German airline Lufthansa reported a fall in second-quarter earnings on Tuesday, as it prepares itself for a tough price war with Ryanair and easyJet, two of Europe’s most popular low-cost airlines.
Lufthansa issue a profit warning last month, and has now shifted the blame of price competition on short-haul routes and increasing fuel and maintenance costs. Lufthansa’s officials stated that the second-quarter adjusted earnings prior to interest and tax decreased by 25% to €754 million from the previous year.
To make matters worse for the German-based company, net profit for the second-quarter fell drastically as well by 70% to just €226 million. This fall in net profit could have comes as a result of a tax provision of almost €200 million.
These worrying results hampered Lufthansa’s share price even further, lowering it by 5.5%, just a year after the share price suffered a massive fall of around a third in value.
Lufthansa’s Chief Financial Officer, Ulrik Svensson, stated “Our earnings are feeling the effects of tough competition in Europe and sizeable overcapacities, especially on our short-haul routes of Germany and Austria.”
With reference to the tough competition that Lufthansa is facing from Ryanair and easyJet, Mr Svensson said “We are expecting that we will indeed have a very tough price competitive situation with these carriers for the rest of the year and maybe also into 2020.”
Lufthansa’s plan to cut costs further as well as boost flexibility in order to combat this tough competition did not work as planned, with the company also having to hope for a turnaround plan that was announced for Eurowings, Lufthansa’s subsidiary company, in June, with this possibly making its low-cost carrier profitable on a sustainable basis.
Lufthansa feel that Eurowings’ short-haul business was probably going to continue facing challenges during the second half of the year, but it hopes that a pick-up in long-haul businesses might be able to even out the losses made from one end with the profits generated from the other.
Lufthansa added that Eurowings will probably report an adjusted EBIT margin (ratio of earnings prior to tax) of -4% to -6% for the whole year.
Back in June Lufthansa stated that Eurowings would try to lower its costs by 15% over the coming three years, whilst also focusing on short-haul flights as an integral part of the plan to become profitable once again by 2021.
The German company blamed the falling revenues at Eurowings as the major reason for June’s profit warning.
However, on Tuesday, Lufthansa forecasted that the Network Airlines unit, made up of Lufthansa German Airlines, SWISS and Austrian Airlines, would face major development in the long-haul business, with this development forecasted to be at an above average rate during the second half of the year. However, Lufthansa also warned that the gloomy economic outlook might result in weaker trends than the ones in the first half of the year.