14.11.2016, 20:46
Lufthansa Group reports good nine-month results in a challenging market environment
OREANDA-NEWS. "The Lufthansa Group is developing with stability in a difficult market environment," says Carsten Spohr, Chairman of the Executive Board & CEO of Deutsche Lufthansa AG. "We are responding to the pricing pressures in the air transport sector with consistent capacity and cost discipline. Our three-pillar strategy – our premium network airlines, our successful dual brand Eurowings and our world-leading service companies – is reaping its rewards. Our business is diversified and robust. And we are confident to reach last year’s good results’ level also for the full year 2016."
"We are building on this position of strength to grow further through global partnerships and drive the consolidation within Europe via our Eurowings platform. The expansion of the Eurowings Group is progressing well, thanks to the planned wet-lease agreement with Air Berlin and our planned full acquisition of Brussels Airlines. This would make Eurowings the Number Three in European in point-to-point traffic, less than two years since its launch. Following our successful new joint-venture agreement with Air China, we have now secured our position in all the key long-haul markets for the long-term. This will sustainably support our revenue development."
Passenger volumes were up for the period, but traffic revenues fell by 4.2 per cent in the face of continued pricing pressures on both the passenger and the cargo front. Total revenue for the Lufthansa Group for the nine months of January to September 2016 amounted to EUR 23.9 billion, a 1.8 per cent decline from the same period last year. Adjusted EBIT, which is the key indicator for the Group’s economic success, amounted to EUR 1,677 million for the period – 0.9 per cent down on the record prior year but with a stable Adjusted EBIT margin. Adjusted EBIT for the third-quarter period declined 6.3 per cent to EUR 1,148 million.
The earnings trends reflect substantial declines in unit revenues and further improved unit costs. Constant currency unit revenues declined 5.8 per cent in the January-to-September period. Prices remain under strong competitive pressure on transatlantic routes, in particular to and from South America. In the Asia business, the increase in individual bookings did not yet fully offset the substantial decline in group bookings. In the European hub traffic, by contrast, revenues remained relatively stable. The pressure on prices eased somewhat in the traditionally strong month of September, thanks in particular to a good short-term booking development of corporate customers. Moreover, Lufthansa slowed its capacity growth and successfully intensified promoting its Premium Economy product.
The Lufthansa Group also made structural progress on the cost. Constant currency unit costs, adjusted for fuel and non-recurring effects, declined by 2.1 per cent. Fuel costs were EUR 798 million lower than they had been in the prior-year period.
Earnings before interest and taxes (EBIT) for the Lufthansa Group amounted to EUR 2,330 million, substantially above the Adjusted EBIT result. The conversion of retirement and transitional payments for cabin staff in Germany from a defined-benefit to a defined-contribution system resulted in the release of EUR 713 million of provisions to the income statement. Since EBIT results for the prior-year period had also included non-recurring income of EUR 503 million deriving from the conversion of the JetBlue bond, however, the nine-month net group result after taxes saw only a 5.9 per cent improvement to EUR 1,851 million.
The Lufthansa Group further enhanced its financial stability in the third quarter. Pension liabilities declined. Net indebtedness also showed a further decline. As a result, the equity ratio rose from the 10.4 per cent at half-year to 14.1 per cent. Due the low-interest-rate policy, the pension liabilities still remain on the high level of EUR 10.5 billion. The reduction of the actuarial interest rate from 2.8 per cent at the end of 2015 to 1.5 per cent by the end of September has added almost EUR 4 billion to pension provision in this year alone.
Stable development at the Passenger Airline Group
The passenger airlines have been instrumental in the stable results of the Lufthansa Group this year. For the first nine months, the Passenger Airline Group achieved an operating profit of EUR 1,406 million, EUR 56 million more than for the prior-year period. Lufthansa Passenger Airlines remains the driving force raising its Adjusted EBIT by EUR 179 million to EUR 955 million for the period. This equates to a margin improvement by 1.8 percentage points to 8.1 per cent particularly by consistently eliminating loss-making routes. Austrian Airlines raised its nine-month Adjusted EBIT by EUR 18 million, while Swiss recorded a EUR 46 million decline in its Adjusted EBIT. Swiss is currently seeing its business performance burdened by the strength of the Swiss franc but remains the Group’s most profitable airline with an Adjusted EBIT margin of 9.8 per cent. Eurowings posted an operating loss of EUR 35 million for the first nine months, a decline of EUR 95 million on the prior-year period. Revenues were up 7.5 per cent to EUR 1.6 billion; but the airline also incurred sizeable start-up and development costs, along with a substantial decline in yields, especially in its Southern European business. The cumulative contribution from the Lufthansa Group’s holdings in SunExpress and Brussels Airlines were EUR 48 million down on the previous year. SunExpress is currently operating in a particularly difficult market; Brussels Airlines suffered substantial losses following the Brussels Airport terrorist attacks.
Lufthansa Cargo saw its nine-month revenues decline 15.9 per cent to EUR 1.5 billion in the face of strong pricing pressures. The company posted an operating loss of EUR 69 million, EUR 104 million down on the prior-year period. The air cargo business remains under pricing pressure. But September was Lufthansa Cargo’s best month of 2016 by far, raising the prospect of better business trends until year-end. Nine-month result at Lufthansa Technik was down EUR 32 million, though this still represents a margin of 9.6 per cent. The LSG Group posted a nine-month Adjusted EBIT of EUR 80 million, a EUR 4 million improvement on January-to-September 2015.
Improved full-year outlook
The Lufthansa Group recently raised its earnings forecast for the full year 2016. The Group now expects to report an Adjusted EBIT approximately on previous year’s level. The Lufthansa Group posted an Adjusted EBIT of EUR 1,817 million for 2015. The forecast has been primarily raised in view of the encouraging developments in short-term bookings at the end of the third-quarter period. In addition to stable corporate travel volumes, the actions taken to steer capacities and revenues are also increasingly reaping rewards. The Lufthansa Group will be slowing the capacity growth at its passenger airlines by a further percentage point in the fourth-quarter period to help further stabilize the pricing environment. The Group now expects to see constant currency unit revenues to decline by 7 to 8 per cent in the fourth quarter, compared to a projection of 8 to 9 per cent three months ago. Constant currency unit costs excluding fuel are expected to fall 2 to 3 per cent and fuel costs to decline by EUR 140 million. For the Group’s other business segments (Lufthansa Cargo, Lufthansa Technik, LSG and Others) cumulative earnings slightly below the same period last year are expected for the fourth quarter. In addition to its beneficial impact on the balance sheet, the switch of Lufthansa cabin personnel’s retirement and transitional payment schemes to a defined-contributions system should reduce annual costs by about EUR 60 million at current interest rate levels from 2017 onwards.
"Despite the volatility of our business and despite the difficult market environment, we are looking ahead with confidence to 2017," Carsten Spohr concludes. "We are moving forward; we are making things happen; we are delivering. We will continue to further work on our future viability also next year."
"We are building on this position of strength to grow further through global partnerships and drive the consolidation within Europe via our Eurowings platform. The expansion of the Eurowings Group is progressing well, thanks to the planned wet-lease agreement with Air Berlin and our planned full acquisition of Brussels Airlines. This would make Eurowings the Number Three in European in point-to-point traffic, less than two years since its launch. Following our successful new joint-venture agreement with Air China, we have now secured our position in all the key long-haul markets for the long-term. This will sustainably support our revenue development."
Passenger volumes were up for the period, but traffic revenues fell by 4.2 per cent in the face of continued pricing pressures on both the passenger and the cargo front. Total revenue for the Lufthansa Group for the nine months of January to September 2016 amounted to EUR 23.9 billion, a 1.8 per cent decline from the same period last year. Adjusted EBIT, which is the key indicator for the Group’s economic success, amounted to EUR 1,677 million for the period – 0.9 per cent down on the record prior year but with a stable Adjusted EBIT margin. Adjusted EBIT for the third-quarter period declined 6.3 per cent to EUR 1,148 million.
The earnings trends reflect substantial declines in unit revenues and further improved unit costs. Constant currency unit revenues declined 5.8 per cent in the January-to-September period. Prices remain under strong competitive pressure on transatlantic routes, in particular to and from South America. In the Asia business, the increase in individual bookings did not yet fully offset the substantial decline in group bookings. In the European hub traffic, by contrast, revenues remained relatively stable. The pressure on prices eased somewhat in the traditionally strong month of September, thanks in particular to a good short-term booking development of corporate customers. Moreover, Lufthansa slowed its capacity growth and successfully intensified promoting its Premium Economy product.
The Lufthansa Group also made structural progress on the cost. Constant currency unit costs, adjusted for fuel and non-recurring effects, declined by 2.1 per cent. Fuel costs were EUR 798 million lower than they had been in the prior-year period.
Earnings before interest and taxes (EBIT) for the Lufthansa Group amounted to EUR 2,330 million, substantially above the Adjusted EBIT result. The conversion of retirement and transitional payments for cabin staff in Germany from a defined-benefit to a defined-contribution system resulted in the release of EUR 713 million of provisions to the income statement. Since EBIT results for the prior-year period had also included non-recurring income of EUR 503 million deriving from the conversion of the JetBlue bond, however, the nine-month net group result after taxes saw only a 5.9 per cent improvement to EUR 1,851 million.
The Lufthansa Group further enhanced its financial stability in the third quarter. Pension liabilities declined. Net indebtedness also showed a further decline. As a result, the equity ratio rose from the 10.4 per cent at half-year to 14.1 per cent. Due the low-interest-rate policy, the pension liabilities still remain on the high level of EUR 10.5 billion. The reduction of the actuarial interest rate from 2.8 per cent at the end of 2015 to 1.5 per cent by the end of September has added almost EUR 4 billion to pension provision in this year alone.
Stable development at the Passenger Airline Group
The passenger airlines have been instrumental in the stable results of the Lufthansa Group this year. For the first nine months, the Passenger Airline Group achieved an operating profit of EUR 1,406 million, EUR 56 million more than for the prior-year period. Lufthansa Passenger Airlines remains the driving force raising its Adjusted EBIT by EUR 179 million to EUR 955 million for the period. This equates to a margin improvement by 1.8 percentage points to 8.1 per cent particularly by consistently eliminating loss-making routes. Austrian Airlines raised its nine-month Adjusted EBIT by EUR 18 million, while Swiss recorded a EUR 46 million decline in its Adjusted EBIT. Swiss is currently seeing its business performance burdened by the strength of the Swiss franc but remains the Group’s most profitable airline with an Adjusted EBIT margin of 9.8 per cent. Eurowings posted an operating loss of EUR 35 million for the first nine months, a decline of EUR 95 million on the prior-year period. Revenues were up 7.5 per cent to EUR 1.6 billion; but the airline also incurred sizeable start-up and development costs, along with a substantial decline in yields, especially in its Southern European business. The cumulative contribution from the Lufthansa Group’s holdings in SunExpress and Brussels Airlines were EUR 48 million down on the previous year. SunExpress is currently operating in a particularly difficult market; Brussels Airlines suffered substantial losses following the Brussels Airport terrorist attacks.
Lufthansa Cargo saw its nine-month revenues decline 15.9 per cent to EUR 1.5 billion in the face of strong pricing pressures. The company posted an operating loss of EUR 69 million, EUR 104 million down on the prior-year period. The air cargo business remains under pricing pressure. But September was Lufthansa Cargo’s best month of 2016 by far, raising the prospect of better business trends until year-end. Nine-month result at Lufthansa Technik was down EUR 32 million, though this still represents a margin of 9.6 per cent. The LSG Group posted a nine-month Adjusted EBIT of EUR 80 million, a EUR 4 million improvement on January-to-September 2015.
Improved full-year outlook
The Lufthansa Group recently raised its earnings forecast for the full year 2016. The Group now expects to report an Adjusted EBIT approximately on previous year’s level. The Lufthansa Group posted an Adjusted EBIT of EUR 1,817 million for 2015. The forecast has been primarily raised in view of the encouraging developments in short-term bookings at the end of the third-quarter period. In addition to stable corporate travel volumes, the actions taken to steer capacities and revenues are also increasingly reaping rewards. The Lufthansa Group will be slowing the capacity growth at its passenger airlines by a further percentage point in the fourth-quarter period to help further stabilize the pricing environment. The Group now expects to see constant currency unit revenues to decline by 7 to 8 per cent in the fourth quarter, compared to a projection of 8 to 9 per cent three months ago. Constant currency unit costs excluding fuel are expected to fall 2 to 3 per cent and fuel costs to decline by EUR 140 million. For the Group’s other business segments (Lufthansa Cargo, Lufthansa Technik, LSG and Others) cumulative earnings slightly below the same period last year are expected for the fourth quarter. In addition to its beneficial impact on the balance sheet, the switch of Lufthansa cabin personnel’s retirement and transitional payment schemes to a defined-contributions system should reduce annual costs by about EUR 60 million at current interest rate levels from 2017 onwards.
"Despite the volatility of our business and despite the difficult market environment, we are looking ahead with confidence to 2017," Carsten Spohr concludes. "We are moving forward; we are making things happen; we are delivering. We will continue to further work on our future viability also next year."
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