Excess Baggage

Profits Soar But Lufthansa Feels Drag

eurowings plane source company
Eurowings' launch has encountered turbulence.
  • Why it matters

    Why it matters

    Take low fuel costs and currency effects out of the equation, and Lufthansa barely rises above structural problems that keep costs higher than those of rivals.

  • Facts

    Facts

    • Europe’s biggest carrier increased revenues in the third quarter by 5.7 percent to €8.9 billion, or about $9.8 billion.
    • The airline benefited from cheaper oil and currency effects, but unresolved problems are keeping the share price down.
    • Wage disputes and high costs are a work in progress.
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    Audio

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Carsten Spohr, chairman and chief executive of Lufthansa, was reluctant to use the word “record” Thursday despite announcing chart-busting figures for the third quarter.

“It would be inappropriate following the Germanwings disaster,” Mr. Spohr said, acknowledging the blackest day in airline history only seven months ago. “When I speak to relatives of those who died, I realize again and again how important safety is. It has to be our number one objective and take priority over everything else.”

But the Lufthansa boss couldn’t quite conceal his pleasure at the best results this year. They are, after all, confirmation of his radical new course.

“Key issues like wage disputes and burgeoning costs still have to be resolved — with or without low oil prices. ”

Johannes Braun, Commerzbank

Europe’s biggest carrier by revenue and number of passengers increased returns in the third quarter by 5.7 percent to €8.9 billion, or about $9.8 billion. Profits, which were adjusted to account for special effects and strike costs, soared by 51.2 percent to €1.2 billion, or about $1.3 billion.

Prospects also look good. Mr. Spohr had earlier assured shareholders, who forfeited their dividend last year, that earnings before interest and tax (EBIT) would reach €1.5 billion in the current year, minus strike-related costs. Now adjusted earnings for the whole year are on track to be between €1.75 billion and €1.95 billion.

carsten spohr dpa
Lufthansa’s chief executive, Carsten Spohr, seems pleased with the first results of his strategic overhaul. Source: dpa

 

“Based on the current figures we should be in position to propose a dividend payment again,” said finance boss Simone Menne.

But Lufthansa’s share price didn’t get a boost from the solid figures and prospects for a dividend payout. After showing a plus when the stock market opened Thursday, the price fell through the morning. By afternoon, it had decreased 6 percent, the day’s big loser among blue-chip DAX companies.

Investor reaction was not really surprising. The good figures were expected and already factored into the share price, following earlier hints by Mr. Spohr. In fact Lufthansa’s stock value has increased by a good 30 percent since the end of August.

More important are the still huge structural problems facing Europe’s leading airline. “Key issues like wage disputes and burgeoning costs still have to be resolved — with or without low oil prices,” warned Johannes Braun of the Commerzbank.

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In tandem with Lufthansa as the premium brand, Mr. Spohr wants to make its Eurowings subsidiary into one of Europe’s leading low-cost airlines. Up to now it is the most radical realignment in company history.

But the Lufthansa boss – himself a former Airbus A320 pilot – has not been able to convince his pilots that such radical change is worth the cost-cutting involved, for example in pension benefits.

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The wage dispute with pilots and cabin staff has been ongoing for more than two years. Only recently, the flight attendants’ union, UFO, threatened another strike if Lufthansa failed to submit a better offer by Sunday. The union affirmed its demand on Thursday after the good figures were presented.

But Mr. Spohr was optimistic because, as he said, “We are talking again.”

Putting the high-flying third quarter into perspective, the results are due in large part to low oil prices. In the first nine months, kerosene costs were €4.5 billion or 13.2 percent cheaper than a year ago.

Lufthansa is also doing well placing its capacity in the market. The new first and business classes have contributed, as have short and medium-haul flights, which for a long time were unprofitable. Up to now they were flown by Germanwings, but in future they will operate under Eurowings.

There is a downside here too. Traffic revenues, which were up by 5 percent to €19.4 billion between January and September, benefited from currency effects, which are no more reliable than oil prices. In the future, increasing competition will put downward pressure on average fare prices.

And Lufthansa is not prepared for this on the cost side. If fuel and currency effects are taken out of the equation, then unit costs increased by 0.8 percent in the first nine months and by 1.1 percent in the third quarter, according to finance boss Ms. Menne. “We cannot be satisfied with this development,”
she said.

 

Jens Koenen reports covers the aviation and IT sectors from the Frankfurt bureau. To contact the author: koenen@handelsblatt.com

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