Lufthansa warns markets

admin
By admin May 5, 2015 19:59

Lufthansa warns markets

Lufthansa today urged caution on its 2015 profit due to pilot strikes and reduced bookings during the first half of the year, which has caused its shares to fall 2% – all as it reported a narrowed first quarter operating loss.

However, the pilot strikes will cost Lufthansa €100 million in lost profit and bookings for the first half of 2015.

Lufthansa reported an adjusted EBIT loss of €167 million for the quarter from €252m for the period last year, with lower fuel prices responsible for the narrowed loss on the same quarter last year but with much of the benefit of lower fuel costs being erased by the Euro falling over 11% against the US Dollar during the reported quarter. Lufthansa now estimates a 2015 fuel bill of €6.2bn from previous estimates of €5.8bn. The airline is currently 79% hedged for this year and 59% for 2016.

Lufthansa reported net profit of €425 million for the quarter due to a €500 million gain from the sale of shares in Jetblue Airways Corp after creditors accepted its offer of an early conversion of a €234 million convertible bond in JetBlue stock, issued in 2012 and set to mature in 2017.  Revenue across the group rose 8% to €6.97bn, beating most estimates.

Lufthansa has confirmed its target for 2015 adjusted earnings before interest and tax (EBIT) of around €1.5bn before strike related costs are taken into account.  “We are in need of an urgent solution [to the pilot strikes], we cannot afford to burden our customers further,” CFO, Simone Menne stated today before confirming that the Germanwings crash affected bookings for a few days only before the same recovered, sighting that the crash will have no impact on the company’s balance sheet, “as claims and other costs are being covered by the airline’s insurers”. There will be additional insurance costs coming through the books in 2015 and beyond, the airline said.

Lufthansa these days is looking a bit more like Air France-KLM and a great deal less like IAG. That is testament to the heavy cutting of costs and market realignment that has been undertaken at IAG and all that was possible because Willie Walsh effectively faced down the unions in the first instance, something that Lufthansa and Air France-KLM have found it nigh impossible to accomplish to date.

Also, like the pre-IAG British Airways, Lufthansa now has a substantial pension deficit affecting its aspirations. Simone Menne has called for “urgent” action to overhaul the way the Lufthansa Group provides retirement benefits to employees as the low interest rate environment balloons the pension deficit of Lufthansa’s defined benefit pension scheme deficit to €10.2bn at the end of March 2015, up 41% from the end of 2014. That rate of increase is without question unsustainable and is a product of the European Central Bank’s quantitative easing programme.

Menne signalled that pension scheme reform was now a priority “more urgently than ever, we need sustainably financeable solutions in place of obsolete structures . . . The enormous pension burdens are putting considerable pressure on our equity.”

Lufthansa’s equity ratio has fallen by 10.4 percentage points to 7.5% over the past 12 months, and with the target for the group at 25% it is clear action needs to be taken. The discount rate applied to Lufthansa’s defined benefit pension scheme declined from 2.6% in the fourth quarter of 2014 to 1.7% in 1Q 2015. Lufthansa wishes to close this scheme but it is unable to do so because management has been unable to agree a new system for retirement benefits with employees – this contributed directly to the hugely expensive pilot strikes in 2014 where the main demands were to maintain existing early retirement benefits and for a defined benefit pension scheme to be available for new employees to be able to join. Strike action in 1Q 2015 cost Lufthansa some €42m and the airline group has stated that the likely cost in Q2 2015 will be €58m. The airline is being brought low. Strong cash flow is the saviour for Lufthansa but for how long will passengers suffer disruption due to strikes before they start choosing alternative carriers? That process is seemingly already underway.

Lufthansa management need to get the mediators in fast and striking staff need to accept that the pension scheme they are fighting for is simply unaffordable in this modern age and the end result of their actions will be a weaker airline/employer. All things point to IAG and the European low cost airlines being able to profit from Lufthansa’s moment of weakness coming as it comes at the same time as Air France-KLM’s moment of weakness. One would assume that Wizz, Ryanair, Easyjet, Vueling (IAG), AirBerlin (Etihad) and NAS will try to increase advertising and capacity at speed during 2015 – The clock is ticking for Lufthansa.

admin
By admin May 5, 2015 19:59