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Lufthansa's Q2 earnings add to Europe's aviation gloom as fare war bites
DEUTSCHE Lufthansa AG said threats to its financial outlook are mounting after a fare war and stuttering global economy dented second quarter earnings, adding to the gloom surrounding Europe's airline industry.
In a statement on Tuesday, Lufthansa stood by its reduced full-year profit guidance issued in June, while warning that the fight for market share means business trends could deteriorate further in the second half.
Europe's biggest airline group joins discount rival Ryanair Holdings Plc in clinging to its earnings goals in the face of falling fares, slowing GDP growth, rising fuel costs and disruption from congested airspace and extreme weather. Lufthansa's home German market has become a key battleground, with the collapse of smaller carriers unleashing a bruising fight for market share.
"Europe is the problem," Bernstein analyst Daniel Roeska said, adding that quarterly figures in line with expectations don't allay more deep-seated concerns. "As we move into peak summer, messages of a tough environment continuing should leave investors cautious on demand for the rest of 2019."
Lufthansa's adjusted earnings before interest and tax fell 25 per cent to 754 million euros (S$1.15 billion) in the second quarter, in line with an average analyst estimate of 757 million euros.
Short-haul routes are most under pressure, with yields, a measure of fares, tumbling at the Eurowings discount arm that the group had expanded to combat Ryanair, but which it now plans to rein in after mounting losses.
Lufthansa said it does not see things improving this year, with discounts continuing to weigh on ticket prices. Budget carriers operating in Germany cut fares as much as 10 per cent in recent months, according to a government report, indicating that the market still has excess seats despite the demise of Air Berlin, Britain's Monarch, Iceland-based Wow and a host of smaller operators.
Headwinds from a German economic slowdown are also building amid simmering trade tensions. As well as hitting corporate demand for flights, the conflict is crimping earnings at Lufthansa's cargo arm, which were 88 per cent lower than a year ago. Routes between Asia and Europe are particularly weak, and the airline said margin targets at the unit are at risk.
Chief financial officer Ulrik Svensson blamed oversupply and "tough competition" for the pressure on earnings and said Lufthansa will respond "by further reducing our costs and increasing our flexibility".
Ryanair said on Monday that it is not about to ease up on capacity despite a 21 per cent drop in quarterly profit, arguing that its cost base gives it an edge over European rivals.
Lufthansa shares are down 24 per cent this year after two profit warnings. Network rivals Air France-KLM and IAG SA, which owns British Airways and Spain's Iberia, are due to report earnings on Wednesday and Friday respectively. BLOOMBERG