German airline Lufthansa has said it is braced for very tough price competition with Ryanair and easyJet for at least the rest of this year as it reported a plunge in second-quarter earnings.
Lufthansa blamed price competition on short-haul routes and rising fuel and maintenance costs as it said second-quarter adjusted earnings before interest and tax (EBIT) fell by 25% on the year to €754 million.
Net profit for the quarter plummeted 70% to €226 million, partly due to an almost €200 million tax provision.
"Our earnings are feeling the effects of tough competition in Europe and sizeable overcapacities, especially on our short-haul routes out of Germany and Austria," Chief financial officer Ulrik Svensson said.
Lufthansa was reacting by cutting costs further and boosting flexibility, and hoped a turnaround plan announced for Eurowings in June would make its low-cost carrier profitable on a sustainable basis.
Referring to budget carriers Ryanair and Easyjet, Svensson said, "We are expecting that we will indeed have a very tough price competitive situation with these carriers for the rest of the year and maybe also into 2020."
Eurowings And Network Airlines Unit
Eurowings' short-haul business is likely to face further challenges in the second half of the year, but a pick-up in the long-haul business should offset some of that, Lufthansa said. It said Eurowings would likely report an adjusted EBIT margin of -4% to -6% for the year as a whole.
In June, Lufthansa said that Eurowings would aim to slash costs by 15% over the next three years and focus on short-haul flights as part of a plan to return to profit by 2021. Lufthansa cited falling revenues at Eurowings as a major reason behind last month's profit warning.
The airline has forecast that the Network Airlines unit - its core brand, Swiss and Austrian Airlines - would see long-haul business develop at an above-average rate in the second half of the year, but warned that the more downbeat economic outlook increased the likelihood of weaker trends than in the first half.
Eurowings - which is facing particularly tough price competition from Ryanair and Wizz Air - reported an adjusted loss of €273 million in the first half of 2019 compared with a loss of €220 million a year earlier.
Forecast And Fuel Costs
Lufthansa maintained its guidance for 2019, having cut its full-year profit forecast in June due to lower prices and higher fuel costs compounding the effect of losses at its budget subsidiary Eurowings.
Since June, it has been forecasting an adjusted EBIT margin of between 5.5% and 6.5% for 2019, which would correspond with adjusted earnings of between €2 billion and €2.4 billion - a decline of 14% to 28.5% compared with last year.
Fuel costs were €255 million higher in the second quarter than in the previous year, it said.