Lufthansa issued profit warning resulting from rising fuel costs, excess seat capacity

epa07003358 An image showing company signage on Lufthansa passenger plane tailfins in Frankfurt, Germany, 31 August 2018. EPA-EFE/MAURITZ ANTIN

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Lufthansa has become the latest European airline to reveal it is suffering financial turbulence and said it would make a €336m loss for the first quarter of 2019.

The German group said a combination of excess seat capacity across the industry and rising fuel prices had impacted its earnings, turning the €52m profit it made for the same period last year into an unexpectedly high negative, The Guardian reports.

In an after-hours statement on Monday, the group said that rising fuel costs would send it to a worse than expected first-quarter loss, prompting its shares to drop 4.4 per cent in early trading on Tuesday.

The Financial Times reports that the company’s shares recovered to trade flat by mid-morning. Lufthansa will now report a loss of €336m in adjusted earnings before interest and tax for the first three months of 2019, a swing from a profit of €52m in the same period a year earlier.

The group blamed a €202m rise in fuel costs, as well as overcapacity in the fragmented and highly competitive European airline market, which is driving fares down. It said unit revenues at its legacy airlines — Lufthansa, Swiss and Austrian — and its low-cost Eurowings carrier “were down significantly”.

The FT adds that airlines have been warning that too many seats are coming on to the market. Europe’s overall seat count grew 4.8 per cent in the first quarter of 2019, according to estimates from Barclays, as airlines attempted to deal with demand, but this represented a cut from previous plans.

In mitigation, Lufthansa said its ailing winter figures compared to an unusually strong 2018, when it was boosted by the collapse of its domestic competitor, Air Berlin. It said it still expected full-year profits to remain in line with guidance, with strong bookings for the next three months. Airlines expect capacity to be reduced across Europe in 2019.

As well as the failure of some small airlines such as Wow, the bigger carriers – including Lufthansa – have curbed some expansion plans. The continued grounding of the Boeing 737 Max aircraft after the disasters in Indonesia and Ethiopia will also reduce capacity for Lufthansa competitors operating the plane, such as Turkish Airlines and Tui, and could eventually delay expansion at Ryanair, which has 135 of the Max models on order.

Lufthansa will shrink its seats by 1.5 per cent in April 2019, Barclays predicted. Jet fuel is back up at $84 a barrel, having been as low as $50 two years ago. It spent most of 2018 between $80 and $90 per barrel and came close to $100 in early October. Towards the end of 2018, information provider Platts estimated the high fuel price would cost airlines an additional $50bn that year.

Analysts at Bernstein said the warning is a test of investors’ patience since it paints a bleaker picture than consensus expectations. Citi expects at least a 4% consensus downgrade to full-year earnings on the back of the warning.

However, Lufthansa confirmed its full-year EBIT margin target and said it expects second-quarter unit revenue to increase on a currency-adjusted basis, helped by favorable booking levels and “a clear slowing” in overcapacity growth.

Financial Times / The Guardian/ Market Watch 

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