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Lufthansa Profit Drops On Air Berlin Integration, Strikes

Published on Nov 1 2018 12:59 PM in Retail tagged: Lufthansa

Lufthansa Profit Drops On Air Berlin Integration, Strikes

German airline Lufthansa missed forecasts with an 11% drop in third-quarter operating profit as it spent money on integrating Air Berlin, which it snapped up after the budget carrier's collapse last year.

The cost and complexity of absorbing the business compounded the effect of higher fuel costs and air-traffic control strikes that have hit the wider sector, dragging down Lufthansa's results and sending its shares to a 17-month low this week.

The disappearance of Air Berlin temporarily relieved pressure on remaining airlines as seats became more scarce, but carriers have been adding capacity again in a grab for market share that may push ticket prices lower overall.

Lufthansa said it was also keeping a close eye on how broader events such as Britain's planned exit from the European Union and the US trade war with China may affect demand.

"We are always prepared for a potential downturn, which is not in sight yet," Chief Executive Carsten Spohr told analysts on a conference call. "Demand seems to be intact."

Germany's flagship carrier reported adjusted earnings before interest and taxes (EBIT) of €1.35 billion for the July-September period, below analysts' average estimate of €1.41 billion in a Reuters poll.

Quarterly sales rose 2% to €9.96 billion, while passenger numbers increased 9% to €41.6 million.

Lufthansa kept its adjusted EBIT guidance for the full year of a slight fall from 2017's record €2.97 billion.

"Beyond today’s results, this is likely to prove a positive for the stock, given that there were significant investor expectations of a profit warning or guidance downgrade heading into the results," wrote Bernstein analyst Daniel Roeska, who rates Lufthansa "outperform".

British Airways owner IAG last week posted an unexpected profit increase as strong demand in Europe helped shield it from rising fuel prices.

Price Pressure

Fuel costs and compensation payments for strike-related and other delays are expected to increase Lufthansa's costs by more than €1 billion this year, Spohr said, while an additional €170 million has been paid to restructure its budget carrier Eurowings, which is absorbing Air Berlin.

Lufthansa expects €900 million in extra expenses for fuel next year, after an increase of €850 million this year. It has paid out €350 million so far this year in compensation for late or cancelled flights.

Lufthansa said it would increase capacity by 8% this winter, slightly less than the 10 percent it expected its peers to add, and next year would add just 5%, limited by the ability of airport infrastructure and air-traffic control to cope with more traffic.

It said it would raise ticket prices next year on the back of higher fuel costs, having already said in the summer it would raise ticket prices for the rest of 2018.

In contrast, Ryanair CEO Michael O'Leary has said he will push fares down by 2% in the six months to March 31 on European short-haul routes, while cutting the airline's profit targets.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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