Lufthansa’s Profit Falls Short As Ticket Prices Dip

Lufthansa, Europe’s largest airline by revenue, reported a lower than expected second-quarter profit on Thursday as ticket prices fell on North American, Asian and European routes and it lost business due to a strike by pilots.

“We are not happy with the second quarter … We have a lot of catching up to do in the summer,” CFO Simone Menne said on a results news conference call.

Menne said pressure on pricing would ease in the fourth quarter as the airline becomes more restrained on the number of seats it offers.

Lufthansa and rival Air France-KLM have been struggling to cope with increased competition from low-cost rivals in Europe and Gulf carriers on long-haul routes, leading both to warn on profits over the last eight weeks.

In response, the two have announced plans for more low-cost operations, to try to emulate the success of companies such as Ryanair, easyJet and Spain’s Vueling, owned by British Airways parent IAG.

“We want to target a price segment and customers that we didn’t previously,” Menne said, adding that talks were continuing on new low-cost long-haul operations, whether on its own or based on SunExpress, its joint venture with Turkish Airlines.

Lufthansa’s second-quarter operating profit was 359 million euros ($480.9 million), far below the average forecast of 416 million given in a Reuters poll of analysts.

Lufthansa’s shares were down five per cent at 13.62 euros at 1100 GMT, when Air France-KLM was down two per cent and IAG was down 1.4 per cent.

“The results … once again show how vulnerable the airline is to the pressure and increased competition from low-cost carriers on its short- and medium- haul routes, while on international destinations the German player has been squeezed by Gulf operators,” said Nadejda Popova, Senior Travel Analyst at Euromonitor.

After hitting 20.27 euros in April, their highest level since late 2007, Lufthansa shares have tumbled since the profit warning in June. They trade at 7.3 times expected earnings, compared with 10.5 times for Air France, 8.6 times for IAG and 13.9 for Ryanair, according to Thomson Reuters data.

CURRENCY CONTROLS

In the first half, strikes wiped 60 million euros off profits in its core passenger airlines business. Yields – the average revenue per passenger carried and kilometre flown – were down 2.6 per cent adjusted for currency effects in the second quarter, extending falls of one per cent in each of the previous two quarters.

Lufthansa had previously said pricing was tough on North American and European routes but said on Thursday yields on its Asian routes came under pressure too in the second quarter as it introduced new routes.

A further 61 million euros was struck off from the first-half results due to write-offs associated with the devaluation of the bolivar in Venezuela, where Lufthansa has a “low three-digit-million-euro amount” in ticket sales trapped in the country due to currency controls.

The German carrier also took a provision for its Austrian Airlines unit after the European Court of Justice in June advised judges to rule that old Austrian Airlines collective wage agreements, which Lufthansa wants to cancel, are valid until a new one is agreed.

Lufthansa declined to specify the amount set aside but DZ Bank analyst Dirk Schlamp said he estimated the provisions in the double-digit million euro range.

Despite that, Lufthansa maintained a forecast for a full-year operating profit of around one billion euros and 2015 profit of two billion.

CAPACITY

Lufthansa confirmed it will only increase the number of seats it offers this winter by two per cent instead of the four per cent previously planned. Capacity on North Atlantic routes will be affected but not by much, Menne said.

The airline also said it expects markets to remain weak in the second half, though the capacity cuts should ease the pressure compared with the first half.

However, Ryanair said earlier this week that it would be raising winter capacity by eight per cent, indicating no let-up on pricing for European carriers.

Ryanair said increasing capacity would put pressure on fares, and that it expected yields to fall by between 6 and 8 percent in the second half of its financial year, giving a two per cent rise for the year as a whole.

Menne said that she was untroubled by the Ryanair plans as there wasn’t much overlap in their routes at present and that Lufthansa would be able to better compete in the medium-term as it expands its low-cost unit Eurowings to markets outside of Germany.