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Abu Dhabi, UAESunday 24 June 2018

Lufthansa's 'clearly disappointing' forecast hits shares

Concerns German carrier is not making sufficient progress in improving competitiveness

Lufthansa's shares have taken a knock. Lukas Schulze / EPA
Lufthansa's shares have taken a knock. Lukas Schulze / EPA

Deutsche Lufthansa stock retreated from nine-year highs as the German airline looked poised for a difficult second half with pressure on fares set to intensify amid a struggle to rein in costs.

Lufthansa shares fell as much as 4.3 per cent, the steepest intraday drop since April 27, even after the carrier raised its 2017 operating profit forecast to gradually catch up with analyst estimates. While first-half earnings almost doubled on stronger traffic, investors focused on the airline’s lingering need to confront lower-cost rivals as it said ticket prices will decline.

“We remain concerned that Lufthansa is not making sufficient progress in improving competitiveness in its core businesses,” said Gerald Khoo, a London-based analyst at Liberum.

Lufthansa’s last two monthly traffic reports showed fare growth was “positive” as a stronger worldwide economy helped passenger numbers rise. Those gains are coming to a halt, with the second-half trend for unit revenue, a measure of pricing per seat, set to be “negative”, the company said. The carrier, which has its main bases in Frankfurt and Munich, has capitalised on added demand by leasing extra aircraft from ailing rival Air Berlin and acquiring full control of Brussels Airlines, which is combining with the Eurowings low-cost arm that Lufthansa is seeking to expand.

The shares fell 1.7 per cent to €20.77 as of 11:24am in Frankfurt. Still, Lufthansa stock is the best performer this year on Germany’s benchmark DAX Index, with a 69 per cent jump.

First-half adjusted earnings before interest and taxes surged to €1.04 billion (Dh4.41bn)) from €529 million a year earlier, prompting Lufthansa to forecast profit will rise this year instead of an earlier prediction of a decline. Unit costs, or operating spending per seat excluding fuel and currency effects, fell 1.2 per cent in the period and will continue declining in the second half, the company said, without specifying a number.

Lufthansa still has to agree on wage and retirement terms with its pilots union. Even if the carrier succeeds in reducing unit costs at Eurowings as planned, the division’s spending per seat will still be far higher than at budget competitors such as Ryanair.

The unit-revenue forecast is a “clear disappointment”, said Guido Hoymann, a Frankfurt-based analyst at Bankhaus Metzler who cut his recommendation on Lufthansa to sell from hold. As Ryanair adds service in Frankfurt and the United States eases carry-on baggage restrictions on Middle East flights that prompted some travelers to fly via Europe, “Lufthansa may again be stuck between competition from low-cost carriers and the [Arabian] Gulf airlines”.