Lufthansa Shares Fall After Airline Warns of Slower Earnings Growth

LONDON— Deutsche Lufthansa AG on Thursday said its earnings improvement will slow this year despite a strong tailwind from lower fuel costs, signaling the continued challenges the airline faces in restoring competitiveness.

Even with an anticipated €1 billion ($1.13 billion) drop in its fuel bill this year, Lufthansa is forecasting only a slight increase in its closely watched adjusted earnings before interest and taxes. Low fuel prices and increased competition have put pressure on ticket prices and some efforts to lower costs are behind plan.

Chief Financial Officer Simone Menne also said the rise in oil prices in recent days is causing the airline to be cautious about its outlook. Passengers are booking more last minute, weighing on ticket prices.

Shares in Lufthansa fell more than 6% in Frankfurt trading.

Lufthansa is undergoing a restructuring program to lower costs and restore competitiveness in the face of aggressive rivals. It has been losing market share in its short-haul business to budget carriers Ryanair Holdings PLC and easyJet PLC, while suffering a flight of long-haul passengers to Middle East carriers such as Emirates Airline and Qatar Airways on routes to Asia.

Lufthansa’s efforts to lower costs, such as moving flights to its own discount unit Eurowings, have met union opposition triggering strikes. Earnings in the fourth quarter suffered a €100 million hit from strike costs, the airline said. Even so, Eurowings delivered a slight operating profit last year, ahead of plan.

“We will consistently press ahead with the further development of the Lufthansa Group throughout 2016,” airline Chief Executive Carsten Spohr said, adding that “as long as we can further align our cost structures to market levels, the Lufthansa Group has great prospects in all its business segments.”

Lufthansa is exiting a difficult year in which it celebrated its 60-year anniversary. It suffered the crash of a Germanwings airliner almost a year ago at the hands of its suicidal co-pilot, killing all 150 people onboard. Strikes also disrupted service. Unit costs excluding fuel and currency effects rose even as those at rivals such as British Airways parent International Consolidated Airlines Group fell.

Costs at its hub airlines such as mainline Lufthansa remain “too high,” Mr. Spohr said.

Still, lower fuel costs last year helped drive a big jump in net profit for 2015 to €1.7 billion from €55 million, Germany’s largest airline said. The year-earlier figure was heavily affected by several one-time items. The loss in the traditionally weak fourth quarter fell to €50 million from a €427 million loss a year earlier.

Lufthansa’s more closely watched adjusted earnings before interest and taxes rose 55.2% to €1.82 billion. The company had forecast adjusted earnings of €1.75 billion to €1.95 billion. Sales increased 6.8% to €32.1 billion.

Lufthansa said unit costs should fall this year, even excluding fuel and currency effects. The company is expected to pay around €4.8 billion for fuel this year.

Earnings should rise at mainline Lufthansa and at Austrian Airlines, though fall for Swiss International Air Lines because of the strong local currency. Budget unit Eurowings is expected to swing back to a loss amid expansion efforts.

The growth of Eurowings should see the addition of six short-haul planes and four long-haul Airbus Group SE A330 planes this year. Lufthansa said the unit’s costs are already 30% below that of its traditional hub airlines and would fall 10% a year through 2018, excluding fuel.

Mr. Spohr reaffirmed his view that the European budget airline sector needed to eventually consolidate, and that he expected Eurowings to be a participant in any such shakeout.

Earnings at its struggling cargo business, hampered by global weakness in air freight, should rebound slightly this year after a 40% drop in 2015. Lufthansa’s plane repair business, which enjoyed an almost 20% increase in earnings to €454 million, should see a “significant” drop this year, Lufthansa said, amid pricing pressure. The group’s catering operation should see a slight fall in earnings, after a 12.5% increase in 2015.

The carrier proposed a dividend of €0.50 a share

Credit: Wall street journal