UPDATE – Lufthansa Group has produced a very strong second quarter, with its subsidiaries SWISS, Austrian Airlines, Brussels Airlines, and Lufthansa Technik turning in record-high operating profits. While the parent airline is lagging behind, Lufthansa has raised its guidance for the full year backed by continued strong demand. Lufthansa Group reports very strong Q2.
Lufthansa Group ended Q2 with an €881 million net profit, up from €259 million last year. The operating profit/Adjusted EBIT reached €1.085 billion, up from €392 million. The operating income was €10.154 million versus €8.541 billion. Total revenues were €9.389 billion compared to €8.0 billion in 2022. Operating expenses were €9.064 billion, up from €81.141 million, mainly caused by higher volumes and more flying.
The airlines within the group carried 33.3 million passengers, up fourteen percent year on year. The average load factor was 83.2 percent. Yields were up by thirteen percent. Bookings were up 25 percent over Q2 2019 and premium leisure has fully recovered since then, whereas premium corporate is still slightly over fifty percent of pre-pandemic levels.
For the first six months, the consolidated net profit was €414 million versus a €-325 million loss in HY1 2022. Adjusted EBIT reached €812 million compared to €-185 million, the operating income €17.845 billion versus €13.985 billion. Revenues totaled €16.406 billion versus €13.002 billion. Operating expenses increased to €17.010 billion from €14.123 billion. The Adjusted free cash flow was €1.071 billion, and the operating cash flow was €3.1 billion.
Passengers carried was 55 million at a load factor of 81.7 percent. Lufthansa Group grew capacity year on year by nineteen percent but still operated at 79 percent of 2019 levels as the airlines – notably Lufthansa – preferred to build more resilience and redundancy into their operations to prevent any operational issues, specifically in Frankfurt and Munich.
Supplier and engine woes
CEO Carsten Spohr is happy that this focus on stability has worked out well in HY1. Unfortunately, the restrictions aren’t over yet, as air traffic management limitations, labor shortages, and in particular staffing shortages at ground handlers will continue for a long time. On the supply chain side, spare parts arrive late and OEMs are late in delivering new aircraft.
And when they arrive, new-technology engines proved to be less durable, resulting in more operational disruptions. As a Pratt & Whitney Geared Turbofan first operator, Lufthansa is also confronted with the recently announced engine inspections and repairs due to powder metal contamination. Until September, twelve GTF engines at Lufthansa and only one at SWISS need to be inspected. Spohr counts on another fifty engines to need repairs in 2024.
Delays also affect the entry into service of the Alegris premium cabins, which was planned on the Boeing 747-8I late this year and on the Airbus A350 early next year. This will slip further into 2024, as it takes longer for Boeing, Airbus, and the regulators to certify the new cabins.
Two brand-new Airbus A320neo-family aircraft are parked at Berlin Brandenburg Airport, as their engines are used as spares for other aircraft. (Richard Schuurman)
SWISS is at a record-high again
All airlines within Lufthansa Group produced an operating profit in Q2, but there are differences. Lufthansa reported an Adjusted EBIT of €515 million versus €-83 million last year. For HY1, Adjusted EBIT improved to €149 million from €-798 million, with revenues up to €7.341 billion from €5.258 billion thanks to significantly higher demand. Lufthansa carried 27.3 million passengers in HY1. Operating expenses were up by nineteen percent to €7.509 billion, due to volume-related increases for fuel, fees, and charges.
Once again, SWISS produced a very strong result, reporting a record-high Adjusted EBIT of €272 million in Q2 versus €107 million last year. For HY1, this was €349 million versus €45 million. Revenues grew 42 percent in HY1 to €2.746 billion, thanks to the combination of high demand and reduced capacity that also boosted yields. SWISS carried 7.5 million passengers in HY1 or 8.7 million if Edelweiss is included, up 41 percent year on year.
“This first-half operating result is one of the strongest we have ever achieved. And it confirms to us that we now have the corona pandemic firmly behind us,” Chief Financial Officer Markus Binkert of SWISS said. He added that the environment is still volatile and risks are still numerous.
Austrian and Brussels Airlines also do well
Happy faces also in Vienna, where Austrian Airlines reported an Adjusted EBIT of €88 million compared to €3 million in Q2 last year. For HY1, the result was €15 million versus €-106 million last year. Revenues increased to €1.064 billion from €678 million as Austrian carried 47 percent more passengers to 6.1 million.
This year was the first when Austrian could operate without restrictions. It immediately benefitted from pent-up demand. “After three difficult years, we clearly produced black numbers and are focusing on achieving a good full-year result now. From crisis mood we progress towards our planned investments for our customers,” said CEO Annette Mann.
Brussels Airlines produced an Adjusted EBIT of €31 million, turning around a €-27 million loss last year. For HY1, it still was loss-making at €-12 million versus €-89 million last year. Revenues grew 56 percent to €705 million thanks to stable operations and higher yields. The Belgian airline carried 3.95 million passengers in HY1 and increased capacity year on year by 34 percent. Chief Financial Officer Nina Oewerdieck is confident that Brussels Airlines will turn in a positive full-year result for 2023.
Leisure airline Eurowings also returned to profit in Q2, producing an Adjusted EBIT of €69 million compared to €-76 million last year. The HY1 result was still negative at €-34 million but showed a huge improvement over €-234 million in 2022. Passengers carried grew by 27 percent to 8.9 million, the lowest increase of all airlines within the group, although capacity grew by 55 percent. Eurowings Discover also produced an HY1-profit in its second year of operations, but Spohr didn’t specify the result, which is included in those of the parent airline Lufthansa.
Lufthansa Cargo volumes drop
Lufthansa Cargo felt the effects of market-wide declines and lower volumes in air freight. Its Adjusted EBIT in Q2 dropped to €37 million from €482 million or to €188 million from €977 million in HY1. Revenues were down to €712 million from €1.257 billion in Q2 and to €1.535 billion from €2.426 billion in HY1. Capacity was still seven percent higher as more belly capacity became available. CFO Steenbergen expects Cargo to produce a full-year Adjusted EBIT of some €300 million.
Lufthansa Technik benefitted from higher demand for aircraft maintenance and capacity restrictions in the MRO business, producing a record Adjusted EBIT for Q2 of €156 million versus €112 million last year. For HY1, this is €291 million versus €241 million. Revenues grew 26 percent to €1.591 billion in Q2 and by 21 percent to €3.128 billion. Negotiations with different investors about the partial sale of LH Technik are still ongoing and should be concluded before the end of the year.
The LSG Group catering business also benefitted from higher demand and produced an Adjusted EBIT of €16 million versus €1 million in Q2 or €10 million versus €-13 million in HY1. Revenues increased to €584 million in Q2 and to €1.107 billion in HY1. Lufthansa announced in April that it has reached an agreement to sell off the European branch of LSG Group to private equity group Aurelius, which should be closed this Q3.
Dividend to be paid again in 2023
Lufthansa ended June with €10.8 billion in liquidity, above its target of €8.0 to €10.0 billion. Net debt was reduced by €700 million to €8.2 billion, the result of a reduction in the pension discount rate. CFO Remco Steenbergen was very pleased that the credit rating of Lufthansa Group has improved, now that the group no longer has any state support. Lufthansa expects to pay dividends over 2023 for the first time since 2019.
Due to the aforementioned restrictions, the German airline group expects to operate this Q3 at 88 percent capacity of 2019 levels and produce an Adjusted EBIT above the €1.3 billion of 2019. Full-year capacity should end around 85 percent and Adjusted EBIT above €2.6 billion. Adjusted free cash flow will be significantly positive. Capital expenditures are guided between €2.5 and €3.0 billion.
For 2024, Lufthansa is not providing capacity guidance. It expects Adjusted EBIT to reach at least eight percent, which compares to 11.6 percent for Q2 and 4.9 percent for HY1. Steenbergen is keen to continue to reduce costs per available seat kilometer, which were up 7.2 percent in Q2 year on year but should moderate to a low single-digit level for the full year. This should be supported by an increase in productivity of the staff and fleet, which both were below 2019 levels this HY1.
Preliminary agreement with pilot union
Spohr said that a preliminary agreement has been reached with pilot union Vereinigung Cockpit, which now awaits ratification from the members. This agreement is crucial, as it not just covers pay increases but also the long-term future of the Lufthansa Group and the fleet size per airline. The airline has recruited 20.000 new staff in the twelve months, with 9.000 joining the group this year to date mainly in operations.
The Lufthansa-CEO is confident that the European Commission will approve the terms and conditions to acquire a 41 percent stake in ITA Airways, which was announced in April. On the fleet, Spohr said that no decision has been made yet to re-activate a seventh and eighth Airbus A380 next year, but that it is quite likely that these aircraft will be required as new aircraft deliveries continue to be delayed.
