Eurowinging it

Low-cost unit clips Lufthansa's wings

A man walks to board an Airbus A330 belonging to Lufthansa’s low-cost brand Eurowings ahead of Eurowings’ first long-haul flight to Havana, Cuba, at Cologne-Bonn airport
On a wing and a prayer. Source: Reuters

Lufthansa’s budget airline Eurowings has left many passengers high and dry this year as a spate of flight delays and cancellations brought the carrier to its knees. And now those problems are catching up with the company: the forced payment of tens of millions of euros in passenger compensation pushed Eurowings into an operating loss of €199 million ($233 million) in the first six months of the year.

The payments were largely a result of Eurowings’ struggle to integrate the 77 planes it bought from rival Air Berlin, which went bankrupt last year. The process is taking longer and is costing more than expected.

The knock-on effect was that Eurowings couldn’t muster enough planes or crews for the takeoff and landing slots it had also taken over from Air Berlin. That meant scores of flights were cancelled or were delayed by hours and Eurowings was forced to hire planes and crews from other airlines, further increasing its costs.

The cost of so-called operating leases, whereby aircraft are hired, doubled to €40 million. And “wet leases,” which refer to the hiring of planes including crews, cost an additional €36 million.

Steady ahead

The expansion of Eurowings will cost Lufthansa a further €50 million in the third quarter and the unit will likely only return to profit in 2019, said Ulrik Svensson, Lufthansa’s Chief Financial Officer, at the release of the company’s figures on Tuesday.

“We will create the structures to lift the profitability of Eurowings to the levels of the most important competitors in the next three to four years,” he said, citing Easyjet as the benchmark.

The British budget carrier, which has been making losses this year because it too is incorporating Air Berlin jets as part of an expansion in Germany, achieved a return of 8.4 percent in 2017 on revenue of €5.75 billion.

That means Eurowings, which generated revenue of €1.94 billion in the first half of 2018 and is just 20 percent smaller than Easyjet, would have to earn an operating profit of €336 million in future.

Analysts said that’s a realistic goal because Eurowings has a large home market giving it economies of scale.

But the airline still lacks the homogeneity of rivals such as Easyjet or Ryanair, as it has several units. “The subsidiaries LGW and Germanwings mean that Eurowings comprises a variety of labor agreements and flight arrangements,” said aviation analyst Heinrich Grossbongardt. It needs to address that if it is to become more flexible, he said. Thanks to its Air berlin acquisitions, Easyjet is also becoming a strong competitor in the German market.

01 p17 Lufthansa-01

There was better news for the Lufthansa group as a whole. The core Lufthansa airline brand managed to absorb Eurowings’ costs and group profit fell just 0.8 percent year-on-year to €734 million in the second quarter. Relief at the group’s resilience propelled the share price up by almost 8 percent to around €24 on Tuesday.

Analysts were impressed. Independent Research, an analyst firm, raised the airline’s stock from Hold to Buy after the second-quarter results and set a price target of €27. It added that Lufthansa had exceeded expectations despite the rocky integration of Air Berlin and high fuel costs.

The group is sticking to its full-year forecast, saying earnings before interest and tax would be only slightly down from 2017 despite cost increases including an increase in kerosene costs by €850 million.

How is Lufthansa managing that? Simple: it has increased fare prices. In that respect, the demise of Air Berlin is already paying off.

Christoph Schlautmann covers the logistics and waste management sectors for Handelsblatt. To contact the author: schlautmann@handelsblatt.com

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