October 30, 2018 / 6:11 AM / 22 days ago

Lufthansa profit drops on Air Berlin integration, strikes

FRANKFURT (Reuters) - German airline Lufthansa (LHAG.DE) missed forecasts with an 11 percent drop in third-quarter operating profit as it spent money on integrating Air Berlin, which it snapped up after the budget carrier’s collapse last year.

Flags with the German airline Lufthansa sign flutter next to the office building in Frankfurt, Germany March 15, 2018. REUTERS/Ralph Orlowski

The cost and complexity of absorbing the business compounded the effect of higher fuel costs and air-traffic control strikes that have hit the wider sector, dragging down Lufthansa’s results and sending its shares to a 17-month low on Tuesday.

The disappearance of Air Berlin temporarily relieved pressure on remaining airlines as seats became more scarce, but carriers have been adding capacity again in a grab for market share that may push ticket prices lower overall.

Lufthansa said it was also keeping a close eye on how broader events such as Britain’s planned exit from the European Union and the U.S. trade war with China may affect demand.

“We are always prepared for a potential downturn, which is not in sight yet,” Chief Executive Carsten Spohr told analysts on a conference call. “Demand seems to be intact.”

Germany’s flagship carrier reported adjusted earnings before interest and taxes (EBIT) of 1.35 billion euros ($1.54 billion) for the July-September period, below analysts’ average estimate of 1.41 billion euros in a Reuters poll.

Quarterly sales rose 2 percent to 9.96 billion euros, while passenger numbers increased 9 percent to 41.6 million.

Lufthansa kept its adjusted EBIT guidance for the full year of a slight fall from 2017’s record 2.97 billion euros.

“Beyond today’s results, this is likely to prove a positive for the stock, given that there were significant investor expectations of a profit warning or guidance downgrade heading into the results,” wrote Bernstein analyst Daniel Roeska, who rates Lufthansa “outperform”.

Shares in Lufthansa, which have fallen by roughly two fifths since the start of the year, were down 7.8 percent at 1215 GMT, the weakest performers in Germany's blue-chip DAX index .GDAXI, which was down 0.1 percent.

British Airways owner IAG (ICAG.L) last week posted an unexpected profit increase as strong demand in Europe helped shield it from rising fuel prices.

GRAPHIC: Lufthansa Share Price - tmsnrt.rs/2CMJM8x

PRICE PRESSURE

Fuel costs and compensation payments for strike-related and other delays are expected to increase Lufthansa’s costs by more than 1 billion euros this year, Spohr said, while an additional 170 million euros has been paid to restructure its budget carrier Eurowings, which is absorbing Air Berlin.

Lufthansa expects 900 million euros in extra expenses for fuel next year, after an increase of 850 million euros this year. It has paid out 350 million euros so far this year in compensation for late or canceled flights.

Lufthansa said it would increase capacity by 8 percent this winter, slightly less than the 10 percent it expected its peers to add, and next year would add just 5 percent, limited by the ability of airport infrastructure and air-traffic control to cope with more traffic.

It said it would raise ticket prices next year on the back of higher fuel costs, having already said in the summer it would raise ticket prices for the rest of 2018.

In contrast, Ryanair (RYA.I) CEO Michael O’Leary has said he will push fares down by 2 percent in the six months to March 31 on European short-haul routes, while cutting the airline’s profit targets.

($1 = 0.8788 euros)

Writing by Arno Schuetze and Georgina Prodhan; Editing by Kirsten Donovan and Mark Potter

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