Lufthansa will step up productivity and efficiency levels next year after a focus on stabilising operations this summer amid continued industry capacity challenges.
Speaking at a second quarter results press conference today, Lufthansa Group chief executive Carsten Spohr said while the airline is on track to have recruited around 20,000 staff across 2022-23, persisting staff shortages across the sector means it has had to put a buffer into its operation to ensure reliability of service.
"Not all our suppliers are as successful on the labour market as we are, that’s why staff shortages still endure especially in the peak times at airport operators,” Spohr said, noting that stabilised operations had come at the expense of productivity at its airlines.
"Better reliability came at a high price due to the numerous buffers we had to put in the system,” he says. "We have adjusted our schedules to the maximum capacity of our airport operators and do everything we can to ensure smooth operations, consciously accepting compromises regarding efficiency and productivity.”
He adds: “For this year it surely was and is the right decision. But after the summer we will prepare for a significant efficiency increase starting in 2024, because next year we want to put around 15 additional long-haul aircraft into service and increase productivity by continuing to improve the schedule, stability and punctuality.”
DEALS SHAPE AIRLINE FOCUS
Spohr was speaking after the group posted a record adjusted EBIT of €1.1 billion ($1.2 billion) for the three months ending 30 June. This was achieved on strong demand and yields. It sees no let-up in that strong demand picture, particular against a backdrop of industry wide-capacity constraints caused by continued supply chain issues impacting aircraft availability.
“Demand remains extraordinarily strong,” says Spohr. "Similar to last year, the summer season will extend to October – for us that means an extension of our peak season. In addition, advance bookings for winter and 2024 are currently up at double-digit percentage rates compared with the prior year period. We expect yield in the third quarter to be up versus 2019 at a similar rate to Q2.”
The strong quarter and bright outlook has prompted Lufthansa to forecast a full-year adjusted EBIT of “more than €2.6 billion”, representing one of the group’s strongest financial performances.
Spohr adds: ”Q2 was more than just a quarter of outstanding results. It was also a quarter in which we made progress in the transformation of Lufthansa group, from an aviation group to an airline group. We were able to sign three transactions in only three months. It clearly shows our determination in executing our strategy.”
Lufthansa struck deals to divest the remainder of its LSG Group catering business and payments services provider AirPlus. “With those transactions already signed, we further reduce our complexity, they reduce our capital intensity and they reduce financial risk for the Lufthansa Group and they strengthen the focus on our core airline business,” says Spohr.
”We are also on track for the potential partial sale of Lufthansa Technik in the second half of this year, but this depends on the strategic fit with the potential buyer offering us strategic opportunities we don’t have alone and, of course, financial terms,” he says.
The third transaction covers Lufthansa’s move to acquire a minority – at least initially – of ITA Airways. “We are in constructive dialogue with the European Commission and the other relevant authorities to allow for a timely clearance, hopefully still before year end,” Spohr says.
The Italian carrier would join a group of airlines which were all profitable in the second quarter. Passenger operations Lufthansa German Airlines, Swiss International Air Lines, Austrian Airlines, Brussels Airlines and Eurowings all turned a profit in the second quarter – compared to the same period last year when only Swiss was in the black.
|Unit||1H Revenues 2023||1H Revenues 2022||1H EBIT 2023||1H EBIT 2022|
|Source: Lufthansa Group Q2 2023 report|
|Lufthansa German Airlines||€7.34bn||€5.26bn||€118m||($760m)|
|Swiss International Air Lines||€2.75bn||€1.94bn||€354m||€43m|
Notably that includes a stronger performance at low-cost carrier Eurowings, which posted an EBIT profit of €70 million for the quarter – although it, together with Brussels Airlines, remains in the red for the first half.
Lufthansa Group chief financial officer Remco Steenbergen says: "We need to see Eurowings [performance] in the history of the last five years, because a lot of the cost-programmes were executed during or before the crisis. Now Eurowings is getting back on its full feet, you can see the cost-savings are really having their benefit.”
He adds: ”You have to see that in combination with the strategic choices of where to fly in Europe, and where to compete. In that sense we look very positively to Eurowings in the years to come to continue on this track.”
Revenue and profits dropped at Lufthansa Cargo after record highs posted during the pandemic amid a weakening in the cargo market as bellyhold capacity from passenger aircraft returned.
Spohr though says: ”While the cargo market has somewhat normalised further in the quarter, average yields are still solidly above pre-crisis levels. Therefore in the long-term, 2023 will be a year with good results also for Lufthansa Cargo.”
PILOTS' DEAL TO HELP GROWTH
Spohr also cites progress in its labour agreements, saying it has struck more than 20 agreements with 10 unions in five countries over the past year. It has now put forward a new long-term offer aimed at reaching terms with pilots at Lufthansa’s mainline and cargo operations.
"We were in more or less 12 months of intensive dialogue with our pilots of the main airline,” says Spohr. “Constructive dialogue, difficult negotiations, but nevertheless we now have a result which by the current voting of the pilots will then be turned into an agreement.”
The offer includes a 7% salary increase in December, and 5% rises at the start of 2025 and 2026. “The upside for us is this is a fairly long period of stability and peace,” Spohr says. ”This will not requrie any change of our financial targets. We think it is a result we can live with and have handed that over [for a vote].”
He adds: ”There is a special element in there that will allow us to re-integrate pilots from the closed-down operation of Germanwings into the mainline, which will also allow to grow capacity in the summer of 2024 -- which we are looking forward to because there is strong demand.”
Lufthansa capacity in the third quarter will be at 88% of pre-pandemic levels, though for the year as a whole it will be at 85%.
That it is still moving toward restoring full pre-pandemic capacity levels is one reason why Spohr believes it can profitably add capacity in 2024, together with the efficiency gains from removing operational buffers added this year.
Spohr also notes the slower post-pandemic reopening of some markets means there are still profitable routes, particular for premium travel, where it can add capacity.
"We will be adding routes which have a corporate focus. First of all China, more than doubling our capacity into China which has a high share of corporate [travellers] but we couldn’t fly there already,” he says. “Some of the routes we are adding, we can now add because there is sufficient corporate demand that we wouldn't have had two years ago.”
Alongside the profit forecast for this year, Lufthansa says it represents a positive step towards its 2024 target of an adjusted EBIT margin of at least 8%. While Spohr and Steenbergen are upbeat on the carrier’s position, this is not yet reflected in a share price which has fallen over the past six months.
“I don’t get it,” Steenbergen admits when asked about the market reaction. “Since I’m around [as CFO], almost three years now, I think we have consistently delivered on the promises we have put along.
“I think on our end, what we will do is consistently continue to deliver on what we say,” he adds. ”We think we have given a lot of data points, particularly with constraints in the supply chain that continue for quite a bit longer – certainly through 24 – that there is no logical reason at all that our profitability will deteriorate.”