have fallen to a level we last saw during the financial crisis in 2009.”
Prospects for Europe’s airlines have deteriorated after carriers added capacity to take advantage of cheap fuel costs. Terrorist attacks from Paris to Istanbul since early 2015 have prompted some travelers to cancel bookings, and consumer uncertainty has increased with the U.K.’s vote in June to leave the European Union. Since then, carriers including British Airways owner IAG SA, EasyJet Plc and Lufthansa have warned they’ll miss profit targets, while in the air-freight industry, United Parcel Service Inc. has said it sees “headwinds” from generally weak global economic growth.
Lufthansa fell as much as 3.5 percent and was trading down 3.4 percent at 10.37 euros as of 10:51 a.m. in Frankfurt. The stock has plunged 29 percent this year, valuing the German carrier at 4.83 billion euros ($5.41 billion).
Second-quarter unit revenue, the average sales generated per seat kilometer flown, fell 4.1 percent, and the pace of decline will about double to a range of 8 percent to 9 percent in the second half, the company said in a statement. The loss at the Lufthansa Cargo unit will be its first in six years. Adjusted earnings before interest and taxes at Eurowings will be negative in 2016, Lufthansa said, after previously saying the unit would be “slightly” unprofitable.
“The difficulty is the uncertainty in the market,” Menne said. “We have very poor visibility, and we miss group bookings from Asia and the U.S. Due to those missing bookings, there is tension in the market and price pressure, and that is exacerbated by the low oil price.”
Even so, the group will be able to pay a dividend this year as a new pension agreement reached with flight attendants eases pressure on profit, Menne said. Ebit will be “several hundred million euros” higher than the adjusted earnings figure that Lufthansa uses for forecasts, she said. In the second quarter, Ebit declined 6.6 percent to 567 million euros, while Ebit excluding asset disposals, pension provisions and impairments fell 8.3 percent to 582 million euros.
Lufthansa reversed its full-year profit forecast on July 20, predicting a decline in adjusted earnings rather than the “slightly higher” figure predicted earlier. Terror attacks and political and economic uncertainty hurt reservations, especially on long-haul routes into Europe, the carrier said at the time, trimming its capacity-growth plan for 2016 to 5.4 percent from 6 percent.
Lufthansa’s focus on adding seating is “putting further pressure on an already weak trading environment,” as the carrier tries to protect market share, analysts at Goldman Sachs, including Alexia Dogani, wrote in a report to clients.
Pension obligations swelled to a record 10.8 billion euros as of June 30. The contract with the cabin-crew union, which includes a switch in retirement terms, will reduce pension provisions by an amount in the “upper three-digit million-euro” range, Lufthansa said.
The carrier extended a deadline for contract negotiations with its main brand’s pilot union by about a week to Friday. Those talks also include a push by Lufthansa to switching to a so-called defined-contribution setup, which outlines the amount of money the company sets aside for retirees, from a defined-benefit system, which specifies the amount that retirees receive.