The Lufthansa Group expects strong summer demand to continue this winter and into next year as European airlines face limits to growth.
The group reported a €1.5 billion ($1.6 billion) adjusted operating profit and 14.3% adjusted operating margin — both improvements over last year — during the September quarter. And unit revenues, a measure of how much the group earned per available seat kilometer, was up 2.7% year-over-year and an impressive 21.2% compared to 2019. Unit costs excluding fuel fell nearly 1% compared to last summer.
But it’s one thing to turn a mega-profit during the summer, when travel demand to and within Europe peaks. It’s another to maintain profits during the slower winter.
“Our flights are well booked,” Lufthansa Group CEO Carsten Spohr said during a third-quarter earnings call Thursday. He added that the booking outlook was “positive” for the fourth quarter; Lufthansa has little visibility of demand beyond 90 days.
With the outlook positive, below are five takeaways from Lufthansa’s earnings call.
Little Risk of Overcapacity in Europe
The airline industry’s supply-side bottlenecks, including new aircraft delays, engine issues, and air traffic control constraints, make “overcapacity very unlikely in the next years to come,” Spohr said. For example, Boeing’s new 777X that Lufthansa has ordered was supposed to begin arriving in 2020; the planemaker now does not anticipate handing over the first plane before 2025.
Issues with Pratt & Whitney geared turbofan engines will also limit airline capacity next year. Lufthansa anticipates an average of 20 of its Airbus A320neo planes will be parked on any given day for engine inspections in 2024. Those groundings will not affect capacity growth for the group, Spohr said. Other airlines are not so lucky; fast-growing discounter Wizz Air has been forced to significantly dial back its expansion plans.
And in Europe, air traffic control staffing remains an issue in certain markets, including Germany. That limits the number of flights airlines can operate, especially during weather. In addition, the Dutch government is pushing to cut flights at Amsterdam’s Schiphol airport, further constraining airline capacity on the continent.
“Demand will still be greater than our capacity in the coming year and enabling us to enforce good prices,” Spohr said.
Lufthansa in Talks with Authorities on ITA Deal
Lufthansa is in talks with European competition authorities on securing approval for its takeover of Italy’s state-owned ITA Airways. Those talks include agreeing to airport slot or gate divestitures that the group would make in exchange for antitrust approval. For example, Lufthansa could be asked to give up slots at Milan’s sought-after Linate airport.
Questioned whether the group was asked to give up slots in Frankfurt and Munich — its main hubs — Spohr declined to comment citing the ongoing talks with European authorities.
Spohr also said it was “too early to comment” on whether Lufthansa would make a bid for TAP Air Portugal. He did acknowledge the group’s interest, though.
Lufthansa City is a Low-Cost Growth Platform
The group’s new subsidiary, Lufthansa City, is its latest effort to add seats at a lower cost on flights from Frankfurt and Munich. Spohr indicated as much Thursday when he cited a cap of 95 seats on planes operated by existing regional subsidiary Lufthansa Cityline among the reasons for creating City.
Take, for example, the Frankfurt-Ljubljana route that Lufthansa serves twice daily with Cityline Bombardier CRJ900s with 90 seats, according to Cirium Diio schedules. The group could replace those with a 138-seat City-operated Airbus A319 — a 53% increase in seats — and efficiently feed more passengers onto Lufthansa’s many longhaul flights.
Why not just use Lufthansa mainline to replace Cityline? Costs. Spohr said the group will save €1-2 million per aircraft per year with City compared to Lufthansa mainline.
Union negotiations on the new subsidiary have yet to begin.
New Onboard Products Coming
Lufthansa’s €2.5 billion investment in new onboard products will begin flying next summer. Spohr said the group will introduce the new first class, business class, and premium economy products, dubbed “Allegris,” on longhaul flights next summer.
The group continues to see strong demand for premium products from leisure travelers, a segment that has replaced some of the lost corporate travel demand.
New economy cabins on narrowbody planes will debut on Lufthansa-operated Airbus A320s in the summer of 2025, Spohr said.
The Outlook for 2024
Lufthansa plans to fly roughly 95% of its 2019 capacity next year, Group Chief Financial Officer Remco Steenbergen said. That represents a double-digit increase from roughly 85% this year.
The growth will include new transatlantic destinations Minneapolis-St. Paul and Raleigh-Durham, and increased service to cities like Washington, D.C.
Corporate travel demand remains significantly below pre-pandemic levels. Volumes continue to hover around 60% of 2019 levels; revenues are higher thanks to strong yields. Steenbergen said Lufthansa expects corporate travel volumes to recover to roughly 65% of four years ago this winter, and to roughly 70% next year.
However, given the supply constraints, Lufthansa does not expect any “substantial deterioration in unit revenues going forward.”
The group forecasts an at least 8% adjusted operating margin in 2024.