Lufthansa Profit Warning Spooks European Airline Sector
Germany's Lufthansa sent shockwaves through the European airline sector this week as it cut its full-year profit forecast, with lower prices and higher fuel costs compounding the effect of losses at its budget subsidiary Eurowings.
The warning follows gloomy comments last month from Irish budget airline Ryanair, which vies with Lufthansa for top spot in Europe in terms of passengers carried. Air France-KLM also reported a widening quarterly loss last month.
In a statement, Lufthansa forecast annual EBIT of between €2 billion and €2.4 billion, down from the previously targeted €2.4 billion to €3 billion.
"Yields in the European short-haul market, in particular in the group's home markets, Germany and Austria, are affected by sustained overcapacities caused by carriers willing to accept significant losses to expand their market share," it said.
European airlines are locked in a battle for supremacy, with a surfeit of seats holding down revenues and higher fuel costs adding to the pressure. A number of smaller airlines have collapsed over the past two years.
Lufthansa cited falling revenue from its Eurowings budget business as a key reason for the profit warning.
"The group expects the European market to remain challenging at least for the remainder of 2019," it said.
It also pointed to high jet fuel costs, which it said could exceed last year's figure by €550 million, despite a recent fall in crude oil prices.
Shares in Lufthansa hit a two-year low of €15.40 euros for their highest intraday loss in three years.
Rivals were also caught up in the turbulence, with shares in Ryanair, British Airways owner IAG, Wizz Air, Air France and Easyjet falling by up to 4.4%.
Fighting Over Passengers
Ryanair CEO Michael O'Leary last month warned of the impact of what he called "attritional fare wars" and said four or five European airlines were likely to emerge as the winners in the sector.
"No signs that anyone is prepared to reduce capacity, therefore we would anticipate the wave of consolidation in European short haul is not over," said analyst Neil Wilson, analyst at London-based broker market.com.
Earlier this month global airlines slashed a widely watched industry profit forecast by 21% as an expanding trade war and higher oil prices compound worries about an overdue industry slowdown.
Lufthansa's problems are centred on its European business, with a more positive outlook for its long-haul operations, especially on transatlantic and Asian routes.
Eurowings management is due to implement turnaround measures to be presented shortly, Lufthansa said, adding that efforts to reduce costs had so far been slower than expected.
Lufthansa's adjusted margin for earnings before interest and tax (EBIT) was forecast between 5.5% and 6.5%, down from 6.5% to 8% previously, it said in a statement.
Lufthansa also said it would make a €340 million provision for in its first-half accounts, relating to a tax matter in Germany originating in the years between 2001 and 2005.
The Network airlines unit - its core brand, Swiss and Austrian Airlines - is expected to reach an adjusted EBIT margin of between 7% and 9%, down from 7.5% to 9.5%. For its Eurowings business, the forecast was for between minus 4% and minus 6%, against about flat previously.