European airlines are flying from strength to strength this year with talk of an economic slowdown seemingly just a memory.
Nothing, it seems, can slow the Lufthansa Group down. Robust travel demand, particularly for its premium offerings, drove record profits in the second quarter and has lifted its outlook for the rest of the year.
“Demand remains extraordinarily strong,” group CEO Carsten Spohr said during a June quarter earnings call Thursday. That is driving its forecast of a roughly 25% increase in revenue earned per passenger mile flown, or unit revenues, in the third quarter. The biggest gains are to Asia, where many countries only began reopening late last year, and across the Atlantic to the Americas.
Demand for air travel, however, looks a lot different than it did four years ago:
- Leisure demand continues to dominate, particularly from the premium leisure travelers who have become a force in the global airline industry throughout the Covid recovery.
- Corporate travel, like at most international airlines, has plateaued at passenger volumes that are roughly 60% of 2019 levels. However, Spohr described the outlook for this fall as “increasingly positive.” Lufthansa doubts domestic German domestic business demand will ever fully recover.
This is broadly the trend in Europe where the recovery is six months or so behind the U.S. Travel demand remains robust and yields, a rough proxy for airfares, continue to rise sharply. This was the story at Air France-KLM, International Airlines Group — owner of British Airways and Iberia — and Ryanair, all of which have already reported second-quarter results. People continue to be willing to pay up for travel both within Europe and on long-haul international routes.
This contrasts with the U.S. where the domestic market surged last year. That has resulted in yield declines at most domestic-focused airlines despite what is broadly agreed to be continued strong travel demand. American Airlines, Delta Air Lines, and United Airlines have largely bucked this trend due to their large international networks where yields continue to rise.
The Lufthansa Group reported a record $1.2 billion (€1.1 billion) adjusted operating profit in the second quarter. That equaled a nearly 11% adjusted operating margin for the period. Revenue was up 17% from last year to $10.3 billion. And yields were up a quarter from 2019 levels on nearly 18% less capacity.
The group includes its namesake carrier Lufthansa plus Austrian Airlines, Brussels Airlines, Eurowings, and Swiss International Air Lines. Within the group, Swiss was the strongest performer in the second quarter, generating a nearly 18% operating margin.
Here are five takeaways from Lufthansa’s second-quarter earnings call.
1. Staffing and Other Issues are Limiting Schedules
Airport staffing, air traffic control constraints, spare part shortages, and delays to new aircraft all came at the expense of growth in the second quarter, Spohr said. Lower capacity growth and productivity meant higher unit costs — a metric that measures how much it costs an airline to transport a passenger — for the period and likely the year.
Both Spohr and group Chief Financial Officer Remco Steenbergen said the increases are warranted given the operational improvements; 70% of group flights departed on time in the first half, a 4 point improvement from last year’s chaos.
Lower growth coupled with strong travel demand also means it is easier to continue those double-digit yield gains that investors like to see. The Lufthansa Group now plans to fly just 85% of its 2019 capacity in 2023, the low end of its previous full year guidance.
2. Lufthansa’s New Premium Product is Delayed
Travelers will have to wait a little bit longer to try out Lufthansa’s new premium offering, Allegris. The first plane to support the product, a Boeing 787-9, is now due in early 2024 because of delivery delays at Boeing, Spohr said. It was previously expected this fall.
Allegris is a $2.7 billion investment that will see all of its twin-aisle aircraft flying long-haul routes refit with the new first, business, and premium economy products over the next several years. The investment dovetails nicely with, but is not necessarily driven by, by the rise of premium leisure travel that is helping boost yields.
3. Lufthansa Wants to Be an Airline, Not Aviation, Group
Diversification be damned, so to speak. The Lufthansa Group is actively divesting its non-aviation assets and focusing on its core airline businesses.
Its catering division, LSG Group, is being sold to private equity firm Aurelias with close expected in the September quarter. It’s selling its payments business, AirPlus, to Swedish bank SEB Kort for roughly $492 million with close anticipated next year. And the group aims to sell part, but not all, of its Lufthansa Technik maintenance division in the second half. Spohr described the deals as reducing organization complexity and “sharpening our portfolio.”
Speaking of airlines, the group is having “constructive dialogue” with the European Commission over its planned acquisition of Italy’s ITA Airways. The deal, which Spohr hopes will close by the end of the year, would provide Lufthansa with strategically important hubs in Milan and Rome, and a much larger share of the lucrative Italian market.
4. Pratt & Whitney Engine Recall Could Be a Positive
The recent recall of some 1,200 Pratt & Whitney engines on Airbus A320neo-family aircraft is both good and bad for Lufthansa. On the negative side, it must remove and inspect 13 engines by the end of September, and another 50 engines within 12 months, Spohr said. That could impact flights though, at least for the initial batch, Spohr said spare aircraft could pick up the slack.
But on the positive side, someone must do those inspections and Lufthansa, with its Technik division, could benefit from additional business inspecting P&W engines for other airlines. “We don’t have a contract yet with Pratt,” Spohr said. “Pratt will need partners around the world to get these engines fixed. So it’s too early.”
5. Lufthansa Has a Good Set Up Into 2024
The Lufthansa Group expects an adjusted operating profit for the year of more than $2.8 billion. That’s significantly better than its May guidance of “significantly above 2022;” the group posted a $1.5 billion adjusted operating profit last year. The main question on analysts’ minds is really over costs, which will rise in the second half instead of stay flat. Group CFO Steenbergen was confident that costs will begin declining next year as more capacity comes online, and the group nears 2019 flying levels.
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Photo credit: Lufthansa sees robust travel demand through the fall. (Fraport AG) Fraport AG