Lufthansa has become the third airline after low-cost rivals easyJet and Ryanair to warn that the integration of parts of bankrupt Air Berlin has added costs and is taking longer than originally envisioned. The Cologne-based group on Tuesday said the higher than expected expenses related to the integration of the 77 aircraft formerly operated by Air Berlin into its budget arm Eurowings had “depressed” earnings in the first six months. Lufthansa booked adjusted earnings before interest and tax (EBIT) of €1 billion ($1.17 billion) in the first half, down 2 percent year-over-year.
“Without the integration costs at Eurowings the group’s result would have grown,” CFO Ulrik Svensson said during an analyst and investor conference call detailing the group’s results for the six months ending June 30. He stressed that the company “willingly” accepts the costs given the acquisition allowed it to further strengthen its market position in Europe. He described the integration of the Air Berlin fleet and operations as a “process that is unprecedented in its scope within the European airline industry.”
Eurowings suffered from €50 million in one-time costs related to the integration of former Air Berlin operations and operational challenges in the second quarter, bringing the total for the first six months to €120 million. It expects an additional charge of around €50 million in the third quarter, but no subsequent expenditures. “We will complete the technical integration of all former Air Berlin aircraft in the next two months,” Svensson said.
Overall the state of the budget division, which comprises Eurowings, Germanwings, Eurowings Europe, Brussels Airlines, Luftfahrtgesellschaft Walter (Air Berlin) and the equity stake in SunExpress, remains “mixed,” Svensson noted. “On the one hand, we are extremely pleased with the top line performance,” he said. “But on the other hand, we have work to do to bring the Eurowings profitability to the level of its key competitors.”
Passenger numbers increased by 23.3 percent year-over-year in the first half, to 17.9 million. Capacity grew by 23.6 percent; passenger load factor rose 2.4 percentage points to 79.8 percent, and traffic revenue rose by 9.1 percent overall to €1.9 billion. Operating costs totaled €2.2 billion. Operating losses deepened to €199 million, from a €77 million loss in the same period a year ago. The airline expects to resolve inefficiencies and complexity due to the largely inorganic growth of the segment by next year, according to Svensson. Eurowings should return to profitability next year and reach profitability to the levels of its prime competitors “over the next three to four years,” he added.
Eurowings’ delays in the Air Berlin integration and related cost hikes prompted Lufthansa to trim its group capacity growth plan again, by a half percentage point to 8 percent, and cut its unit cost outlook to a 1 percent decrease, against a previous 1 percent to 2 percent target. However, it reaffirmed its 2018 earnings forecast and said adjusted EBIT would fall slightly from 2017’s record level of €2.97 billion.