Lufthansa Group turns in solid third quarter |

UPDATE - Lufthansa Group produced a strong summer quarter, posting an Adjusted operating profit in Q3 of €1.468 billion that sits right in between that of its main competitors IAG and Air France-KLM. The airline confirms its full-year guidance op producing an Adjusted EBIT of €2.6 billion, based on continued strong bookings in Q4 and for the holiday season. Adjusted EBIT of Q3 is up 31 percent from last year’s €1.131 billion. It is the highest-ever result in a summer quarter for the group. Consolidated revenues were up by eight percent to €10.275 from €9.537 billion, of which €8.832 billion came from traffic. Operating expenses were up by five percent to €9.561 billion. Lufthansa Group produced a net profit in the September quarter of €1.192 billion, up from €809 million last year. The consolidated nine-month results show an Adjusted EBIT of €2.280 billion, up from €939 million. Total revenues grew by 18 percent to €26.681 billion from €22.539 billion. Expenses increased 14 percent to €26.571 billion. The net profit was €1.606 billion versus €484 million. The operating free cash flow was €4.320 billion and the Adjusted free cash flow €1.663 billion. The results build on a strong second quarter. Group CEO Carsten Spohr said in the earnings release: “With the highest revenue and profit ever achieved in one summer - including an operating profit of 1.5 billion euros in the third quarter alone. All airlines in our Group and Lufthansa Technik contributed to this with double-digit profit margins. At the same time, employee satisfaction in our company has improved significantly to the pre-crisis record level. It is paying off for all of us that we have combined our successful multi-airline and multi-hub strategy with strengthening the private travel segment, setting the right strategic course.” Leisure demand has fully recovered in Europe In Q3, all airlines together carried 38 million passengers, up 14 percent year on year. Adjusted EBIT for the passenger airlines reached €1.356 billion with a margin of 15.9 percent. Yields improved by two percent year on year and by 24.5 percent over 2019. In Europe, traffic on VFR and leisure routes is fully back to pre-pandemic levels or even exceeds those, while intercontinental is at 95 percent for VFR and 76 percent for touristic flights. German domestic is lagging behind at three percent in revenues to 2019, due to the high cost levels in Germany. Domestic now represents 25 percent of all revenue compared to one-third some years ago. Corporate travel is doing better on intercontinental routes (62 percent) than within Europe (54 percent) and the difference between yields of corporate and premium leisure has come down. Operational stability improved to 98 percent regularity, although this remained challenging. Parent airline Lufthansa including Discover reported an Adjusted EBIT for the 9M period of €790 million versus €-594 million last year. Revenues were up by 29 percent to €12.096 billion from €9.411 billion. Operating expenses were up 14 percent to €11.819 billion, mainly due to higher external MRO services, staffing costs, and fuel. Lufthansa continues to feel the effects of operational bottlenecks in Frankfurt and Munich, necessary improvements in customer experience, and the slower recovery of traffic to Asia. SWISS and Edelweiss reported an Adjusted EBIT of €676 million versus €279 million, a record-high for any Q3. Revenues went up by 28 percent to €4.449 billion and expenses by 20 percent to €3.962 billion. The higher expenses are mainly volume-related. SWISS has seen a particularly high demand for leisure travel. Currently, it observes a normalization of yield levels and rising costs. This will make the market environment more challenging. Austrian Airlines also reported a record Q3 result of €129 million versus €110 million last year and improved Adjusted EBIT to €144 million from just €4 million in January-September 2022. Total 9M revenues grew by 32 percent to €1.805 billion. Expenses were up 20 percent to €1.711 billion, also reflecting higher volumes. Austrian carried 4.5 million passengers in Q3. CEO Annette Mann said she is concerned about the more-than-average high inflation in Austria, while new labor agreements will result in higher staffing costs next year. Brussels Airlines produced the lowest 9M Adjusted EBIT within the group of €59 million, up from €-37 million. For Q3, this was €72 million thanks to 2.4 million passengers, making this the best third quarter ever. January-September revenues were up 33 percent to €1.184 billion, and expenses by 20 percent to €1.176 billion. Operations to the sub-Saharan regions were affected by the closure of Niger airspace this summer and by rising fuel costs. Brussels Airlines is on track to end the year with a record profit. Eurowings turned around a €-136 million profit last year into an Adjusted EBIT of €147 million this year. Revenues increased by 42 percent to €2.020 billion thanks to strong leisure demand. Expenses were up 16 percent to €2.009 billion. Lufthansa Cargo saw significantly lower results, with an Adjusted EBIT of just €189 million versus €1.308 billion in 9M 2022. Revenues were down by 38 percent to €2.210 billion. Yields were still up by 39 percent over Q3 2019. Lufthansa said that Cargo actually returned to normal levels following the strong results in previous years. Capacity grew by seven percent, mainly due to more belly capacity. CFO Remco Steenbergen expects Cargo to achieve an Adjusted EBIT margin of eight percent for FY23, "in our view a respectable result in a difficult environment. Lufthansa Technik generated an Adjusted EBIT of €459 million, up seven percent, with revenues up by 20 percent to €4.814 billion. This reflects higher demand for maintenance as flying volumes of Lufthansa and its customers increased. Cost escalations have been passed on to customers. Despite the non-occurrence of effects related to the strong US dollar from last year, LHT is on track for a record result. Net debt and costs reduced The operating cash flow was €1.2 billion in Q3, up 38 percent year on year, but down 19 percent for 9M to €4.320 billion. Net debt was reduced from €6.9 billion in December last year to €5.4 billion. Net liquidity grew from €10.4 billion to €11.1 billion. "It is a great success for the Lufthansa Group that we were able to achieve the second-best quarterly result in history in the third quarter. Despite high inflation, we were able to reduce our unit costs. However, we need to further improve our operational reliability and thus also our productivity and efficiency, which are still below pre-crisis levels. We will work intensively on this in the coming months and in the coming year. We are thus confident in our outlook," said CFO Remco Steenbergen in the earnings release. In its outlook, Lufthansa is optimistic for Q4. Forward bookings for the quarter and the Christmas holiday season are strong. The group expects to achieve a positive operating result. “Despite the increase in fuel costs in recent weeks, the Group is confirming its previous expectation of generating an Adjusted EBIT for 2023 of more than €2.6 billion.” Twenty GTF neo's to be grounded each day Where its rivals were unwilling to look ahead too far into 2024, Lufthansa is positive that it will be able to generate an Adjusted EBIT margin of at least eight percent. Capacity should recover to around 95 percent of pre-crisis levels, exceeding those levels in Europe and North America but still recovering in China and the Asia Pacific. Lufthansa expects to operate at an average of 85 percent capacity in 2023, having opted for a lower capacity level to ensure that its operations would run smoothly. Steenbergen said that Lufthansa has kicked off a company-wide efficiency program, "with the aim of reducing the current of around ten percent productivity gap to pre-pandemic levels as far as possible next year." This is not a start-stop program, but will have different phases within different business units. Priority is given to the network airlines next year. Headwinds are the forced inspections and repairs of the Pratt & Whitney Geared Turbofan-powered Airbus A320neo family fleet, while GTF durability issues also impact Airbus A220 operations at SWISS. Spohr said that Lufthansa expects to ground around twenty A320neo family aircraft each day next summer as checks and repairs of 146 GTFs continue. This will not impact capacity for 2024, as the group will extend the use of A320ceo family aircraft and is sourcing more spare engines. Lufthansa Technik should be able to offer crucial MRO and parts manufacturing capacity, which will not benefit only Lufthansa but also other GTF customers. Turnaround times of GTFs will likely be 100 days shorter than the 250-300 that have been guided by P&W. The labor market remains constrained, but Lufthansa has been able to welcome 1.200 new staff each month over the past year, or 22.000 in total. Staffing shortages remain also at air traffic management in Europe, which can affect operational reliability. Fuel costs and the jet crack between jet fuel and crude oil also are headwinds for 2024, but Lufthansa has already hedged 74 percent of its 2024 fuel consumption. Lufthansa expects to take delivery of 30 new aircraft in 2024. Next summer, it will introduce the Allegris cabin on the first long-haul aircraft, including a new Business Class and Premium Economy. From 2025, some forty A320ceo's will receive cabin updates with larger luggage bins and USB ports. Asked about the differences in labor contracts between CityLine and the new subsidiary City Airlines that will launch operations in the summer 2024, Spohr said that while the contracts are copy-paste identical, they offer a cost advantage of one to two million euros per aircraft each year. Talks with unions are ongoing, but the pilot union has already agreed that City Airlines will not be restricted by scope clause. This clause limits CityLine to operate only aircraft with less than 95 seats. "That's why we had to move to make sure we have competitive feed into our long-haul network in Frankfurt and Munich."

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