Lufthansa has turned the corner on losses and produced its first operating profit since the start of the pandemic in Q3. The airline group reported a €272 million Adjusted EBIT excluding restructuring costs, a huge improvement over the €1.204 billion loss for the same period last year. “We are back to black. Now it is a question of continuing on the path of successful change”, said Group CEO Carsten Spohr on November 3. Lufthansa produces first operating profit since Covid-crisis.
The Q3 net loss was reduced to €72 million from €-1.967 billion last year. Revenues improved by 96 percent to €5.207 billion.
For the first nine months, the carrier reported a €1.877 billion net loss (2020: €5.584 billion). The Adjusted EBIT was €-2.078 billion (€-4.161 billion) on revenues that were almost flat at €10.978 billion (€10.995 billion).
Lufthansa stopped the monthly cash burn and produced an operating cash flow of €13 million in Q3 compared to €-594 million over January-September. This despite the payment of €443 million in deferred tax for Lufthansa Technik. For Q2, Lufthansa reported a €756 million net loss.
Driving the recovery are strong bookings in the third quarter, which are back at eighty percent of pre-crisis levels. Lufthansa sees strong pent-up demand for leisure travel but business travel also recovered strongly over the quarter. Corporate bookings across Europe were 119 percent higher over Q3 2020.
Premium bookings are also strong, with more leisure travelers booking premium seats. Whereas Economy bookings are down 24 percent compared to 2019 and Premium Economy by 23 percent, Business Class is down by only twelve percent. First Class bookings are even up by eight percent.
Lufthansa and its partner airlines SWISS, Austrian, Brussels Airlines, and Eurowings responded with almost doubling capacity. The group airlines carried 19.6 million passengers in Q3 (46 percent of 2019 levels) at a 68.8 percent load factor. Short-haul capacity was back to 65 percent. Yields on the intercontinental markets were slightly better (0.2 percent) than in 2019.
Record result for Lufthansa Cargo
By airline, Lufthansa’s Adjusted EBIT for January-September improved to €-2.165 billion from €-2.635 billion, with revenues of €3.094 billion compared to €3.537 billion last year. Lufthansa Cargo produced another strong result, with an Adjusted EBIT over the nine months period of €941 million (€446 million last year) or €301 million in Q3 (€169 million).
Lufthansa Cargo increased capacity by five percent year on year, adding two Boeing 777Fs to the fleet and retiring the last McDonnell-Douglas MD-11 in October. Demand for cargo remains strong and will be even stronger in Q4, the busiest period of the year, although Carsten Spohr confessed that demand and yields will not continue forever and come down as more belly cargo capacity will become available. Two A321P2Fs will be added to the fleet early next year.
Adjusted EBIT at Lufthansa Technik in Q3 was €61 million including restructuring costs (€-86 million last year). This is thanks to some very good business and a keen eye on cost reductions.
Between January and September, Adjusted EBIT for SWISS improved to €-391 million from €-444 million. In Q3, the Adjusted EBIT was €1.0 million versus €-152 million last year. Nine months’ revenues were €1.330 billion, down from €1.445 billion. SWISS continued its restructuring program to reduce structural costs by CHF 500 million, reducing staff, placing five Airbus A330s in deep storage, and bringing forward the retirement of the A320ceo fleet. While receiving two A320neo’s this year, SWISS has deferred deliveries of more aircraft.
Austrian Airlines produced nine months Adjusted EBIT of €-199 million compared to €-341 million last year. Revenues improved to €491 million from €414 million. Like SWISS and Lufthansa, it also reported a positive Adjusted EBIT in Q3 if only of €2.0 million. In July, Austrian repaid €30 million from the aid package it received last year from the government. Another €300 millon will be repaid before the end of the year
Brussels Airlines reduced its negative Adjusted EBIT to €142 million from €-233 million, with revenues up by twelve percent to €380 million. The Belgian subsidiary resumed operating its hub structure in June and significantly increased capacity as demand rose during the summer months. It produced a €1.0 million Adjusted EBIT in Q3.
Eurowings produced a strong Q3 result, but for Eurowings Discover it is too early to judge in its first 100 days. (Eurowings)
Eurowings performs strongly
Low-cost leisure subsidiary Eurowings and the now integrated Sun Express saw the biggest improvement in its financial results. Adjusted EBIT went from €-108 million in Q3 last year to a positive €108 million this year. For the nine months period, Adjusted EBIT was €-144 million versus €-466 million, an improvements thanks to extensive cost-cutting measures and the adoption of a single Airline Operating Certificate (AOC) after closing Germanwings. Q3 revenues were 111 percent up to €372 million, reflecting the strong recovery of the leisure market.
Eurowings responded quickly by growing its capacity from ten percent in Q1 to 62 percent in Q3. Spohr said that the results of Eurowings confirm that the restructuring plan launched in 2019 is finally bearing fruits and is on track for an eight percent margin, in line with the other airlines.
Eurowings Discover launched long-haul services this summer and started short-haul services last week. It is still too early to see how it has performed financially.
Staff reductions continue
While Eurowings hired some two hundred extra staff to cope with demand and Lufthansa will need more staff to cope with demand, the overall picture is that Lufthansa Group is still reducing staff numbers. In Germany, some 4.000 employees at Lufthansa and Lufthansa Technik have left the company this year, with agreements with 3.000 more to go in due course. This leaves a target of 3.000 jobs that Lufthansa wants to reduce. It launched another volunteer program for cabin crew until March 2022 to eventually get to 100.000 employees, down from 107.000 who were employed by the end of September. Lufthansa specifically targets higher productivity.
SWISS also continues its plans to reduce the workforce by 2.000 before the end of this year, while Brussels Airlines is cutting staff by 25 percent.
Lufthansa is still in negotiations with the pilot union about securing new part-time contracts for some 400 pilots in the mainline business before March when the current part-time contract runs out. The unions are opposing this, but Spohr said the alternative will be forced redundancies in which the pilots will be worse off. Without an agreement, Lufthansa will also be free to allocate all aircraft types for all pilots as a kind of scope clause will no longer apply.
Thanks to the job reductions, other cost-cutting measures, and process improvements, Lufthansa has already implemented measures to get to €2.5 billion in annual fixed cost savings from 2022. It is well ahead of schedule to meet the €3.5 billion targeted for 2024.
Lufthansa had €11.9 billion in total available liquidity by the end of September. Taking into account the proceeds from the €2.2 billion capital increase in October, the repayment of €1.5 billion of the Silent Participation I funds to the German Economic Stabilization Fund in October, the planned repayment of €1.0 billion of Silent Participation 2 before January, and the cancellation of the remaining undrawn €1.5 billion of SP1, the pro-forma liquidity is €8.5 billion. This is above the €6-8 billion target that Lufthansa has set itself. The net debt was €9.0 billion, down €900 million since December.
Capacity expected to grow to on average seventy percent
As Lufthansa produced its first operating profit since Covid-crisis, it expects capacity in Q4 to growing to sixty percent as demand continues to grow, especially as the US reopens on November 8, which already has translated in 81 percent higher bookings to the US in the past weeks. “Every seat to the US for next week is filled”, said Spohr. Asia remains weak, although Singapore, Thailand, Australia, and India are progressively re-opening.
Capacity should grow to 65 percent in Q1 2022 and to eighty percent in HY2 2022, or on average seventy percent compared to 2019. The Adjusted EBITDA for Q4 should be positive again, but the full-year result will still see a net loss.
Almost sixty percent of fuel has been hedged for 2020 at $73, well below the current $78 per barrel.
Lufthansa had 498 aircraft in active service by the end of September, with another sixty being prepared for a return to service by the summer to bring the fleet to 560. The plan is to get back to 650, which at current growth levels could be reached earlier than originally planned. “We will maintain flexibility”, said Spohr.
On the fleet renewal, Spohr said that Lufthansa has entered the first stage of negotiations of the renewal of the regional fleet at CityLine, where Embraer E1 and Mitsubishi CRJs are up for replacement. However, Lufthansa is in no hurry here to make a quick decision. Delivery of the first Boeing 787-9 has slipped to Q1 2022 as Boeing needs to overcome the quality issues first that have paused deliveries since May.
To meet its sustainability targets, Lufthansa will invest €250 million in the purchase of sustainable aviation fuels (SAFs) through 2024. The carrier is already the largest user of SAFs in Europe. Like American Airlines, Lufthansa will join the Science-Based Target Initiative next year to monitor CO2 emissions and reduce them in line with the 2015 Paris Climate agreement.