Lufthansa warns on profit, shares plunge

Wednesday 11 June 2014 15.11
Shares in German carrier slump 16% after profits warning
Shares in German carrier slump 16% after profits warning

German airline Lufthansa today lowered its profit targets for the next two years, citing competition from Middle East and low-cost carriers, sending its shares plunging.

The airline's shares fell 16% after the statement to wipe €1.5 billion off the company's market value and were heading for their biggest ever one-day drop. 

The warning dragged down European rivals too, with Air France-KLM losing 6% and British Airways owner IAG down 4.5%. Irish airline shares were also lower this afternoon, with Aer Lingus down 1.9% and Ryanair dropping 2.1%.

Europe's largest airline by revenue, Lufthansa had surprised with better than expected results in May. 

However, it said it now expects 2014 operating profit of €1 billion, down from a previous forecast of €1.3-1.5 billion. It also reduced its 2015 earnings target to €2 billion from €2.65 billion. 

Along with weakness in its cargo operations, Lufthansa is experiencing problems with pricing for its business and first class seats on European and US routes, where it and rivals have been increasing the number of seats available, its finance chief said.

Lufthansa itself plans to increase capacity by 7.4% on North American routes this summer, plans that the company confirmed today.

Lufthansa said it was feeling the competition especially from Gulf carriers such as Emirates Qatar Airways and Etihad, and from low-cost airlines. Its own low-cost unit Germanwings was on track to break even in 2015, it added. 

Compared with IAG, Lufthansa is more exposed to transfer traffic and to competition from Turkish Airlines and Middle Eastern carriers on routes south and east of Germany, analysts said. 

They said the airline has been the most aggressive in terms of raising seat capacity this summer even though the German economy is not growing as fast. 

The weak revenues from the passenger and cargo side mean new CEO Carsten Spohr, in the job for just over a month, will introduce new restructuring moves in July.

Lufthansa is already in the middle of a major restructuring programme, dubbed Score, and it said it was still on track to reduce unit costs by 4% this year as planned.

Lufthansa has 261 planes with a list value of €32 billion on order which are due for delivery by 2025. 

On the cargo side, a much anticipated recovery has not happened and no pick-up is in sight, the airline said. The unit will now post a profit only slightly above last year's €77m, rather than the significant jump it had hoped for.

Here too, Lufthansa is losing out to fast-growing Gulf carriers, which are carrying more and more cargo in the holds of their passengers planes. 

Lufthansa also said three-day pilot strikes in April had wiped €60m off its profit for the year, while currency restrictions in Venezuela preventing airlines from repatriating revenues from ticket sales there had lowered results by a further €60m.