Lufthansa lowers profit forecast after European fare war bites

Deutsche Lufthansa AG is expecting lower profits as fare war in European airlines escalates. (AFP pic)

FRANKFURT: Deutsche Lufthansa AG shares slumped the most in three years after the company said it fears a European fare war will squeeze profits at least for the rest of the year.

A Europe-wide fight for market share forced Lufthansa to lower profit expectations for 2019, the German carrier said late Sunday. Falling revenues at its low-cost Eurowings subsidiary were chiefly to blame, the airline said, adding that the market will remain “challenging” for at least the rest of the year due to the seating glut. Lufthansa said it expects an adjusted margin for earnings before interest and tax of 5.5% to 6.5% for the year, down from previous guidance of between 6.5% and 8%.

Lufthansa shares dropped as much as 12% in Frankfurt and traded at that level as on 9:17 a.m. Shares in the airline have fallen around 20% this year.

European airlines are struggling to turn a profit due to the surplus of seats on tourist and business routes. Despite the demise of Air Berlin, Monarch, Wow and several other airlines since the end of 2017, too many planes are still flying to too many places. Budget carriers operating in Germany cut ticket prices by as much as a 10th in recent months, according to a government report, and booking website Skyscanner has also shown sharply lower ticket prices on various routes in June 2019 compared to the prior year.

The latest guidance “does not spell good news” Bernstein analyst Daniel Roeska said in a note, adding Lufthansa will need to provide more than just a long-term strategic plan in order to soothe investor concerns. In its first-quarter earnings report, Lufthansa said it expected unit revenues to rise amid strong bookings and an expected reduction in capacity growth, although it is now digging in for a protracted fight against low-cost rivals.

Lufthansa said sales at Eurowings, its low-cost airline, are expected to fall in the second quarter and for the full year, adding it would shortly unveil new cost-cutting measures at the unit. The worsening performance at Eurowings comes months after Lufthansa said it would halt the expansion of the airline amid a capacity glut.

Fuel prices have also increased, thanks to tensions between the US and Iran, Lufthansa said, while a trade war has curbed revenues. The company also said it would take a 340 million-euro provision in the first half for a tax risk in Germany.