Lufthansa predicts further profit slide this year after 2016 decline

German flag carrier says overcapacity will hit ticket prices amid rising fuel costs this year after after it posted a fall in adjusted operating earnings for last year.

A Lufthansa Boeing 747 plane in its final descent at Frankfurt Airport, Germany. Lufthansa says earnings will decline for a second year in succession this year. Uwe Anspach / EPA

Deutsche Lufthansa has predicted that earnings will fall for a second consecutive year as a capacity glut weighs on ticket prices while fuel costs rise.

Adjusted operating profit will decline “slightly” in 2017 after the figure dropped 3.6 per cent to €1.75 billion (Dh6.89bn) last year, including strike costs, Europe’s third-biggest airline said on Thursday.

Fares across Europe are under pressure after weakening oil prices prompted airlines to add seats just as stuttering economies and a spate of terrorist attacks hurt demand. With crude prices rising, the International Air Transport Association predicts the region will suffer a 25 per cent profit slump this year.

“It remains necessary to further reduce our costs,” said the Lufthansa chief executive Carsten Spohr. “This is the only way to meet and master the decline in unit revenues and the higher fuel expenses, and at the same time maintain and strengthen our financial stability.”

Unit revenue, which reflects ticket prices, fell 5.8 per cent in 2016 at constant currencies and is set to decline again this year, although not so steeply, the company said. At the same time, Lufthansa’s fuel bill is expected to be €350 million higher.

Mr Spohr was buoyed on the eve of the earnings release as he sealed a pilot deal that may end years of labour strife. The accord covering pay and pensions will lower flight-crew costs by 15 per cent.

The chief financial officer Ulrik Svensson said first indications are that the erosion in fares will slow as predicted, based on forward bookings and favourable trading in January and February. The fourth-quarter slide in unit revenue was also less than forecast at 6.4 per cent, while costs were reduced by 6.1 per cent, more than double the targeted rate.

Lufthansa’s suggestion that operating profit may show a slight decline in 2017 compares with analyst predictions for a slump of about 20 per cent to €1.42bn, the average of 15 estimates compiled by Bloomberg.

The group will have to keep cutting costs in 2017 as intense competition drives down ticket prices even as fuel costs have increased, Mr Spohr said.

At €31.7bn, Lufthansa’s revenues in 2016 remained at around the same level as the previous year, when it brought in €32.1bn.

But it was able to increase operating profit almost 36 per cent to €2.3bn, in part because of a €700m bonus from a pay and pensions deal struck with cabin crew.

Mr Spohr has said he plans to lift capacity at the group’s network carriers by 3 per cent this year, while growth at the Eurowings discount division will slow to 19 per cent from 27 per cent. The low-cost arm has said its fares may fall 5 per cent amid the capacity glut.

He also agreed last month to deepen ties Etihad Airways following a deal to lease planes from the Abu Dhabi carrier’s German affiliate airberlin.

Lufthansa shares have risen by 17 per cent so far this year. That is after the stock fell the most in more than five months on January 9 when Lufthansa said unit revenue would show a “clearly negative” trend this year.

* Agencies

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