The Wall Street Journal
By Natalia Drozdiak
Updated Oct. 30, 2014 10:07 a.m. ET
FRANKFURT— Deutsche
Lufthansa AG on Thursday scaled back its earnings targets for next year
and said it was drawing up contingency plans should economic conditions
further deteriorate.
The German airline now
sees its 2015 operating profit “significantly above the result of 2014,”
compared with its previous €2 billion ($2.52 billion) target, while
confirming its 2014 operating profit target of €1 billion. The airline
blamed the weaker global economic backdrop as well as overcapacity in
key markets. In response to the weakness, it said it would curtail
capacity growth next year to 3% from 5% to help combat pressure on
yields.
“We can see that the
economic slowdown and the continuing declines in our passenger yields in
the face of such fierce competition will affect our operating scope in
the year ahead,” said Chief Financial Officer Simone Menne. She said
earnings would also be hit by a sharp rise in pension costs.
The airline also warned
that its 2014 dividend payment could be cut because of a change in
interest rates and the sale of its IT unit.
Ms. Menne said the
carrier’s dividend policy was “under review” and would be discussed when
the supervisory board meets in early December. Lufthansa said earlier
this month that it would sell its IT infrastructure division to
International Business Machines Corp. , a move that will reduce costs in
the long run but result in a €240 million charge this year.
Lufthansa also said its
2014 earnings targets remained vulnerable to further labor union strikes
this year. It said strikes aren’t factored into the 2015 outlook, so it
too could be further impacted if more labor unrest takes place. Labor
union strikes have already shaved off €170 million in operating profit
this year, Lufthansa said.
“To have conviction in
the investment case we need to regain confidence in the stabilization of
forecasts, which is difficult at this stage given the challenged
operating environment,” Jefferies analyst Mark Irvine-Fortescue said.
Lufthansa’s shares dropped 7% to €11.47 around 1300 GMT.
The airline said the
pressure on yields from overcapacity in the industry stemmed from
outside Europe and mainly from North America. Lufthansa said it sees
stable versus rising yields in 2015 and that capacity growth in North
America will likely surpass 3% in 2015.
Like other European
airlines, Lufthansa is struggling to compete with discount carriers,
which have undermined short-haul operations in Europe, while rapidly
growing Middle Eastern carriers are also threatening their long-haul
businesses.
Lufthansa said it might
have to make more capacity cuts and shrink the size of its fleet if
demand declines further. Still, the carrier is so far “satisfied” with
next year’s bookings, Chief Executive Carsten Spohr said.
“We are disappointed that
management is giving up again on its originally agreed financial target
for 2015 without taking further action to preserve the 2015 target,”
Citi group analyst Andrew Light said.
The company said its fuel
hedging policy was so far unaffected by the low jetfuel costs, adding
that its fuel for next year is partly already hedged at 65% for 2015.
The altered 2015 outlook
came even as it reported that third-quarter net profit rose 24% to €561
million from €451 million last year. Analysts had expected the airline
to post a third-quarter net profit of around €491 million. Sales for the
quarter advanced 1.9% to €8.46 billion from €8.3 billion, Lufthansa
said.
Lufthansa said it would
hold off on a specific 2015 forecast until next year, saying “strong
volatility” in issues such as exchange rates and fuel costs made it too
difficult to be more precise for now.
The airline said lower
restructuring costs and a new aircraft depreciation policy helped offset
the cost of the strikes. Its third-quarter operating profit rose 25% to
€735 million, compared with €589 million the year before and against
analyst estimates of €662 million.
Lufthansa said the cost
cuts are outpacing their 2015 Score restructuring target to slash
operating costs by €1.5 billion and doesn’t see any other restructuring
expenses next year. The airline plans to make the cost reductions and
earnings improvements a permanent fixture once the program ends.
Chief Executive Spohr
said the airline could cut more administrative staff and implement a
hiring freeze in airline operations departments.
Earlier this year, the
airline said it is extending the depreciation period for its aircraft
from 12 to 20 years, and reducing their residual book value from 15% to
5% of purchase price. Lufthansa said the new policy has already boosted
operating results by €260 million in the first nine months of the year.
The airline had already
downgraded its outlook in June on weak sales growth and labor unrest,
when it was subsequently hit by a number of pilot strikes. Lufthansa and
its pilots are at odds over a push by the carrier to raise the early
retirement age and the airline’s plans to shift some flying to
lower-cost operations.
Mr. Spohr, earlier this
year announced a plan to boost the shift of short-haul operations to a
discount unit while also moving some long-haul flights to a lower-cost
business model. The airline also wants to revamp some Airbus Group NV
A340-300 long-haul jets to offer discount flights to leisure travelers.
It will brief its board about the lower-cost “Wings” concept in
December, Lufthansa said.
European rival Air
France-KLM SA in October also announced its second profit warning this
year. The unprofitable Franco-Dutch carrier said a two-week-long pilots
strike cost the airline about €416 million in lost sales.
- Source: http://online.wsj.com
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment