Lufthansa Details Turnaround Plan After Profit Falls
Helen Massy-Beresford
July 31, 2024
Lufthansa Group said it would streamline its long-haul fleet by decommissioning Airbus A340-300, A340-600, A330-200 and Boeing 747-400 sub-fleets by 2028 as part of a turnaround plan for its main Lufthansa Airlines carrier after it was hit by strike costs, aircraft delivery delays and “structural problems.”
The German group posted a drop in net profit to €469 million ($508 million) in the three months to end-June, from €881 million in the same period a year earlier, on group revenues up 7% to €10 billion.
The airline group had already flagged up a drop in operating profit and the challenges it was facing when it gave an update July 12, in which it also adjusted full-year guidance and said it would be launching a turnaround plan for Lufthansa Airlines.
The group recorded more than 60 million passengers across its airlines in the first six months of the year, with around 36 million in the second quarter (Q2), up from 33.3 million in the year-earlier period, it said July 31.
Q2 capacity for group airlines rose 11% year-on-year, and capacity reached 91% of pre-COVID levels. Load factor for the quarter stood at around 82%.
“Flying has lost none of its fascination—global demand for air travel remains strong,” CEO Carsten Spohr said. “As a result, we exceeded the €10 billion turnover mark for the first time in the second quarter.”
Spohr said an increase in available seat capacity meant that “the normalization of air fares and average yields continued in all markets worldwide in the first half of the year.”
“In view of the simultaneous rise in costs, profit expectations had to be adjusted across the industry—and also for us,” he said.
Lufthansa Airlines suffered from high strike costs, further delays in aircraft deliveries and the resulting inefficiencies, as well as structural problems, the group said. The group wants to accelerate the modernization of Lufthansa Airlines to “make it the group’s flagship again,” Spohr said.
Lufthansa Group’s other passenger airlines—Austrian Airlines, Brussels Airlines, Eurowings, and Swiss—as well as Lufthansa Cargo, remain on course, the group said, while Lufthansa Technik posted another record result in the first half of the year.
Strikes, both internal and external, had a more than €100 million impact on earnings during the period.
Operating expenses increased by 10% due to expanded passenger flight operations and inflation-related cost increases.
Unit revenues (RASK) for passenger airlines fell 5.3% on a currency-adjusted basis. “In addition to the slight decline in seat load factors, falling average prices—which, however, still remain significantly above pre-crisis levels—were the main reasons for this,” the group said, a phenomenon it said was particularly pronounced in Asia.
Unit costs (CASK, excluding fuel and emissions expenses) remained at their prior-year level despite the strike costs and generally high-cost inflation in the second-quarter period.
The airline group said Lufthansa airline was particularly challenged by negative market developments in the important Asia-Pacific region, but also faces “inefficiencies” in Lufthansa and CityLine flight operations.
“The significant delays in aircraft deliveries are causing upheavals, in areas such as fleet management and also through the additional maintenance costs for the older aircraft still in use. The disproportionately high increase in location cost in Germany and new collective labor agreements for cockpit, cabin and ground staff also had a negative impact on earnings.”
Focus On Lufthansa Airlines
Lufthansa airline recorded a first-half loss of €427 million, compared to a €149 million profit in the year-earlier period.
“Achieving a breakeven full-year result is becoming increasingly challenging for Lufthansa Airlines,” the group said. Its turnaround plan includes increasing revenue through premium products, including Allegris; improving customer experience by focusing on smooth and efficient flight operations, such as through the further digitalization of ground services; optimizing the network in line with the stronger seasonalization of demand and increasing productivity, for example, by further developing crew planning systems.
As part of the turnaround plan, the group wants to reduce the number of long-haul types it operates by decommissioning the A340-300, A340-600, A330-200 and 747-400 sub-fleets by 2028. It also plans to strategically expand the flight operations of Discover Airlines and Lufthansa City Airlines in order to further develop its offering in Frankfurt and Munich at lower costs.
“Lufthansa recognizes the challenges of aviation in the current environment, where it likely has a tougher time than other network groups,” said Bernstein analyst Alex Irving in a research note.
With corporate demand still weak, Lufthansa is affected more than other network carriers, he added.
“The fleet has long been far, far too complex,” Irving said. “Management is addressing these challenges with sensible initiatives, principally network optimization with a promise to ‘prioritize yields over growth,’ shifting production to more efficient [air operator certificates] (more Discover, and we expect more Swiss, implying less Lufthansa and Austrian), and fleet simplification with the elimination of four sub-fleets. These should take time to pay off, but we agree with the broad strokes of the plan.”
The airline said global demand for air travel remained robust, especially among private travelers, and the airlines expect a good summer in travel volume terms.
Bookings through the end of October are more than 10% higher compared to 2023, with Spain, Portugal, Italy, Greece, the U.S., Japan and southern Africa topping the destination lists and many leisure travelers once again choosing premium tickets.
The group sees third-quarter capacity at around 96% of pre-crisis levels and yields in that period were a low-single-digit percentage down on 2023 levels. Adjusted operating profit is expected to fall short of 2023 levels of €1.5 billion.
It is now predicting an adjusted operating profit of €1.4 billion for the full year, depending on airline and cargo performance.
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