This summer has been tough for travelers in Europe and around the world. Flight delays and cancellations have spiked, labor strikes have added an additional layer of disruption, and lost luggage has become such an issue that some flyers have resorted to tracking bags with AirTags.
Lufthansa Group CEO Carsten Spohr was confident that the worst has passed, at least for his airlines with the situation having “stabilized” at the group’s hubs, he said in opening remarks to the group’s June quarter results call Thursday. This is good news for anyone who has misconnected in Frankfurt and had to wait days for an alternative flight in recent weeks, or had their entire itinerary thrown to the wind by the one-day strike that hit Lufthansa on July 27.
But the stabilization has come at a cost for the airline: tens of thousands of flights have been thinned from schedules, staff temporarily rehired, shifts added at airports, and digital functionality enhanced for travelers. In total, the Lufthansa Group estimates €450-500 million ($459-510 million) in one-time costs this year related to the operational issues.
The situation, while improved, has not fully passed. Spohr described the industry as in the second phase of a three phase recovery process where demand is ramping up faster than staffing and other services can handle. The third, and final, phase that includes “full normalization in terms of personnel, in terms of reliability, [and] punctuality,” and is not expected until 2023, he said.
That is unfortunate news for the many people that plan and need to fly over the next five months, and just seek the comfort that their flight will arrive at their destination on time and without issue.
Operations aside, Lufthansa is benefitting from what Spohr described as “the joy of good demand.” Revenues in the second quarter were €8.4 billion, or 88 percent of 2019; a 20 point improvement over the same comparison in the first quarter. And the strong revenue recovery came as the group only flew 74 percent of its 2019 capacity. Unit revenues improved 8.9 percent year-over-three-years, which beat — unlike at many other airlines — the 8.5 percent increase in unit costs excluding currency and fuel.
The performance drove the group to an earnings before interest and taxes (EBIT) profit — its first since the onset of the pandemic — of €340 million, and a net profit of €259 million, in the June quarter. Its freight business, which is included in the group results, continued to standout with an adjusted EBIT profit of €482 million.
“Yields have increased significantly in both premium and non-premium classes over the course of the second quarter and this trend, to our joy, also continued in July and the outlook beyond,” Spohr said. He noted that the operational and aircraft sourcing issues, which are not limited to Europe, have prompted global capacity discipline that further supports financial improvements at his airlines.
The group was forced to cut five points from its third quarter capacity plans to roughly 80 percent of 2019 levels on account of the summer schedule reductions. This includes cuts at all of its airlines, Austrian Airlines, Brussels Airlines, Eurowings, Lufthansa, and Swiss International Air Lines. The full year capacity outlook remains roughly 75 percent of three years ago. And, in response to delays at planemakers Airbus and Boeing, Lufthansa will reactivate its Airbus A380s to meet demand next year.
Lufthansa forecasts a “substantially higher” EBIT profit in the September quarter, and a full year EBIT profit of more than €500 million, Chief Financial Officer Remco Steenbergen said Thursday. It had not previously provided a full year profit forecast.
The group still faces key hurdles in achieving the normalization Spohr sees next year. Negotiations continue with both its pilots and ground staff unions on new contracts, the outcome of which is likely to result in higher costs. Pilots have threatened to strike in the coming weeks over a pay dispute. Asked by analysts if Lufthansa was willing to sacrifice its multiple-operating unit model for standardized pay rates across airlines, Steenbergen said no. “One overall pay scale system for all the airlines in Germany is, for us, a strategic no go. We cannot do that because that will really put our company at such a strategic disadvantage position against the other airlines,” he said.
But the tone from Frankfurt was bullish, with Spohr seeing the group as “ideally positioned” to succeed in the recovery. In a throwback to lighter pre-pandemic days, he outlined plans to update its onboard product and service in all classes, from first to economy, on its aircraft through 2023.
The group also awaits a decision from Rome on its proposed strategic investment in ITA Airways. Lufthansa has partnered with shipping giant MSC, while U.S. private equity firm Certares in collaboration with Air France-KLM and Delta Air Lines has submitted a competing proposal. Bids were submitted in early July but a decision has been delayed by Italy’s political turmoil.
“Our patience is not endless,” Spohr said to Italy’s political leadership on the privatization process. He reiterated his belief that the Lufthansa Group is “the right partner” for ITA.