Lufthansa braces for more challenges after price war hits earnings

BERLIN (Reuters) - German airline Lufthansa LHAG.DE said it was braced for very tough price competition with Ryanair RYA.I and easyJet EZJ.L for at least the rest of this year as it reported a plunge in second-quarter earnings on Tuesday.

Planes of German air carrier Lufthansa are seen at Germany's largest airport, Fraport, in Frankfurt, Germany, January 14, 2019. REUTERS/Kai Pfaffenbach

Lufthansa, which had issued a profit warning last month, blamed price competition on short-haul routes and rising fuel and maintenance costs as it said second-quarter adjusted earnings before interest and tax (EBIT) fell by 25% on the year to 754 million euros ($839.73 million).

Net profit for the quarter plummeted 70% to 226 million euros, partly due to an almost 200 million euro tax provision.

The results put further pressure on Lufthansa’s share price, which skidded 5.5% by 0850 GMT, after falling by around a third in the past year.

“Our earnings are feeling the effects of tough competition in Europe and sizeable overcapacities, especially on our short-haul routes out of Germany and Austria,” Chief Financial Officer Ulrik Svensson said.

Lufthansa was reacting by cutting costs further and boosting flexibility and hoped a turnaround plan announced for Eurowings in June would make its low-cost carrier profitable on a sustainable basis.

Referring to budget carriers Ryanair and Easyjet, Svensson said: “We are expecting that we will indeed have a very tough price competitive situation with these carriers for the rest of the year and maybe also into 2020.”

Eurowings’ short-haul business was likely to face further challenges in the second half of the year but a pick-up in the long-haul business should offset some of that, Lufthansa said. It said Eurowings would likely report an adjusted EBIT margin of -4 to -6% for the year as a whole.

In June Lufthansa said that Eurowings would aim to slash costs by 15% over the next three years and focus on short-haul flights as part of a plan to return to profit by 2021. Lufthansa cited falling revenues at Eurowings as a major reason behind last month’s profit warning.

On Tuesday, the airline forecast that the Network Airlines unit - its core brand, Swiss and Austrian Airlines - would see long-haul business develop at an above-average rate in the second half of the year but warned the more downbeat economic outlook increased the likelihood of weaker trends than in the first half.

Eurowings - which is facing particularly tough price competition from Ryanair and Wizz Air WIZZ.L - reported an adjusted loss of 273 million euros in the first half of 2019 compared with a loss of 220 million euros a year earlier.

Ryanair on Monday reported a 21% drop in quarterly profit as price wars in some European markets drove ticket prices lower. But Wizz Air last week raised its full-year capacity growth outlook after a strong start to its financial year.

Lufthansa maintained its guidance for 2019, having in June cut its full-year profit forecast due to lower prices and higher fuel costs compounding the effect of losses at its budget subsidiary Eurowings.

Since June it has been forecasting an adjusted EBIT margin of between 5.5% and 6.5% for 2019 - which would correspond with adjusted earnings of between 2 billion and 2.4 billion euros - a decline of 14% to 28.5% compared with last year.

Fuel costs were 255 million euros higher in the second quarter than in the previous year, it said.

Newspaper Handelsblatt reported on Monday that Lufthansa is considering adopting a corporate holding structure to simplify its operations, improve profitability and regain the support of investors.

But CFO Svensson said the company had no plans to change its corporate structure.

($1 = 0.8979 euros)

Writing by Michelle Martin; Editing by Madeline Chambers and Susan Fenton