Things are looking good in Frankfurt. The Lufthansa Group, Europe’s largest network carrier, sees all the elements falling into place for a significant improvement in operating profits this year.
Travel demand remains robust. Cost pressures are easing despite significant investments in operational aspects of the business to avoid a repeat of last summer’s rampant flight delays and cancellations. And the group sees a permanent shift to more premium leisure travel that supports its big investment in new first, business, and premium economy cabins dubbed Allegris.
“The Lufthansa Group is on track,” CEO Carsten Spohr said during a first-quarter earnings call Wednesday. The group posted an adjusted €273 million ($302 million) operating loss, and €467 million net loss, in the first quarter; not an unusual result for the weakest three months of its year. Its operating margin was negative 3.9 percent.
Lufthansa, however, sees money to be minted this summer. Spohr said the group is “on the verge of the strongest summer in our company’s history in terms of traffic revenue.” Yields, a proxy for airfares, are forecast up roughly 25 percent over 2019 levels in the second quarter; for comparison, yields were up only 10 percent from 2019 levels during the June quarter last year. The only area of demand weakness is in corporate travel, which at the end of the first quarter was down 40 percent on volume and 30 percent on revenue from four years earlier.
The group anticipates an adjusted operating profit of more than €754 million — its result in 2019 — during the second quarter. Its full-year adjusted operating result outlook is more than €1.5 billion is unchanged, though analyst consensus has risen to roughly €2.2 billion for the year — an estimate that Chief Financial Officer Remco Steenbergen declined to affirm or reject.
But Lufthansa’s forecasted summer revenues are not solely the result of torrid demand. The airline industry’s capacity constraints, including labor and, increasingly, aircraft availability, mean carriers will fly less — in some cases a lot less — than they want. More travelers and not so much more capacity means airfares, and yields, will rise.
“I’ve been around 30 years in this industry, [and] I’ve never seen anything like it — basically spare parts are missing,” Spohr said. He referred specifically to the issues plaguing Pratt & Whitney geared turbofan engines on Airbus A220 and A320neo family aircraft. The Lufthansa Group currently has three A320neo family planes, and a third of Swiss International Air Lines’ 30 A220s parked due to the shortage in spare parts for their P&W engines, Spohr added.
In India, Go Air filed for bankruptcy Tuesday citing losses that stemmed from the delay of P&W-equipped A320neo family aircraft. In the U.S., Hawaiian Airlines has five of its 18 A321neos on the ground awaiting parts, and Spirit Airlines has had to cut its capacity outlook for the rest of the year due to grounded A320neos awaiting parts. And in Europe, AirBaltic has resorted to wet-leasing aircraft to make up for the number of A220 aircraft it has parked awaiting parts.
There is a “global shortage of spare engines,” Air Lease Corp. CEO John Pleuger said Monday. Efforts to address this by P&W and other engine suppliers, he added, has diverted production capacity from engines for new aircraft, further delaying deliveries from both Airbus and Boeing.
Lufthansa executives did not comment on how many of its own new aircraft deliveries could be delayed this year. However, Spohr did say the airline plans to debut its new Allegris premium cabins on the 787 in the fourth quarter.
The Lufthansa Group maintains its 2023 capacity forecast of 85-90 percent of 2019 levels. Second quarter capacity will be roughly 82 percent of levels four years ago, or an 8.5 percentage point improvement from a year ago.
One benefit for Lufthansa this summer is the return of its Airbus A380s in June. The decision last year to return the 509-seat superjumbos to service was made with the view that the airline needed the capacity lift to meet travel demand amid aircraft delivery delays, particularly of Boeing’s new 777-9. Lufthansa will reintroduce the A380 on flights from Munich to Boston on June 1, and to New York JFK on July 4, according to Diio by Cirium schedules.
Lufthansa continues to negotiate with the Italian government on its planned purchase of ITA Airways, Spohr said. If finalized, Rome would be a strategically important southern European hub for flights to Africa and Latin America for the group that now counts Zurich as its furthest base south. And the airports in both Milan and Rome have excess capacity that gives the Lufthansa Group needed opportunities to grow. One thing that Spohr was clear about is that the group does not intend to turn ITA into a dominant force in the Italian domestic market, which is now dominated by budget airlines and train services.
“The Italian government clearly considers the Lufthansa Group as the best home that will ensure a good future for its national airline. Our talks here are on the right track,” he said. The deadline for a deal was recently pushed back to May 12.
In the first quarter, the group’s passenger airlines posted a combined €512 million adjusted operating loss, or half the loss a year ago. Only Swiss was in the black with a €77 million adjusted operating profit. Lufthansa Cargo and Technik also reported profits during the period. Unit revenues (RASK) were up 25 percent compared to 2019, and unit costs (CASK) excluding fuel and currency were down slightly year-over-year but up nearly 18 percent from four years earlier.