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Deutsche Lufthansa AG 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 percent to 1.75 billion euros ($1.9 billion) last year, including strike costs, Europe’s third-biggest airline said in a statement 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 percent profit slump this year.
“It remains necessary to further reduce our costs,” Lufthansa Chief Executive Officer Carsten Spohr said in the release. “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 percent in 2016 at constant currencies and is set to decline again this year, though not so steeply, the company said. At the same time, Lufthansa’s fuel bill is expected to be 350 million euros higher.
Spohr was buoyed on the eve of the earnings release as he sealed a pilot deal that may end years of labor strife. The accord covering pay and pensions will lower flight-crew costs 15 percent, advancing his push to combat the challenge from Mideast airlines on long-haul routes and low-cost specialists in Europe.
Chief Financial Officer Ulrik Svensson said first indications are that the erosion in fares will slow as predicted, based on forward bookings and favorable trading in January and February. The fourth-quarter slide in unit revenue was also less than forecast at 6.4 percent, while costs were reduced by 6.1 percent, 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 percent to 1.42 billion euros, the average of 15 estimates compiled by Bloomberg.
Spohr has said he plans to lift capacity at the group’s network carriers by 3 percent this year, while growth at the Eurowings discount division will slow to 19 percent from 27 percent. The low-cost arm has said its fares may fall 5 percent amid the capacity glut.
Speculation about a possible Etihad investment in Lufthansa has helped spur its shares to a 17 percent gain so far this year. That’s after the stock fell the most in more than five months on Jan. 9 when Lufthansa said unit revenue would show a “clearly negative” trend this year.
©2017 Bloomberg L.P.