Bloomberg News

Lufthansa Scraps Profit Target as Economy Eats Into Bookings

September 20, 2011

(Updates with German economic outlook starting in 10th paragraph, IATA outlook starting in 12th, IAG guidance in last.)

Sept. 20 (Bloomberg) -- Deutsche Lufthansa AG cut its full- year profit forecast and said it would deepen capacity cuts this winter after last month’s results were weaker than expected and forward bookings slumped. The stock fell the most in 19 months.

Operating profit will be “at the upper end of the three- digit million-euro range,” while falling short of last year’s figure of 876 million euros ($1.2 billion), Lufthansa said today, after reiterating in August that earnings would increase.

Lufthansa shares fell as much as 7.1 percent as Europe’s second biggest airline joined market leader Air France-KLM Group in predicting a decline in annual earnings. The German carrier was already trimming capacity growth for the winter season from Oct. 29 to 6 percent from 12 percent by using smaller planes, deferring planned routes and shutting the Lufthansa Italia unit.

“It’s a bad surprise, because management was very confident about increasing earnings,” said Uwe Weinreich, an analyst at Unicredit in Munich. “It’s completely the economy. And the rest of the year is not in their favor in passenger or cargo.”

The drop in Lufthansa stock was the sharpest since Jan. 22, 2010, based on intraday prices. The carrier was trading down 5.9 percent at 10.16 euros as of 2:54 p.m. in Frankfurt, taking the slump in 2011 to 38 percent and valuing it at 4.7 billion euros.

‘Economic Uncertainties’

“The adjustment undertaken reflects a weaker-than-expected monthly result for August reported by the passenger airline group,” the Cologne, Germany-based airline said in today’s statement. “In view of ongoing economic uncertainties, further booking trend expectations were also adjusted.”

Lufthansa Chief Executive Officer Christoph Franz had said on Aug. 30 that the carrier still aimed to boost earnings this year as oil-price hedging and non-airline operations left it better placed than rivals. The carrier is hedged on 75 percent of its 2011 fuel needs, while the Lufthansa Technik and LSG SkyChefs maintenance and catering units aren’t subject to a German aviation tax, Franz said, diminishing the levy’s impact.

August’s earnings figures, combined with other factors, led the Lufthansa board to revise its view at a meeting today, spokeswoman Claudia Lange said by telephone. While the company’s airlines lifted capacity 8.4 percent in the month, traffic rose only 5.7 percent, causing occupancy to fall 2 percentage points.

Dwindling Confidence

“They considered this issue and decided that a combination of altered expectations, the weak month and economic effects would have an impact on expected revenue, and that they should make this known, which is what we’ve done,” Lange said.

German investor confidence is at the lowest since December 2008 as Europe’s debt crisis and a global slowdown damp the growth outlook, according to an index of investor and analyst expectations based on a survey carried out between Sept. 2 and Sept. 19 by the ZEW Center for European Economic Research.

Still, Germany’s Bundesbank said in a monthly bulletin yesterday that it expects “robust” growth in Europe’s largest economy in the third quarter as private consumption rebounds from a second-quarter slump. The central bank last month reiterated its forecast for growth of about 3 percent this year.

Lufthansa’s revised guidance also came as the International Air Transport Association raised its global earnings forecast for 2011 by 73 percent to $6.9 billion, citing stronger-than- expected demand in regions including Europe, where the industry group says a weak euro is boosting exports and tourism.

Thin Margin

IATA lifted its net income outlook for European carriers to $1.4 billion, $900 million higher than predicted in June, while cautioning that the region will have the weakest operating margin outside Africa at 1.5 percent and predicting that global earnings will fall in 2012 as growth stalls in western nations.

Profit at Europe’s airlines may total only 300 million euros next year, IATA said, representing a decline of almost 80 percent from its forecast for 2011.

Air France-KLM was priced 3.2 percent lower today, taking the decline this year to almost 58 percent and giving a value of 1.7 billion euros, while International Consolidated Airlines Group SA, the owner of British Airways and Spain’s Iberia, traded 2.5 percent lower and has lost 45 percent in the year for a value of 2.8 billion pounds ($4.4 billion).

Air France, which posted net income of 613 million euros in the year to March 31, reiterated July 28 after a 145 million- euro second-quarter loss that its goal this year is simply to be profitable. Lufthansa’s earnings of 230 million euros, reported the same day, fell short of a 325 million-euro analyst target and both carriers said they’d rein in capacity.

IAG had an operating profit of 190 million euros in the second quarter versus a 71 million-euro year-earlier loss, outperforming its European rivals and beating analyst estimates.

The London-based carrier reiterated July 29 that it expects “significant growth” in full-year earnings as it wins market share on U.S. routes through an alliance with American Airlines and merger savings help counter high kerosene prices. That guidance still stands, spokeswoman Laura Goodes said today.

--With assistance from Tom Lavell in Frankfurt and Steve Rothwell in London. Editors: Chris Jasper, Chad Thomas.

To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Chris Reiter in Berlin at creiter2@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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