The FINANCIAL — “The Lufthansa Group achieved a solid result for the first half-year,” says Carsten Spohr, Chairman of the Executive Board & CEO of Deutsche Lufthansa AG. “We are making good progress in implementing our Three-Pillar-Strategy. We see progress in all the areas where we can influence the changes ourselves. And this is particularly true for our cost structures and the growth of Eurowings, the development of which is progressing well.”
“At the same time, our industry has to prepare for a difficult second half-year”, Spohr continues. “The terrorist attacks in Europe and also the increasing political and economic uncertainties are having a tangible impact on passenger volumes. The forward bookings, in particular for our long-haul services to Europe have declined significantly. We expect the high pricing pressure to continue. In view of this, and as we recently announced, we expect to report an Adjusted EBIT for the full year which is below the previous year’s. This is why we will push on our efficiency increases even more consistently.”
Total group revenue for the first half of 2016 amounted to 15.0 billion euros, a 2.1 per cent decline on the prior-year period. Despite higher passenger volumes, traffic revenue was down 4.5 per cent due to strong pricing pressures in both the airline and the cargo businesses. In spite of the lower revenues, however, Adjusted EBIT – the key indicator of economic success – increased by 61 million euros to 529 million euros. This earnings result reflects both lower fuel prices and improved cost structures. Unit costs excluding fuel costs and currency effects decreased by 1.3 per cent in the first half-year compared to the prior-year period. The fuel cost benefits amounted to 597 million euros; and the pricing pressure, which is also partly the product of the lower fuel prices, resulted in a 5.2 per cent reduction in unit revenues excluding currency effects for the first half-year. Routes to Europe from South America and Asia showed a particularly weak performance. European and North American business developed relatively stable; Europe even saw an increase in its yields excluding currency effects in the second quarter, according to Lufthansa Group.
Financial stability increased
The net result for the first half of 2016 amounted to 429 million euros (prior year: 954 million euros), slightly below the prior-year result excluding one-off effects. In the first quarter 2015, the result included a positive effect amounting to 503 million euros from the early conversion of the JetBlue convertible bond. First-half cash flow from operating activities declined 13 per cent to 2.2 billion euros, reflecting consumers’ hesitancy to make forward bookings. But with investments for the period showing an even bigger decline, free cash flow still increased to 1.1 billion euros (prior year: 1.0 billion euros). The equity ratio declined to 10.4 per cent (18.0% at year-end 2015), owing largely to an increase in pension fund provisions in response to the decline of the IFRS discount rate to 1.6 per cent (2.8% at year-end 2015). At a comparable discount rate in the first quarter of 2015 (1.7%), the equity ratio of 7.5 per cent was substantially lower than its present level, which confirms the Lufthansa Group’s enhanced financial stability. The 2016 first half-year results do not yet include the impact of the agreement (following mediation) with the UFO flight attendants’ union under which employees’ retirement system will be switched from a defined benefit to a defined contribution model; the agreement is still to be ratified. The new tariff agreement will further noticeably improve the equity ratio. The EBIT, the metric which is relevant for dividend payment purposes, is still expected to be above the previous year and will be several hundred million euros above the Adjusted EBIT for the financial year 2016.
“Our balance sheet still reflects the volatility of our pension provisions”, says Simone Menne, Chief Officer Finance of Deutsche Lufthansa AG. “But these swings were a lot weaker than they had been a year ago because we have taken advantage of our favorable earnings of the past year to add some 1 billion euros to our equity. Within the current financial year we will see further stabilization, thanks to a result that is still encouraging in a long-term comparison and the positive impact of our new collective labor agreements.”
Lufthansa Passenger Airlines as main driver for improved earnings
Positive developments at Lufthansa Passenger Airlines were the main driver for the overall improvement in the Lufthansa Group’s first half-year result. It was the only business unit to substantially improve its operating result in both the first and the second quarter. First-half earnings for Lufthansa Passenger Airlines increased by 281 million euros to 387 million euros, and the EBIT margin rose accordingly to 5.2 per cent, an improvement of 3.8 percentage points. Amongst others, this is due to strict capacity discipline. The best margin among the Group’s network airlines remains SWISS’s at 6.3 per cent although earnings declined by 47 million euros in the first half-year as a result of the economic effects of the strong Swiss franc. Austrian Airlines improved its result in the first half-year by 16 million euros, while the cumulative earnings result from the holdings in SunExpress and Brussels Airlines showed a decline of 40 million euros. Both subsidiaries are currently operating in very difficult markets. The first half-year result for Eurowings was 67 million euros below its prior-year level, a result attributable mainly to its ramp-up and project costs and to the challenging competitive environment.
The biggest decline in first-half earnings – by 95 million euros – was seen at Lufthansa Cargo. Due to massive market overcapacities, yields in the airfreight sector have now declined to levels last seen during the financial crisis in 2009. In response, Lufthansa Cargo has embarked on a structural cost reduction program which is intended to save 80 million euros, twice as much as originally planned. The service companies Lufthansa Technik and LSG Sky Chefs reported first-half results that were 64 million euros and 2 million euros below their prior-year levels, respectively.
The second half-year is set to become more difficult
The Lufthansa Group expects to report an Adjusted EBIT for the financial year 2016 that is below last year’s level of 1.8 billion euros. In particular for the third quarter the Passenger Airline Group anticipates very weak trends. Unit revenues excluding currency effects are expected to fall 8 to 9 per cent in the second half-year. Planned full-year capacity growth is being reduced from 6.0 per cent to 5.4 per cent. On current estimates, second-half fuel costs will be around 350 million euros below their prior-year levels. For the year as a whole Lufthansa confirms its previous fuel cost forecast of 4.8 billion euros. The company is confident of lowering its unit costs excluding fuel costs and currency effects by 2 to 3 per cent for the second half-year – not including the positive impact of the new collective labor agreement with the UFO flight attendants’ union. For all other business segments, the Lufthansa Group expects to report a cumulative second-half result that is on par with prior-year levels. This forecast already includes any possible restructuring costs.
“We are and remain on course”
“The present market developments affirm the importance of further implementing our Three-Pillar-Strategy”, says Carsten Spohr. “It gives us the flexibility we need to find the right responses to the significantly-changed market environment. With our network airlines we have now laid important foundations to sustainably enhance both our revenue quality and our cost structures, from continued fleet renewal to product enhancements like internet connectivity on short-haul services and the conclusion of the new collective labor agreement with the UFO labor union.”
“Eurowings already has competitive unit costs on comparable routes”, Spohr continues. “We aim to significantly reduce these further by 2020. And at our service companies we have introduced growth projects and efficiency programs that will raise our performance and permit sustainable and profitable growth.”