Lufthansa share: Lufthansa continues to make losses

The pandemic is not quite over yet, the next crisis is already here. The war in Ukraine could complicate further recovery of the “Hansa”. The problem: The consequences of the geopolitical conflict for aviation cannot yet be fully grasped. That is why Europe’s largest airline group does not dare to make any concrete forecasts for the current year. Investors reacted with corresponding uncertainty. The Lufthansa share lost a good eight percent by midday. The Spohrs insurance company did not change that either, saying that the booking figures are still very good: “Demand is still high, but the enormous momentum of the last few weeks has weakened somewhat since the beginning of the war.”

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Lufthansa remained in the red in 2021, but the group was able to significantly reduce the minus. The operating loss (operating earnings before interest and taxes) fell from 7.4 to 2.3 billion euros. The consolidated loss was 2.2 billion euros, after minus 6.7 billion euros in 2020. Sales increased by almost 24 percent to 16.8 billion euros last year.

For the current year, despite the war in Ukraine, the Lufthansa management assumes that the operating result will improve in the following quarters. However, Spohr left it open whether the figures will be in the black this year.

This shows the insecurity triggered by the Ukraine war. The cancellation of flights to Russia and Ukraine is the smallest problem. “About one percent of sales are missing, but what is that compared to what we are dealing with in Ukraine right now,” said Spohr.

The fact that planes in the direction of Asia have to be diverted because the important airspace over Russia is closed has major consequences. This currently affects the rapidly growing and profitable cargo flights in particular. The jets have to take more fuel on board, at the expense of the payload. In return, the high fees for the flight over Siberia are eliminated, but the Lufthansa boss expects additional monthly costs in the single-digit million range.

The indirect consequences are even more dangerous. Experts like Alex Irving from Bernstein Research see two main potential risks: On the one hand, the war will drive up the price of oil and thus also the price of kerosene. On Thursday, the price of a 159 liter Brent barrel approached $120, the highest in many years.

Lufthansa CFO Remco Steenbergen pointed out that Lufthansa has already hedged 63 percent of its fuel requirements for this year. Provisions have also been made for the necessary emission certificates. But a residual risk in the price of kerosene remains. On the other hand, inflation is rising rapidly. In the euro zone, it reached a new record of 5.8 percent in February. That also drives up Lufthansa’s costs. Added to this are rising fees at airports and air traffic control.

Ticket prices will go up

Steenbergen therefore sent a clear message to passengers: “Ticket prices have to go up, just because of fuel costs and inflation,” said the CFO. That will also affect other airlines, added CEO Spohr.

At the same time, rising inflation could also shrink private household budgets, warns Irving von Bernstein. However, it is private and holiday travelers who are currently filling the jets. This is reflected in the Lufthansa figures. The drivers of sales last year were the low-cost platform Eurowings with a sales increase of 37 percent to 822 million euros and the freight subsidiary LH Cargo with growth of 38 percent to 3.8 billion euros. Private travel is returning to the pre-crisis level much faster than business travel. Eurowings in particular will benefit from this.

In turn, Lufthansa Cargo benefits from the fact that supply chains have become more fragile. Ships back up in front of major ports, so more cargo space is booked on the jets, even if it’s more expensive. This situation has worsened since the beginning of the war in Ukraine.

All in all, the core business of “Hansa” with the transport of passengers remained in the red despite the boost at Eurowings 2021. The network airlines recorded an operating loss of 3.5 billion euros, Eurowings posted an operating loss of 230 million euros.

On the other hand, the offshoots beyond the passenger division stand out on the earnings side. They alone secured the profit of the group. The maintenance subsidiary Lufthansa Technik was able to turn its previous year’s loss into a profit of 210 million euros. The freight offshoot increased its earnings to almost 1.5 billion euros, a whopping increase of more than 90 percent. The catering division LSG converted a three-digit loss into a small profit of 27 million euros.

Despite the group loss, the Lufthansa management was able to correct the balance sheet, which had gotten into trouble as a result of the crisis, in important areas. At the end of last year, the group had liquidity of 9.4 billion euros. Until the beginning of the crisis, the management thought only around two billion euros was sufficient, in the future it should always be between six and eight billion euros. This shows how much Lufthansa management wants to play it safe after experiencing the pandemic. This also applies to the equity ratio. It rose from 3.5 percent to 10.6 percent.

This shows that the Lufthansa Group has mastered the crisis better than the other two major airline groups in Europe. For example, Air France-KLM still had to deal with negative equity last year. The British-Spanish IAG with the brands British Airways, Iberia, Vueling and Aer Lingus only managed a modest equity ratio of 2.5 percent in 2021.

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