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2014 Media Kit
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Lufthansa warns on profit

By: | at 02:59 PM | Channel(s): Air Cargo  

Lufthansa cut back its profit targets for the next two years citing competition from Middle East and low-cost rivals. The warnings surprised investors after better-than-expected results in May and come just over a month after new chief executive Carsten Spohr took charge.

Spohr will now set out fresh restructuring plans next month, and the German airline will review its spending plans, including the possible cancellation or deferral of plane orders from Airbus or Boeing, Finance Chief Simone Menne told analysts and reporters.

Lufthansa cut its forecast for 2014 operating profit to 1 billion euros from a forecast of 1.3-1.5 billion and lowered its 2015 earnings target to 2 billion euros from 2.65 billion.

Europe’s largest airline by revenue said it was suffering from competition on European flights as well as on routes across the Atlantic where demand from business travellers has traditionally delivered healthy operating margins.

“The main reason for this lower forecast is significantly weaker than expected revenue development in the passenger and freight businesses compared to what we anticipated at the beginning of the year,” Menne said.

“There is overcapacity in the North Atlantic,” she said, noting Lufthansa was feeling the heat especially from Gulf carriers Emirates [EMIRA.UL], Qatar Airways and Etihad, and from low-cost airlines, such as easyJet and Ryanair.

“The extent of the warning is comparatively big. It’s especially disappointing that the target for 2015 was also reduced,” DZ Bank analyst Dirk Schlamp said.

Lufthansa shares were down 14 percent as of 1443 GMT, shedding almost 1.5 billion euros ($2 billion) in market value and poised to mark their biggest ever one-day drop.

The warning dragged down European rivals too, with Air France-KLM down 7 percent and British Airways owner IAG off 3 percent.

Pricing Problems

“We had hoped that the pricing weakness was temporary,” Menne said, referring to overall trends at the group. “But May showed negative pricing year on year and for forward bookings in June and July we see unit revenues are clearly behind last year’s figures.”

RBC analyst Damian Brewer said the airline had been the most aggressive in terms of raising seat capacity this summer even though the German economy is not growing as fast as others.

“IAG are growing but also the UK economy is heading towards 3 percent GDP growth, not 1 percent or so as is the case in Germany,” he said.

Lufthansa intends to increase capacity by 7.4 percent on North American routes this summer, Menne confirmed.

She said the cargo business would now likely post a profit only slightly above last year’s 77 million euros, rather than the significant jump hoped for. Here too, Lufthansa is losing out to Gulf carriers.

New CEO

Already in the midst of a major restructuring programme dubbed Score, Menne said the company remained on track to reduce unit costs by 4 percent this year.

Menne said the airline, which is spending billions on upgrading business class seats and a premium economy class to catch up to rivals, will cut the number of seats it offers in winter and possibly next year.

She also said Lufthansa will review its capex plans, including looking at options to potentially delay or cancel current plane orders. Lufthansa has 261 planes on order with a list value of 32 billion euros which are due for delivery by 2025. Of the total, 178 are Airbus aircraft while 53 are on order from Boeing.

Any order cancellations would deal another blow to Airbus after Emirates on Wednesday scratched a $16 billion order for the A350 airliner.

Lufthansa, Airbus’ biggest customer and operator, committed to buy 25 A350s last year with options to take a further 30 in a deal worth up to $16 billion at list prices.

Christoph Niesel, a fund manager at Union Investment, one of Lufthansa’s 15 largest shareholders, said the profit warning signalled that both internally and externally there were a lot of challenges to meet.

“But with the new targets, Lufthansa even has room to surprise on the positive side,” Niesel said. (Reuters)