Lufthansa Group with earnings improvement in the first quarter

Dino D'Amore
By Dino D'Amore May 3, 2016 11:25

Lufthansa Group with earnings improvement in the first quarter

Total revenues for the Lufthansa Group in the first quarter of 2016 declined by 0.8 per cent to €6.9 billion. Despite significantly higher passenger volumes, traffic revenue was 3.9 per cent down, the airline group said that this was a reflection of the substantial pricing pressures faced by the Group’s passenger airlines and the cargo business. The company’s Adjusted EBIT improved, however, by €114 million to €-53 million.

This tangible result improvement in the traditionally weak quarter is attributable not only to further benefits on the fuel cost front, which totalled €237 million for the period, but also to a 4.0 per cent reduction in unit costs excluding fuel and currency impacts. Group results for the first quarter of 2015 had included €100 million of expenses relating to writedowns on the Venezuelan bolivar and strike action effects. This has impacted the relative development of unit costs in the first quarter of this year positively. But first-quarter unit costs for 2016 also reflect the success of cost reduction actions taken throughout the Lufthansa Group, while the growth of Eurowings had a further beneficial impact on overall unit cost levels.

The Group’s net income for the first quarter amounted to €-8 million (Q1 2015: €425 million). This is a €70 million improvement on the adjusted prior-year result, since the 2015 first-quarter result included a €503 million financial profit from the early conversion of the JetBlue convertible bond. First quarter cash flow from operating activities declined 21.5 per cent to €1.1 billion. This is primarily attributable to the trend towards more short-term bookings where flights are booked closer to the departure date, which leads to a later cash-in for the company, the airline group said. The statement added that this effect should, however, even out in the coming months provided overall bookings remain at their current levels.

The equity ratio declined 3.7 percentage points to 14.5 per cent almost entirely due to an increase of €1.5 billion in pension provisions based on a reduction in actuarial interest rates.

“We have seen a solid start into the new business year,” says Simone Menne, Chief Financial Officer of Deutsche Lufthansa AG. “We are seeing significant pricing pressure at our passenger airlines, and even more at Lufthansa Cargo. But the substantial unit cost reduction at our passenger airlines has more than made up for the pricing declines. And we are not just benefiting from further fuel cost reductions and non-recurring effects. We have also improved our operating cost structure. This marks an important change in trend in our unit cost development.”

“The new Eurowings is also off to a successful start,” Menne continues. “The seat load factor of its new long-haul services stood at a very encouraging 94.2 per cent in the first three months. The customer feedback has been very positive, too. Its first-quarter result is a decline on last year’s; but this partly reflects the company’s start-up costs, and we feel that the new Eurowings is well on track.”

“The continuing volatility in interest rates shows once again how important the changes to the pension system are to our long-term financial stability,” Simone Menne emphasizes. “With Verdi we have already moved our biggest employee group into the new system.”

The earnings improvement of Lufthansa Group’s in the first quarter is driven by Lufthansa Passenger Airlines and Austrian Airlines. All other operating companies in the Group reported lower results. The Adjusted EBIT of Lufthansa Passenger Airlines increased by €244 million, while Austrian Airlines posted a €23 million improvement. The Adjusted EBIT at SWISS was down €28 million, owing largely to a decline in demand in the face of the strong Swiss franc. Eurowings, the results of which are reported separately for the first time, achieved a first-quarter Adjusted EBIT that was EUR 33 million below its prior-year level. This reflects the start-up costs of the company’s long-haul operations and the costs for its structural setup.

Lufthansa Cargo suffered a substantial EUR 71 million decline in its first quarter Adjusted EBIT. Sizeable overcapacity particularly on transatlantic routes and low demand led to a contraction of cargo revenues by 21.8 per cent. Lufthansa Cargo is bracing itself for a challenging financial year: the Adjusted EBIT is now expected to be significantly below its 2015 level. An additional cost reduction program was launched some weeks ago. First quarter results of the MRO and catering segments were in total €20 million below their prior year levels.

The Lufthansa Group’s result forecast for the year remains unchanged: the Group expects to achieve an Adjusted EBIT slightly above the previous year result of €1.8 billion. This forecast does not, however, include the negative result impacts of possible strike actions. The Group does not expect to see any easing of the pricing pressures in the passenger and cargo transport sectors. Yields are under particular pressure on services to and from South America, as a result of the region’s currently weak economies. In the Asia traffic region lower booking volumes from Chinese and Japanese travel groups lead to lower volumes. In contrast, Europe and North America – Lufthansa’s biggest and most important traffic regions – are both showing more stable trends.

“The trends we have seen in the last few months are likely to continue throughout the present quarter,” concludes Menne. “The intensity of the competition and the resulting pricing pressures will not ease – not least because of the low fuel costs. This is why it is important that we continue to work consistently on our cost positions. We remain fully committed to our goal of reducing our unit costs this year net of fuel and currency impacts.”

Dino D'Amore
By Dino D'Amore May 3, 2016 11:25