Lufthansa Pares Growth Plans After Fare War Weighs on Profit

(Bloomberg) -- Deutsche Lufthansa AG cut its growth plans after a slide in fares and higher fuel costs weighed on 2018 earnings.

The stock fell the most in 4 1/2 months on Thursday after the German carrier said it will slow capacity increases to 1.9 percent this summer from the 3.8 percent previously planned in an effort to bolster prices and cope with limited room for extra flights at airports.

Lufthansa is putting a brake on expansion as it focuses on profitability after a year in which an industry-wide glut in seats combined with severe weather and air traffic control strikes to erode margins. European rivals have warned that a fare war will make for a tough summer, with Ryanair Holdings Plc, the region’s top discounter, cautioning last month that conditions could get tougher.

Chief Executive Carsten Spohr said earnings had been held back despite the best revenue performance in Lufthansa’s history. Capacity growth across the sector should slow to 3 percent in Europe this summer, providing some relief for yields, a measure of fares. Scope for German expansion is limited any way as air traffic controllers are recruited too slowly to cope with demand, he said.

Lufthansa dropped as much as 6.7 percent, the most since Oct. 30, and was 5.2 percent lower at 21.66 euros as of 10:41 a.m. in Frankfurt. That pares gains this year to 10 percent after the shares fell almost 36 percent in 2018.

Read More: Europe Airline Profit to Be Hurt as Rivalry Inflates Capacity

The carrier’s adjusted earnings before interest and tax fell 7 percent to 2.8 billion euros ($3.2 billion) last year, versus an average analyst estimate of 2.75 billion euros. The figure was boosted by a 122 million-euro accounting gain from capitalizing engine overhauls.

The company is targeting an adjusted Ebit margin of 6.5 percent to 8 percent for 2019, suggesting profitability may erode further from a 7.9 percent margin in the prior 12 months. Discount arm Eurowings is targeting break even after booking 170 million in costs from integrating jets from failed rival Air Berlin.

Bankhaus Metzler called the 2019 goals “unambitious” and cut its rating on the stock to sell from buy. Liberum said the results had been “clouded” by the accounting change, while the guidance range was wider under the new format.

Fuel costs are expected to rise by 650 million euros, though that’s lower than previously forecast. Lufthansa on Wednesday said it would buy 40 new twin-engined wide-body jets, helping it retire thirsty four-turbine models that many rivals have already eliminated.

©2019 Bloomberg L.P.