Lufthansa Forecast Looks Cloudy With Little Chance of Profit

(Bloomberg Businessweek) -- As Air Berlin slid into insolvency two years ago, Carsten Spohr spotted an opportunity to strengthen his response to low-cost carriers Ryanair, EasyJet, and Wizz. The chief executive officer of Deutsche Lufthansa AG had been seeking to make Eurowings, his budget unit, more competitive by marrying bargain-bin fares with Lufthansa’s top-shelf brand name. Spohr snapped up Air Berlin planes, employees, and landing slots, but since then Eurowings has racked up almost €500 million ($570 million) in losses. This spring, Spohr halted expansion of Eurowings after soaring fuel prices and too many empty seats squeezed profits, helping drive Lufthansa’s stock down 10% this year. In the company’s annual report, he said integrating Air Berlin had made for an “extremely difficult” year. “We did not always live up to our premium promise to our customers and disappointed many of our passengers with delays,” he said.

Lufthansa’s woes are emblematic of a European industry that’s facing a second straight bummer summer. Carriers are grappling with gyrating fuel prices because of U.S. tensions with Iran and the escalating trade war with China. Brexit jitters have sapped consumer confidence among Britons, spurring airlines to ponder airfare cuts to tease out shy demand. Germans face crowded airspace, jammed security lines, and strike threats. Eurocontrol, the regional air traffic authority, says there could be 40% more delays this summer than there were last.

Despite the demise of Air Berlin, Germania, Monarch, Wow, and at least a half-dozen other European carriers since 2017, too many planes still fly to too many places, making it difficult for airlines to boost profit by raising prices. Budget airfares in Germany are 10% lower than this time last year, according to the DLR aerospace center. Booking site SkyScanner says fares from Frankfurt to the Spanish holiday hub Palma de Mallorca have fallen 24% since last summer, to an average of €135, and London Gatwick to Rome averages €149, vs. €155 a year ago.

The Stoxx Europe Total Airlines index has dropped almost 15% since January, and in May it hit its lowest level in three years. Shares in Norwegian Air Shuttle ASA are off 70% this year as the carrier nurses the financial hangover from a growth binge. British Airways is digging in for strikes as contract negotiations begin. SAS faces boycotts from travelers citing Flygskam, a Swedish neologism meaning “shame about flying due to climate change concerns.” Alitalia is on life support while the government in Rome seeks a buyer for the troubled carrier.

After Spohr took the top job at Lufthansa in 2014, the trained pilot introduced his Eurowings plan. Lufthansa spent aggressively on the discount unit, including €170 million integrating Air Berlin. Investors more than doubled the share price in 2017—Lufthansa’s best year ever—as stock analysts praised the Eurowings strategy. Unions, though, decried it as a ploy to cut wages: A pilot at Lufthansa can earn more than €200,000 per year, while Eurowings pay is capped at €150,000, according to the website Pilot Jobs Network. With losses mounting and unions threatening strikes at Eurowings this summer, shareholders have turned against the strategy. “Eurowings has been a catastrophe,” says Michael Gierse, a portfolio manager at Union Investment.

Spohr insists the situation will improve as he wraps up the integration of Air Berlin, and he says he’s working to stabilize operations at the company’s other brands. He’s adding spare aircraft to keep things running in case of breakdowns, and he’s increasing turnaround times at airports to ensure more on-time departures. “We need growth, but not blind growth,” he said at the company’s annual meeting in May. “Tickets for less than €10, as offered by some of our competitors, are economically, ecologically, and politically irresponsible.”

Aggravating Lufthansa’s problems is German infrastructure. Cologne Bonn Airport has Europe’s worst record for departures, with almost 1 in 5 flights delayed by more than 30 minutes last year, according to consumer group Flightright. At Frankfurt Airport, Lufthansa’s primary hub, outdated scanners and procedures mandated by the police mean each security line can handle fewer than half as many passengers as those in Amsterdam or London, according to the German Aviation Association. Extra security gates and a terminal under construction will help, but the new facility won’t open until 2021. In Berlin, Willy Brandt International Airport has been sitting empty for seven years as workers repair countless construction defects. The capital’s other two airports, meanwhile, are jammed far beyond capacity.

To ease congestion, the government, airlines, airport operators, and police have agreed on 24 measures ranging from automated systems for checking boarding passes to higher-­altitude flight paths. But officials warn that it will take time for them to pay off. “We’re working hard to provide good travel opportunities,” Transport Minister Andreas Scheuer said at a March conference where the measures were negotiated. “But we can’t make everyone happy this summer.” —With Richard Weiss

To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net

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