The unpredictability of crude oil prices and their effect on jet fuel prices makes Lufthansa Group very cautious about the financial results for the full-year 2022. Although the airline is seeing strong bookings, fuel costs are a negative factor. Lufthansa will continue to compensate for rising costs with higher ticket prices, it said during the Q1 results presentation on May 5. Lufthansa worried about ‘jet crack’-effect on fuel prices.
Lufthansa Group’s fuel bill increased 259 percent to €987 million this first quarter, partly because of more flight operations but mainly due to rising prices for jet fuel. The carrier has hedged 63 percent of fuel costs this year at a price of $74 per barrel and so far 29 percent of 2023 costs at $82 per barrel.
What worries Chief Financial Officer Remco Steenbergen is the so-called jet crack: the sharp difference between jet fuel prices and crude oil. “This has increased from $20 at the beginning of March to $150 recently. This is multiple times higher than compared to historical levels. Current forward prices indicate a jet crack of $38 for the remainder of the year.” Lufthansa is, therefore, more focused on the jet crack and will continue hedging crude oil as well. The full effects of a European ban on Russian oil are not clear yet. “One thing is clear: the current increase in fuel prices impacts the industry and is far higher than can be offset by cost reductions. Therefore, ticket prices will have to rise.”
Lufthansa has already increased fares four times in recent months. “They have been accepted by both corporate and non-corporate travelers. Everywhere there are price increases. We have to deal with them as a society”, said Steenbergen, who thinks that the effect on bookings will be limited. At the presentation of the 2021 results, Lufthansa said it was counting on a very strong 2022.
Lufthansa CFO Remco Steenbergen (left) and CEO Carsten Spohr (center) in March at the 2021 results presentation. (Lufthansa)
Lufthansa Group ended the first quarter with a €584 million loss compared to €-1.049 in the same period last year, slightly higher than reported by Air France-KLM today. Adjusted EBIT was down to $-591 million from €-1.048 billion and Adjusted EBITDA to €-28 million from €-482 million. Operating expenses increased by 64 percent to €6.361 billion. Total revenues grew to €5.363 billion from €2.560 billion.
As CEO Carsten Spohr started his remarks, “people have been flying again. There has been a huge recovery in demand with an increase in both leisure and corporate travel. The network is almost fully restored and the numbers are back at 2019 levels.” He added: “Seldom, I have seen a quarter in which the picture changed so quickly as this first quarter.” The climax was on April 26, the busiest day in bookings ever. In Q1, the Group carried 13.2 million passengers, up from three million last year, of which 5.7 million in March. Capacity in available seat kilometers (ASK) was up by 171 percent to 45.7 million, revenue passenger kilometers (RPK) to 29.9 million (up 294 percent).R
Results by airline
By airline, Lufthansa (including CityLine and Eurowings Discover) carried a combined 7.2 million passengers (plus 285 percent) and produced an Adjusted EBIT of €-715 million compared to €-831 million last year. Revenues were up to €1.759 billion from €550 million. SWISS (including Edelweiss) reduced its negative Adjusted EBIT to €-62 million from €-211 million last year. Revenues grew to €746 million from €270 million thanks to a “tangible increase in demand” and a continued focus on cost reductions, which wasn’t easy with the high fuel prices. Passengers carried was up to 2.1 million (+453 percent).
Adjusted EBIT at Austrian Airlines slightly deepened to €-109 million from €-104 million, despite significantly higher revenues to €201 million from €61 million in 2021. It saw an unprecedented “booking boom” in March that bodes well for the coming summer period. Pax numbers were up by 268 percent to 1.1 million.
Brussels Airlines reduced its Adjusted EBIT to €-62 million from €-70 million and increased revenues to €157 million from €55 million.
Eurowings produced an Adjusted EBIT of €-163 million (2021: €-142 million), caused by costs for preparing for the ramp-up of capacity for the spring and summer season. Yet, Eurowings produced costs per available seat kilometer (CASK) below 2019 levels. Revenues were €186 million versus just €39 million the year before, thanks to 1.8 million passengers (292.000 in Q1 2021).
Lufthansa Cargo produced another record quarter with an Adjusted EBIT of €495 million versus €315 million the year before. Revenues increased by 46 percent to €1.169 billion. Cargo benefits from the continued capacity problems in the freight market, notably sea shipping, while belly capacity on long-haul air routes is also still at lower levels. Lufthansa Cargo added eighteen percent capacity in Q1 as more belly capacity became available while also inducting its first Airbus A321P2F into the fleet.
Lufthansa Technik improved Adjusted EBIT to €120 million, up from €45 million, with revenues up sixty percent to €1.326 billion. As traffic recovered, demand for MRO activities increased. LHT had to suspend all its activities in Russia following the sanctions that were imposed in February. The unit has taken a €41 million impairment on its activities in Russia.
SWISS is about to repay all state aid this quarter
On the financial side, Lufthansa Group ended Q1 with an adjusted free cash flow of €780 million, in part due to €1.1 billion in net-cash bookings. The positive free cash flow allows SWISS to repay €204 million of the bank loan facility that it received in 2020 and is 85-percent state-backed. The remaining €1.254 billion in undrawn funding is also to be repaid this quarter, making SWISS the second airline within the group after Lufthansa which will have repaid all state said that was provided during the Covid-crisis. Group liquidity improved to €9.7 billion (up €0.2 billion). Net debt is down to €8.3 billion from €9.0 billion. Lufthansa concluded a new €2.0 billion revolving credit facility in April that replaces a €0.7 million facility.
Lufthansa expects capacity to increase to 85 percent on average this summer, with Eurowings even above 2019 levels. (Lufthansa)
The German airline group has now secured €2.9 billion of the targeted €3.5 billion in structural cost reductions by 2024. It is in negotiations with unions in Germany about a new collective agreement for pilots and cabin crew, which it hopes to finalize before the current agreement expires at the end of June. “But we haven’t made real progress on cost savings with our pilots on the main airline. We need to reduce our costs in Frankfurt”, said Spohr. Part of the solution is the new platform next to CityL:ine that should accommodate part of the surplus Germanwings staff, which Spohr hopes can launch operations by summer next year.
A new CLA with SWISS will become effective from July. Another 1.500 cabin crew left Lufthansa in Q1 and voluntary programs were completed for both pilots and flight attendants, bringing the total headcount down by some 3.000 since the first quarter last year to 34.443. The airline can no longer benefit from payroll support programs and short-term working subsidies.
SWISS reduced its workforce in twelve months by 1.300 to 8.494 and Austrian by 700 to 5.611. By contrast, Brussels Airlines and Eurowings hired extra staff and are now up 90 to 3.142 and up 780 to 3.792 respectively.
Coming summer will be challenging
While reductions have been necessary to reduce costs, Spohr admits that the coming summer will become a challenge as far as staffing is concerned. Not just at the airline, but at airports and with other partners, there is a shortage of staff. “We try to plan ahead and prepare, to increase our workforce, and be as flexible as possible. But we know that many partners suffer from huge labor shortages. We are looking for solutions, but everyone has to raise the bar. I already have had to apologize for cancelations and disruptions, I fear I will have to do that another time.”
Looking at the rest of 2022, capacity is expected to be an average of 75 percent for the full year, with short-haul leading the way. Q3 will see capacity at 85 percent on average, short-haul at 95 percent, and Eurowings operating above 2019 levels. In Q4, a slight drop is expected again to 75 percent. Premium bookings continue to be strong, with Business Class set to recover to seventy percent by the end of the year. But despite this positive outlook, the fuel and oil price situation makes Lufthansa unable to offer full-year guidance. It only says it expects to see an improvement of the Adjusted EBIT over last year, targeting eight percent in 2024.
