This week Lufthansa presented its final 2018 results. As is customary at such occasions, market context, implications and forecasts are discussed.
Despite Lufthansa Group's first quarter results not being due until the end of this month those comments at the 2018 presentation led to the release of what, in accordance with financial regulations, is termed an "Ad Hoc Announcement":
"Lufthansa announced when presenting its 2018 annual results that, in view of the overcapacities in Europe, the strong comparable results for the prior year period and the interim rise in fuel costs, earnings for the first quarter of 2019 were likely to be down from their prior year level."
The ad hoc announcement itself addresses the issue of preliminary results for the first quarter of 2019 by pointing straight to "higher fuel costs of some €200 million" and "marketwide overcapacities in Europe" as an explanation for its adjusted EBIT (earnings before interest and taxes) falling to -€336 million in the first three months of 2019.
This has caused quite a stir. A year ago the Group which includes, amongst other units, network carriers Lufthansa, Swiss and Austrian and "Eurowings" which includes carriers Eurowings, Brussels and Germanwings was posting record profits. However, the financial performance of the network carriers is what our readers are likely to be most interested in.
Network carriers' EBIT, on a preliminary basis, for the first quarter is -€160 million compared with +€128 million a year earlier.
That's a big difference.
The fuel price is difficult to comment on as there is no significant difference in the price of Brent crude between Q12018 and Q12019 but a year ago this price was peaking after prices that had dipped below $50 a barrel whereas prices have steadily risen this year since March. More importantly, airline fuel is commonly hedged so the price to any specific carrier is related very much to its hedging policy.
Moreover, oil price is a global issue and it is worth noting that US carriers such as United and Delta have announced impressive first quarter profits.
The issue of capacity is different. European capacity in the first quarter of 2018 had been hit by the demise of Air Berlin. This year many of the region's carriers have launched new routes and overall capacity is significantly higher than it was a year ago.
Lufthansa says that it is seeing "good booking levels" for the quarter ahead (Q2) and "At the same time, we have substantially reduced our own capacity growth."
Lowering capacity (supply) means all other things being equal, prices will rise but demand for air travel is also rising. However,the rate of increase is likely to be slowing. IATA says that although passenger demand rose 5.3% February compared to a year earlier, that "This was the slowest rate of growth in more than a year." (https://www.iata.org/pressroom/pr/Pages/2019-04-04-01.aspx )
That figure of course masks regional differences but shrewd buyers should always be aware of demand trends. Those who can offer sustainable volume to an airline can often negotiate lower rates when there are any signals that overall demand is dropping. All airlines want at the least to maintain their market share.
Expect other European carriers to exhibit a similar trend.