Lufthansa Group outperforms rival European airline groups but still holds on to bad seeds

In its 9 month financial results, Lufthansa Group reported a EUR288 million net profit, showing more resilience in a tough operating environment than its European peers. This amount represents a 45 per cent decrease in comparison to 2010 figures, yet it is still better than industry expectations of global industry performance. Last month IATA published its 2011 revised estimates, showing a 60 per cent decrease in airline industry profits. No doubt airlines are in far worse position in 2011, following a large rebound in 2010. The European and North American sovereign debt crisis, rising fuel prices, turmoil in the Arab world and Japan’s earthquake, all had a negative impact on the financial results of European carriers with international route networks.

In addition, the Group does not have positive contributions from some of its other airline subsidiaries, with the exception of Lufthansa airline and Swiss. Germanwings, Austrian Airlines and British Midland have been consistently underperforming, with the latter being up for sale for over a year. More bad news to follow for this sector, as January 2012 will mark the start of aviation becoming part of the EU Emissions Trading Scheme, resulting in higher costs for European airlines. Specifically for Lufthansa’s cargo operations, a decrease in freight traffic is certain, following Frankfurt Airport’s announcement of a night flight ban. The airline estimates the impact to be in the range of EUR 10 million, but we believe this is still optimistic. On the positive side, over the last few months the Group proactively readjusted network capacity which is now set to grow only 3 per cent this year, from 9 per cent previously planned.

Even in these adversary times, Lufthansa is still in a good position to grow. Having invested over EUR 2 billion in expanding and modernising its fleet as part of an effort to decrease unit costs and increase fuel efficiency, the airline is set to take advantage of any upside in demand. Another of the Group’s businesses, Lufthansa Technik, is expected to generate stable revenues and profit year-on-year, maintaining its Original Equipment Manufacturers (OEM) partnerships in the Maintenance, Repair and Operations (MRO) business and taking advantage of opportunities to expand in Asia.