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Lufthansa Drops as Fare Pressure Looms Amid Cost-Cut Battle

Published on Jul 19 2017 10:28 AM in General Industry tagged: Ryanair / Deutsche Lufthansa

Lufthansa Drops as Fare Pressure Looms Amid Cost-Cut Battle

Deutsche Lufthansa stock retreated from nine-year highs as the German airline looked poised for a difficult second half with pressure on fares set to intensify amid a struggle to rein in costs.

Lufthansa shares fell as much as 4.3 percent, the steepest intraday drop since April 27, even after the carrier raised its 2017 operating profit forecast to gradually catch up with analyst estimates. While first-half earnings almost doubled on stronger traffic, investors focused on the airline’s lingering need to confront lower-cost rivals as it said ticket prices will decline.

“We remain concerned that Lufthansa is not making sufficient progress in improving competitiveness in its core businesses,” Gerald Khoo, a London-based analyst at Liberum, said in a report to clients.

Lufthansa’s last two monthly traffic reports showed fare growth was “positive” as a stronger worldwide economy helped passenger numbers rise. Those gains are coming to a halt, with the second-half trend for unit revenue, a measure of pricing per seat, set to be “negative,” the company said late Monday. The carrier, which has its main bases in Frankfurt and Munich, has capitalized on added demand by leasing extra aircraft from ailing rival Air Berlin Plc and acquiring full control of Brussels Airlines, which is combining with the Eurowings low-cost arm that Lufthansa is seeking to expand.

The shares fell 1.4 percent to 20.81 euros as of 2:30 p.m. in Frankfurt. Still, Lufthansa stock is the best performer this year on Germany’s benchmark DAX Index, with a 70 percent jump.

First-half adjusted earnings before interest and taxes surged to 1.04 billion euros ($1.2 billion) from 529 million euros a year earlier, prompting Lufthansa to forecast profit will rise this year instead of an earlier prediction of a decline. Unit costs, or operating spending per seat excluding fuel and currency effects, fell 1.2 percent in the period and will continue declining in the second half, the company said, without specifying a number.

Lufthansa still has to agree on wage and retirement terms with its pilots union. Even if the carrier succeeds in reducing unit costs at Eurowings as planned, the division’s spending per seat will still be far higher than at budget competitors such as Dublin-based Ryanair.

The unit-revenue forecast is a “clear disappointment,” said Guido Hoymann, a Frankfurt-based analyst at Bankhaus Metzler who cut his recommendation on Lufthansa to sell from hold. As Ryanair adds service in Frankfurt and U.S. eases carry-on baggage restrictions on Middle Eastern flights that prompted some travelers to fly via Europe, “Lufthansa may again be stuck between competition from low-cost carriers and the Persian Gulf airlines.”

In addition to the Eurowings strategy, the German company is trying to benefit from the discount segment’s growth through its Lufthansa Technik maintenance unit, which has a target by 2025 of boosting the number of planes it services for low-cost airlines by 54 percent. Still, that expansion requires cost savings of 25 percent. The unit is negotiating with labor leaders to reduce overhead and increase productivity through more flexible hours, the company said Tuesday.

 News by Bloomberg, edited by Hospitality Ireland
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