Profit Warning

Terror Fears Hit Lufthansa Forecast

Lufthansa airplanes are parked on the tarmac during a strike by cabin crew union (UFO) at Frankfurt airport, Germany, November 13, 2015. REUTERS/Ralph Orlowski/File Photo
Bookings at Lufthansa are down in light of terror attacks in Europe, the airline warned Tuesday.
  • Why it matters

    Why it matters

    A drop in profits for the first half of the year show terrorism and other uncertainties have already affected Lufthansa’s bottom line.

  • Facts

    Facts

    • At the end of July Lufthansa said it expected this year’s adjusted operating profit to come in below the €1.8 billion reported for last year.
    • The airline on Tuesday reported a 17-percent drop in second-quarter profits to €437 million.
    • Analysts currently expect full-year profits of around €1.45 billion.
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    Audio

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Carsten Spohr is having a hard time predicting the future. The Lufthansa chief executive on Tuesday was forced to admit that he really doesn’t know how profitable Germany’s flagship airline will be this year.

“The terror attacks in Europe, but also the increasing political and economic uncertainty, have left their mark on passenger travel,” Mr. Spohr told reporters.

It was an uncertain statement for uncertain times. In releasing the first-half results for Europe’s largest airline, Mr. Spohr warned that the entire airline industry faced a “difficult second half year,” characterized by an unusual amount of uncertainty.

That uncertainty has weighed on ticket prices and affected long-haul bookings to Europe. Group bookings particularly from Asia and the United States are down.

Long-haul flights are where Lufthansa earns the bulk of its profits, but the recent terror attacks in Paris, Brussels and Munich have held many travelers at bay. The uncertainty, coupled with tougher competition and low oil prices, means price pressures are likely to continue in the second half, Mr. Spohr said.

Forecasting is tough in this environment, because executives don’t really have a good feel for how many people may still book flights at the last minute, the airline’s chief financial officer, Simone Menne, told reporters.

“The terror attacks in Europe, but also the increasing political and economic uncertainty, have left their mark on passenger travel.”

Carsten Spohr, Lufthansa CEO

Lufthansa is hardly the only tourism-related company affected. Nadejda Popova, a travel project manager at Euromonitor International, warned in an analyst note that the attacks in Europe are “expected to hurt European travel very seriously.” Travel agencies have also reported “sharp declines in bookings,” she noted, while many have reported cancelled trips from the United States and Asia.

“Holidaymakers are becoming more cautious and concerned about their security and safety, cancelling pre-booked packages, postponing travel or visiting destinations which have similar travel product proposition,” Ms. Popova said.

Lufthansa already cut its forecast for adjusted operating profit at the end of July, saying it expected profits below the €1.8 billion ($2 billion) reported for last year. Analysts currently expect full-year profits of around €1.45 billion.

Ms. Menne said the airline would provide a clearer profit forecast in the third quarter. She rejected fears that the airline may have to cancel its dividend to shareholders, insisting that the numbers as they stand should allow the payment to go forward.

That didn’t stop investors from being spooked. Shares in Lufthansa fell 2.84 percent to €10.42 by 13:25 local time in Frankfurt. Its shares are down about 26 percent since the start of the year.

A weak first half has made clear why investors are concerned. The airline on Tuesday reported a 17-percent drop in second-quarter earnings to €437 million – and even that was partly the result of positive one-time effects, Ms. Menne noted. For the first half, net profit was down 55 percent to €429 million.

Revenues fell 3 percent to €8.1 billion in the April-June period and are down 2 percent over the first half of 2016 to €15 billion. Passenger numbers also fell 1.4 percent in the second quarter, though they remain up slightly on the year.

But perhaps the biggest surprise didn’t come from the airline’s passenger travel, but from its cargo division. Average earnings per cargo ton in its subsidiary Lufthansa Cargo fell to the level of the 2009 financial crisis, with the company warning of “massive overcapacity” in freight worldwide.

 

Jens Koenen is Handelsblatt’s airline correspondent, based in Frankfurt. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the authors: koenen@handelsblatt.com and cermak@handelsblatt.com 

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