Lufthansa sees Asia as particular challenge, no recovery signs yet

FRANKFURT Fri Aug 2, 2013 9:30am EDT

File aerial photo of Lufthansa planes parked on the tarmac of the closed Frankfurt's airport, April 19, 2010. REUTERS/Johannes Eisele/Files

File aerial photo of Lufthansa planes parked on the tarmac of the closed Frankfurt's airport, April 19, 2010.

Credit: Reuters/Johannes Eisele/Files

FRANKFURT (Reuters) - Lufthansa AG (LHAG.DE) said markets in Asia remained particularly challenging in the second quarter with no signs yet of recovery, indicating it might be forced into more measures to respond to the tough conditions.

Traditional airlines in Europe, all in the middle of deep restructuring efforts, are battling to cope with slow demand as well as competition from low-cost carriers and Middle Eastern rivals.

Lufthansa, Europe's biggest airline by sales, posted a 27 percent decline in second-quarter operating profit to 431 million euros ($570.4 million), well below the consensus forecast of 599 million. Its shares dropped more than 4 percent.

The results were dragged down by currency effects, staff costs and the recession in Europe. But it was tough environment in Asia which was the biggest worry.

"Asia is a particular concern," Chief Financial Officer Simone Menne told reporters, noting half of the reduction in yields - a measure of pricing - in the key Japanese market was due to the weak yen.

"It remained tough in the second quarter ... We didn't see any recovery in the economies based on forward bookings," Menne added, noting competitors in Asia were also behaving in a "more aggressive" manner.

"We obviously have to look at our Asia growth and see what we are doing there," she said, adding one of Lufthansa's responses so far had been to sell only two classes of tickets - economy and business, and not first class - for some routes.

Analysts have said Chinese carriers were competing aggressively, while Gulf airlines were growing market share, particularly in southeast Asia.

Lufthansa also said exchange-rate effects had depressed its first-half operating result by 23 million euros and that its "SCORE" restructuring program, which included 3,500 job cuts, had helped offset weak demand.

It kept its full-year profit outlook, noting cost cuts were on track and passenger forward bookings were in line with expectations. Menne said forward bookings for North America and Europe were stable and showed positive development.

CAPACITY CUTS

The downturn in earnings contrasts with IAG (ICAG.L), which said on Friday it had swung to a second-quarter profit as its Spanish carrier Iberia started to show signs of recovery, adding to the resilient performance of British Airways.

IAG shares rose to an all time high.

Menne told reporters that underlying profit had improved year-on-year, stripping out one-off factors such as this year's restructuring and last year's sale of bmi, as well as cost cuts at Austrian Airlines.

In an interview with Reuters Insider, Menne said she was "absolute happy" with the second-quarter results, noting the revenue development reflected "very stringent" seat management while forward bookings were stable.

"For Europe it's stable, North America looks very good, Asia we see lots of capacity in the market," she told Insider.

Analyst Donal O'Neill of Goodbody Research said Lufthansa's results were not all bad. "Staff costs (at Lufthansa) were a source of negative surprise, coming in 1 percent above estimate. Other costs were materially better, coming in 4.8 percent below forecast and showing the effects of the SCORE program," O'Neill said.

The Germany-based airline's quarterly revenue was largely flat at 7.84 billion euros, but also missed the consensus forecast of 8.12 billion.

Its shares were down 4.2 percent at 14.79 euros by 1319 GMT, after falling as low as 14.625 euros, their lowest since late April. The stock is still up around 6 percent so far this year, while that of Air France-KLM (AIRF.PA) has fallen 13 percent and IAG has gained 57 percent.

(Editing by Tom Pfeiffer and David Holmes)