Lufthansa Sees Minimal Fallout From Ukraine War

Russia's invasion of Ukraine will not affect Lufthansa's recovery plans, even if airspace closures require the German carrier to fly more circuitous routes to Asia. Lufthansa is predicting heavy summer leisure demand, particularly on European short- and medium-haul routes.

Before the invasion, Lufthansa operated only about 2 percent of its systemwide capacity to Russia and Ukraine, CEO Carsten Spohr told investors on Thursday. "It was a small part of our business," Spohr said. But Asia routes undoubtedly will be affected. Russia closed its airspace to European airlines earlier this week in response to Europe barring Russian airlines from operating in the bloc.

Spohr estimates the southern and western routes to Asia will take about two hours longer than they would have if they could overfly Siberia. But the additional fuel costs probably will be offset by not having to pay Russian overflight fees. Although Spohr declined to detail how much Lufthansa paid Russia in overflight fees, a EU study estimated that European carriers paid about €400 million ($443 million) to Russia in a typical year.

In addition, Lufthansa now is operating only about 20 percent of its pre-pandemic capacity to Asia, due to depressed demand and continuing Covid-related travel restrictions in the region, Spohr said. But Spohr differed from his peers at Air France-KLM and International Airlines Group, who even before the outbreak of war planned to shift aircraft from Asia routes to the transatlantic. The new, longer routes to Asia require more aircraft to operate, so Spohr said the carrier would not divert resources from its Asia network to satisfy increased transatlantic demand.

The war is causing oil prices to spike worldwide, and Lufthansa is expecting fuel costs to rise sharply this year. But the carrier has 74 percent of its first-quarter fuel costs hedged, and for the full year has hedged 63 percent of its fuel, Spohr said.

Analysts believe cargo flights could be most affected by the Russian airspace closure. Spohr dismissed those concerns and said Asia-bound cargo flights may only have to add a refueling stop to carry their maximum payloads. But he predicted maritime shipping will suffer even more setbacks. He cited anecdotal evidence that Russian and Ukrainian merchant sailors are abandoning their ships in harbors around Europe, further snarling maritime transport, which will redound to air cargo's benefit.

Lufthansa weathered 2021 with a €1.8 billion loss, down sharply from the €5.2 billion it reported in 2020. The company focused on cutting costs. Since the start of the pandemic, Lufthansa has cut its workforce by 30,000 employees, 10,000 in Germany alone last year.

But this raises a further complexity for Lufthansa. The company is applying for a new air operators certificate (AOC) in Germany to expand its CityLine regional operation. It needs a new AOC in order to absorb pilots who would have been downsized from the mainline, including MD-11 pilots now that the aircraft has been retired. The company needs the new AOC to comply with German labor law, Spohr said, but he is anticipating union pushback.

The carrier forecasts strong transatlantic and short- and medium-haul European routes this summer. Lufthansa plans to operate 95 percent of its pre-pandemic capacity on those routes this summer. For the full year, Lufthansa plans to fly 70 percent of its pre-pandemic capacity systemwide, across all the group's airlines. The booking curve is lengthening out now that the industry has settled from the turmoil the Omicron variant caused at the beginning of the year.

Much of this demand will be for premium leisure. Without divulging specifics, Spohr said premium economy is the most profitable of the carrier's fare classes, beating even business class. Lufthansa plans to expand its premium economy cabins on its aircraft, and on Swiss and Eurowings aircraft that currently don't offer the product. When demand returns, Spohr said Lufthansa's aim is to provide a "premium service" as a differentiator. "We were not always able to deliver the level of service quality we wanted," he said. "And despite the financial effects of the crisis, we are investing billions to significantly enhance our offers and products once again," Spohr said.

"This includes a new state-of-the-art premium economy seats that will be introduced before the end of the first quarter, initially at Swiss and any investments in many other products and services on board and on the ground, catering, lounges, digital offerings," Spohr added.

Lufthansa's passenger airlines lost money last year, but its other businesses turned profits. Cargo reported a record-setting profit of €1.5 billion. Cargo profits may not be as high when the industry fully recovers, but Spohr believes it will not return to pre-pandemic levels, given the structural shift toward e-commerce and package delivery. Lufthansa's catering arm turned in a €210 million profit, while Lufthansa Technik was €27 million in the black.

Passenger airlines did not far as well. The network airlines reported a €3.5 billion loss, and Eurowings was €230 million in the red. Passenger traffic, however, was up systemwide by 29 percent year-over-year. For the full year, Lufthansa reported revenues of €16.8 billion, up 24 percent from 2020.