Lufthansa Group’s strategic realignment reaps first rewards

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The FINANCIAL — The Lufthansa Group is on course for a significantly improved full-year result. After the first nine months of 2015, the Adjusted EBIT increased by 71.4 per cent year on year to EUR 1.7 billion.

The significant earnings improvement is mainly attributable to strong summer business at the Group’s passenger airlines and continuing low oil prices. The service companies Lufthansa Technik and LSG Sky Chefs also posted significant improvement in earnings. On the basis of these pleasing developments, Lufthansa refined its forecast for the full-year results to an Adjusted EBIT between EUR 1.75 and 1.95 billion. This forecast does not incorporate any strike-related costs which might be incurred between now and year-end, according to Lufthansa.

“We are delighted to be able to present these encouraging results, which confirm that we are on the right track, and that our chosen strategy is having its desired effect,” says Carsten Spohr, Chairman of the Executive Board & CEO of Deutsche Lufthansa AG. “The realignment of the Lufthansa Group is now being reflected in good results, too. There is no question that the low oil price helped us to achieve these. But our improved earnings rest on more than this alone. We recorded outstanding passenger volumes this summer and significantly improved load factors, too. In the third-quarter we completed the most comprehensive product and service upgrade in the history of our company, and our guests are clearly honoring our enhanced quality levels. The strong development at our airlines is closely linked to the enhancements we have made to our products and services. At the same time, Germanwings has not just reached break-even, but clearly exceeded this target. We have also made ourselves more efficient, not least through our rigorous capacity discipline: We have deliberately refrained from further growth, and currently have 25 fewer aircraft in service than we planned to have at this time back in 2012.”

Total revenue for the Lufthansa Group for the nine months until 30 September 2015 amounted to EUR 24.3 billion, up 7.4 per cent on the previous year. Of this amount, EUR 19.4 billion (up 5.0 per cent) are traffic revenues. Key drivers for this were the positive development of volumes and favorable exchange rates. Capacities for the period were more extensively utilized, though the 2.8% increase in the passenger airlines’ unit revenues was only achieved through the euro’s relative weakness. Excluding currency effects the unit revenues decreased by 3.3 per cent. In the third-quarter, however, significant improvement in unit revenues adjusted for currency effects was being reached.      

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In addition to the sizeable fuel cost declines, the Lufthansa Group achieved its originally-forecast full-year Adjusted EBIT for 2015 of over EUR 1.5 billion after just nine months in particular due to the strong demand in July and August. The nine-month Adjusted EBIT margin amounts to 7.0 per cent, some 2.6 percentage points above previous year’s level. And the same margin was as high as 13.7 per cent for the third-quarter. Net profit for the period more than tripled to EUR 1.75 billion, including some EUR 500 million from the sale of the equity stake in JetBlue in the first half year.         

“Our third-quarter business performance is particularly good as we were able to improve a number of our key performance indicators,” adds Simone Menne, Chief Officer Finance & Aviation Services of Deutsche Lufthansa AG. “There is one cause for concern in all of this, though: if we exclude the fuel cost and currency factors, our unit costs saw a further increase in the third-quarter. And we cannot be satisfied with this trend.”     

Lufthansa Passenger Airlines made the greatest contribution – with a rise of more than half a billion euros – to the Group’s increased nine-month earnings. The Adjusted EBIT for the period increased by EUR 533 million to EUR 853 million, which Germanwings accounted for a double-digit million-euro amount. Nine-month earnings at SWISS rose by EUR 163 million to EUR 375 million; and Austrian Airlines also posted a positive EBIT for the period – in contrast to last year – of EUR 61 million. Lufthansa Cargo saw a continuation of the weaker development since May in the third quarter. Adjusted EBIT was almost halved to EUR 35 million. Both Lufthansa Technik and LSG Sky Chefs posted strong increases in both revenue and earnings. Lufthansa Technik reported nine-month earnings of EUR 398 million (up EUR 50 million), while the nine-month Adjusted EBIT at LSG Sky Chefs totaled EUR 76 million (up EUR 19 million). In both cases the improved earnings stemmed primarily from additional business generated outside the Lufthansa Group.

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Largely as a result of these positive earnings trends, the Group’s operating cash flow stood at EUR 3.2 billion after the first nine months of 2015, some EUR 1.1 billion up year on year. After deducting net capital expenditure of just under EUR 2 billion, this results in a free cash flow of EUR 1.2 billion. Due to the very good earnings development  in combination with stable interest rates the equity ratio increased by 1.1 percentage points in the third-quarter to 18.6 per cent at the end of September. 

The refined Adjusted EBIT forecast for the full year reflects the strong third-quarter performance and the anticipated relief in fuel costs. Lufthansa expects pricing in its passenger airline business to worsen again in the fourth quarter of the year. Demand has deteriorated noticeable again in the last few weeks. But in view of the further falls in oil prices over the past few months, Lufthansa now expects to report total fuel costs for 2015 of EUR 5.7 billion, some EUR 300 million less than forecast after the first six months.

“We cannot expect to fly for too long with a tailwind of low oil prices,” warns Carsten Spohr. “So we must continue to work hard on the competitiveness of our cost structures. And here we have already identified cost savings of around EUR 1 billion for 2016. We are making good progress at all levels in securing the Lufthansa Group’s future, and our new group alignment is now clearly taking shape. The establishment and operational start of our point-to-point carrier Eurowings is fully on track. We now need to make our German hub airline capable of further growth, together with our social partners, to give our core business, too, additional aircraft and new prospects and perspectives again in the interests of all our employees there. Our aim here is not to have to further adjust our network to our costs, but to give ourselves a competitive cost structure that will enable us to once again open up new routes and tap new markets.”


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