Lufthansa says fare slide to slow as CEO seeks further cost cuts

Bloomberg

Deutsche Lufthansa AG said a slide in fares triggered by excess capacity is beginning to slow, easing the burden on earnings as fuel costs rise.
Adjusted operating profit will decline “slightly” in 2017 after the figure dropped 3.6 percent to 1.75 billion euros ($1.9 billion) last year, Lufthansa said in a statement on Thursday. The guidance for this year compares with analyst predictions for a slump of about 20 percent to 1.42 billion euros.
Fares across Europe have been under pressure after weakening oil prices prompted airlines to add seats just as stuttering economies and a spate of terrorist attacks hurt demand. While Lufthansa’s unit revenue — a measure of prices — fell 5.8 percent in 2016, the decline should be less severe this year, the German carrier said. Chief Executive Officer Carsten Spohr said the company still needs to slash costs even after he sealed a pilot deal that may end years of labor strife on the eve of the earnings release. The accord covering pay and pensions will boost flight-crew productivity 15 percent, advancing his push to combat the challenge from Mideast airlines on long-haul routes and low-cost specialists in Europe.
Lufthansa shares rose as much as 4.6 percent and were trading 3.9 percent higher at 14.97 euros as of 9:13 a.m. in Frankfurt. The stock gained 1.8 percent after news of the labor deal Wednesday and is up 22 percent this year.

Fuel Bill
“It remains necessary to further reduce our costs,” Spohr said. “This is the only way to meet and master the decline in unit revenues and the higher fuel expenses, and at the same time maintain and strengthen our financial stability.”
Pressure to deliver savings will increase as Lufthansa’s fuel bill jumps by 350 million euros this year. With crude prices rising, the International Air Transport Association predicts that European airlines as a whole are set for a 25 percent profit slump in 2017.
Lufthansa’s chief financial officer, Ulrik Svensson, said first indications are that the erosion in fares is easing as predicted, based on forward bookings and favorable trading in January and February. The fourth-quarter slide in unit revenue was less than forecast at 6.4 percent, while costs were reduced by 6.1 percent, more than double the targeted rate.
Spohr has said he plans to lift capacity at the group’s network carriers by 3 percent this year, while growth at the Eurowings discount division will slow to 19 percent from 27 percent. The low-cost arm has said its fares may fall 5 percent amid the capacity glut.
The CEO also agreed last month to deepen ties with former foe Etihad Airwaysfollowing a deal to lease planes from the Abu Dhabi carrier’s ailing German affiliate Air Berlin Plc.