Lufthansa outlook

Flying Into the Storm

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Lufthansa is suffering from over-capacity in the airline industry.
  • Why it matters

    Why it matters

    The crises currently affecting the airline industry are likely to last for a long period, meaning airlines must change to survive.

  • Facts

    Facts

    • Over-capacities, fierce competition and terrorism concerns are all hitting airline revenues.
    • Lufthansa’s adjusted profits fell by 8.3 percent between April and June.
    • The company’s shares fell 3 percent to €10.39 on Tuesday and are down about 27 percent since the start of this year.
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    Audio

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Ever since he took the helm at Lufthansa two years ago, crises have loomed large on Carsten Spohr’s radar. A suicidal pilot who killed 150 people, striking staff and terrorism across Europe have all required careful navigation.

Now he may be facing his biggest challenge yet: Restructuring Europe’s largest airline at a time when terrorism, turmoil in Turkey, the Brexit vote and cutthroat competition are all taking the airline industry into uncharted territory.

But he is still confident. “We’re moving forward in the areas which we can control,” he said as he released the airline’s first-half results on Tuesday. The figures suggested his team has made inroads in the restructuring effort. Adjusted EBIT jumped by 13 percent to €529 million in the first six months of the year, and the costs per passenger per kilometer decreased by 1.3 percent.

The second-quarter figures were not so positive. Adjusted EBIT fell by 8.3 percent between April and June and unit costs increased by 1 percent. The airline’s chief financial officer, Simone Menne, contended that this is the consequence of one-time effects. “Our airlines’ cost discipline is good, therefore unit costs will decrease in the third quarter,” she said.

Over-capacities, fierce competition on prices and an increasing sense of uncertainty driven by terrorism all mean the global airline industry is headed for a rough ride.

This would be welcome news, for the business environment is becoming more hostile. Due to ever more intense price competition, Ms. Menne forecasts that revenue per passenger will slump by 8 to 9 percent in the second half of this year, with profits expected to be “below last year’s.” But Mr Spohr remains upbeat: “It shouldn’t be forgotten that we’ll achieve one of our best results this year.”

Investors and analysts disagree. A report from Bankhaus Lampe tellingly titled “Lufthansa AG – turbulence ahead” argues that Europe’s largest airline has more than just external factors to contend with. “There are also structural issues… like, for instance, fiercer competition on long and medium-haul,” the report highlighted. Investors are staying away from Lufthansa. The company’s shares fell 3.14 percent to €10.39 on Tuesday and are down about 27 percent since the start of this year.

Other key figures in Lufthansa’s interim report show that the airline faces an uphill battle. Operative cash-flows dropped 13 percent in the first half of the year. This is a possible outcome of customers’ plummeting confidence: They think twice before travelling and choose to book flights at short notice, thus depriving Lufthansa of advance payments.

There is also the thorny issue of retirement benefits. In March, Lufthansa raised its retirement benefit liabilities from €6.6 billion ($7.4 billion) to €10.8 billion. This puts the airline’s top management under renewed pressure to complete their retirement benefits reform plan. While this has been achieved with ground personnel, Lufthansa’s pilots, who have gone on strike over this issue several times in the past two years, are still negotiating. But “talks are under way and are constructive,” Mr. Spohr said.

The former pilot was keen to point to the company’s successes. He said that Eurowings, the group’s new consolidated low-cost airline, has become a leader in its market segment, and pledged to decrease unit costs by 28 percent by the end of this decade. Mr. Spohr declined, however, to comment on reported discussions with Air Berlin on a possible takeover of some of the routes and planes of Germany’s beleaguered second-largest airline.

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Lufthansa boss Carsten Spohr is facing a tough year. Source: DPA

 

Meanwhile, the entire industry is grappling with bad news. Just last month, the U.S.-based Delta Airlines slashed its operative margin forecast to 17 percent instead of the expected 23 percent, while its arch-rival American Airlines reported a plunge of its profit by a whopping 44 percent in the second quarter. As a result, American is delaying its purchase of 22 Airbus A350 aircraft by more than two years.

In Asia too, Singapore Airlines and Hong Kong-based Cathay Pacific are suffering from the “aggressive increases in capacity” caused by Gulf competitors and regional budget carriers, Singapore chief executive Goh Choon Phong recently complained.

Over-capacities, fierce competition on prices and an increasing sense of uncertainty driven by terrorism all mean the global airline industry is headed for a rough ride. In a recent note, NordLB bank analysts claim these are the first signs of the end of an economic cycle.

The industry may have itself to blame. In recent years, instead of enjoying low fuel costs to consolidate their balance sheets, airlines strove for bigger market shares at all cost, further congesting the skies with half-empty planes. Up to now, crises used to pass quickly, to be followed by a swift rebound. This time around, however, no one knows how long the crisis will last.

 

Jens Koenen leads Handelsblatt’s coverage of the aviation and space industry. To contact the author: koenen@handelsblatt.com

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