Lufthansa fares set to slide further as airline revamps its operations

BERLIN — Deutsche Lufthansa AG said passenger fares are set to slide further this year as it revamps European operations in a bid to stem the flow of customers to discount rivals. The stock fell as much as 6 per cent.

Lufthansa’s yield, a measure that reflects average ticket prices, fell the most in at least four years during the first quarter, while airline revenue declined almost 4 per cent, the German carrier said in a statement on Tuesday (May 3).

A €237 million (S$368.7 million) fuel-saving linked to the lower oil price helped the company to reduce its adjusted loss before interest and tax to €53 million in the three months, down from €167 million a year earlier.

Lufthansa said the intensity of competition and the resulting pressure on prices will not ease, reiterating that it expects earnings to rise only slightly this year, compared to 2015, as weaker fares erode fuel benefits.

STOCK SLIDES

Shares of Europe’s third-largest airline fell as much 83 cents to €12.90 and were trading down 5.7 per cent at 9.29am in Frankfurt.

Lufthansa has split its airline operations in two, separating hub-based network brands from low-cost services provided by the Eurowings discount division. A push to expand Eurowings into a competitor for low-cost leaders Ryanair Holdings and EasyJet has met with resistance from unions, and walkouts have held back profit the past two years.

The Eurowings result was €33 million below its prior-year level, reflecting start-up costs for long-haul flights, according to the company, while the main Lufthansa brand lifted earnings by €244 million.

A seat-occupancy rate of 94.2 per cent nevertheless showed that the expanded discount arm is “off to a successful start” with customer feedback “very positive”, said chief financial officer Simone Menne.

Yields declined by 6.3 per cent in the quarter, the most since the company began breaking out the figure on quarterly basis in 2012, while group revenue 0.8 per cent. Capacity growth this year will be limited to 6 per cent, down from the 6.6 per cent forecast earlier, as pricing pressures remain significant, and Lufthansa could trim growth further, Ms Menne said.

IMPROVING COSTS

Group-wide unit costs declined 4 per cent in the quarter, with about half that gain coming from sustainable measures, Ms Menne said, adding that the company has “turned the trend”.

Lufthansa also benefited from the absence of a year ago expense of €100 million attributable to strike costs and write-downs on the Venezuelan bolivar.

Analysts had forecast an adjusted Ebit of €71 million for the first quarter, according to figures provided by the company.

While terror attacks across Europe have prompted some customers to delay bookings, that trend caused “no relevant declines” at Lufthansa, the CFO said. That’s after British Airways owner IAG SA, which said last week that bookings were being hurt by the Brussels bombings, as well as weaker demand from oil-based economies and the possibility of the United Kingdom exiting the European Union.

Lufthansa reiterated that fuel expenses should decline by €1 billion this year, and continues to target a reduction in unit costs. The company’s cargo operations, among the industry’s largest, have been hit by overcapacity and won’t now improve profit this year, it said.

European airlines frequently post losses in the first quarter, which falls between the Christmas and New Year period and the summer high season, though IAG, which is more advanced in its short-haul restructuring, said last week that operating profit increased more than six-fold to €155 million. BLOOMBERG