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Lufthansa Group adjusted EBIT for 2018 only slightly below prior year despite higher fuel and one-off costs

Forecast for 2019: Adjusted EBIT margin of between 6.5 and 8 percent; Capacity growth in summer further reduced to 1.9 percent.

“2018 was another successful year for the Lufthansa Group in financial terms,” says Carsten Spohr, Chairman of the Executive Board & CEO of Deutsche Lufthansa AG. “We generated the second-best result in the history of our company. This is a great teamwork achievement by all the 135,000 people who make up our group workforce.”

Total Group revenues for 2018 were a six-percent increase on the previous year. Burdened by the first-time application of the IFRS 15 accounting standard, total revenues were one percent up on 2017, at 35.8 billion euros. The Adjusted EBIT for the year of around 2.8 billion euros was only slightly below the record 3.0 billion euros of the previous year, despite an increase of some 850 million euros in fuel costs and 518 million euros of expenses incurred through delays and cancellations (up a substantial 70 percent from the 304 million euros of the prior year). In addition, the Eurowings result was burdened by some 170 million euros one-off costs related to the integration of parts of the former Air Berlin fleet. Adjusted EBIT margin amounted to 7.9 percent (prior year: 8.3 percent). The net Group result for the year declined slightly to 2.2 billion euros (prior year: 2.3 billion euros).

Adjusted EBIT was affected by a change in the accounting of engine overhauls, which increased Adjusted EBIT for 2018 by 122 million euros and decreased Adjusted EBIT for 2017 by 4 million euros. Without this accounting change, Adjusted EBIT for 2018 would have amounted to 2.7 billion euros.

Unit revenues adjusted for the first-time adoption of IFRS 15 and currency effects declined 0.5 percent for 2018 owing to lower unit revenues at Eurowings. Unit revenues were slightly above their prior-year level at the Group’s Network Airlines, where higher unit revenues on long-haul routes (over the North Atlantic and to and from Asia) more than made up for lower short-haul unit revenues, especially in the second half of the year.

Profitable growth and cost reductions supported earnings trends. Unit costs adjusted for fuel price and currency movements were 1.7 percent down from their 2017 level (or 1.2 percent down excluding the change in the accounting of engine overhauls). The Network Airlines made an above-average contribution to the overall unit cost reduction.

“We continue to work on further reducing our unit costs year by year,” confirms Ulrik Svensson, Chief Financial Officer of Deutsche Lufthansa AG. “We managed to do so in 2018 for the third year in a row. We are well equipped to invest in profitable growth and simultaneously further enhance our cost efficiency in the future, too.”

The Lufthansa Group invested 3.8 billion euros in 2018, a large part thereof in new more cost- and fuel-efficient aircraft. 470 million euros of this amount is attributable to the changed accounting of engine overhauls. The Group’s total aircraft fleet grew by 35 planes and numbered 763 aircraft at the end of the year.

“For our customers, we want to be the best airline group in Europe,” explains Carsten Spohr. “At the same time, we are fully aware of maintaining sustainable business activities. This is why we continue to invest in advanced, low-noise and fuel-efficient aircraft. The 40 state-of-the-art long-haul planes that we ordered yesterday will replace the significantly less efficient four-engined aircraft in our fleet. As a result, we will have totally modernized our entire long-haul fleet by the mid-2020s.” The fuel savings from this alone will amount to 500,000 tonnes a year, equaling 1.5 million tonnes of less carbon dioxide emissions.

The Lufthansa Group is able to make such investments because of the continuously strong balance sheet. Net financial debt rose 21 percent in 2018 to some 3.5 billion euros (prior year: 2.9 billion euros). However, the debt ratio (adjusted net debt in relation to Adjusted EBITDA) of 1.8 (prior year: 1.5) remained well below the Group’s target maximum debt ratio of 3.5.

Free cash flow declined to EUR 250 million (prior year: 2.1 billion euros). In addition to the slight earnings decline, this was primarily due to non-recurring working capital effects in the prior-year result. 2018 also saw increases in both variable compensation and taxes paid, which were both the result of the substantial earnings improvements of the previous year.

Pension provisions increased 15 percent to 5.8 billion euros (prior year: 5.1 billion euros), owing primarily to the challenging capital market environment. Return on capital employed (Adjusted ROCE) after taxes declined 1.3 percentage points to 10.6 percent (prior year: 11.9 percent), but remained well above capital costs.

“In view of these favorable results, which were achieved in a challenging market environment, we will propose to the 2019 Annual General Meeting that a stable dividend of 80 cents per share be distributed for the 2018 financial year,” says Ulrik Svensson. “This will both enable our shareholders to participate appropriately in our company’s success, while still giving us the strength to invest in our future growth.” A dividend of 0.80 euros per share corresponds to a dividend ratio of 13 percent of consolidated EBIT for the year.

Network Airlines
The Group’s Network Airlines – Lufthansa, SWISS and Austrian Airlines – achieved an aggregate Adjusted EBIT for 2018 of 2.4 billion euros, a further six-percent increase on the record 2.3 billion euros of the previous year. Adjusted EBIT margin amounted to 10.7 percent (prior year: 9.8 percent), an improvement of 0.9 percentage points. Unit revenues (adjusted for currency movements) for the year were up 0.3 percent, owing mainly to increases in long-haul operations. Unit costs (adjusted for fuel and currency influences and excluding the impact of the change in accounting) declined by 1.7 percent.

Earnings at Eurowings in 2018 reflected the growth leap that the airline experienced through its integration of large parts of the former Air Berlin fleet, and were burdened in particular by some 170 million euros in non-recurring associated costs. The integration was completed by the end of the third-quarter period. Adjusted EBIT for the year declined to -231 million euros (prior year: 60 million euros), and Adjusted EBIT margin fell accordingly to -5.5 percent, a decline of 7.0 percentage points (prior year: 1.5 percent). Unit revenues (adjusted for currency movements) were 2.9 percent down on 2017, owing largely to the tough prior year comparison base. Unit costs (adjusted for fuel and currency influences and excluding the impact of the change in accounting) were 1.9 percent above their prior-year level. Excluding the nonrecurring integration expense, however, such unit costs were 2.9 percent below their 2017 level.
Aviation Services
The Group’s logistics, technical services and catering business segments all raised their earnings for the year.

The logistics segment with Lufthansa Cargo increased its record Adjusted EBIT of 2017 by a further two percent to EUR 268 million (prior year: 263 million euros). 

Adjusted EBIT for Lufthansa Technik was also two percent up at 425 million euros (prior year: 415 million euros).

The catering business of the LSG Group achieved an Adjusted EBIT for 2018 of 115 million euros (prior year: 66 million euros), a year-on-year increase of 74 percent. The Adjusted EBIT for Additional Businesses & Group Functions declined 45 percent to -189 million euros (prior year: -130 million euros), primarily affected by the nonrecurrence of positive effects in the prior year.

The Lufthansa Group will be focusing in 2019 on achieving sustainable quality growth. Therefore, the Group is further reducing the capacity growth for its airlines for the upcoming summer to 1.9 percent. Despite this, the Group expects to report mid-single-digit percentage annual revenue growth.

Cost reductions will make a sizeable contribution to offsetting the 650 million euros of additional costs that are expected to be incurred by the airlines owing to higher fuel costs. Overall, the Group expects to post an Adjusted EBIT margin for the year of between 6.5 and 8.0 percent. Eurowings is expected to achieve a breakeven Adjusted EBIT, which would be a substantial improvement on its 2018 earnings result.

Lufthansa Group orders 40 state-of-the-art Boeing 787-9 and Airbus A350-900 long-haul aircraft
The Lufthansa Group is consistently forging ahead with the modernization of its long-haul fleet. In today’s meeting, based on the recommendation of the Executive Board, the Supervisory Board approved the purchase of a total of 40 state-of-the-art aircraft for the group’s airlines. The 20 Boeing 787-9 and 20 additional Airbus A350-900 planes will primarily be replacing four-engine aircraft. The new planes will be delivered between late 2022 and 2027.

The order has a list-price investment volume of 12 billion USD. As is usual with such orders, Lufthansa Group has negotiated a significant price reduction. The parties have agreed not to disclose the actual purchase price.

“By replacing four-engine planes with new models, we are laying a sustainable foundation for our future in the long run. In addition to the cost-effectiveness of the A350 and B787, the significantly lower CO2 emissions of this new generation of long-haul aircraft was also a decisive factor in our investment decision. Our responsibility for the environment is becoming more and more important as a criterion for our decisions,” says Carsten Spohr, CEO and Chairman of Lufthansa Group.

The decision regarding which airline will deploy the aircraft at which hub will be made at a later date.

The investment in new technology, efficiency and passenger comfort is a continuation of the ongoing fleet modernization of the group’s airlines. The arilines of the Lufthansa Group currently operate a long-haul fleet of 199 aircraft (as of December 2018), including twelve state-of-the-art Airbus A350-900 aircraft. Beginning in 2020, Lufthansa will be introducing the new Boeing 777-9.

Investment in modern, fuel-efficient and low-noise aircraft
With the Airbus A350-900, the Boeing 777-9 and the Boeing 787-9, Lufthansa Group will own the most fuel-efficient long-haul aircraft of their class in terms of kerosene consumption per passenger and 100 kilometers flown. This order highlights the company’s desire to invest in cutting-edge technology in the interest of the environment. On average, the new aircraft will only consume around 2.9 liters of kerosene per passenger and 100 kilometers flown. That is 25% below what is used by predecessor aircraft, which will likewise have a positive impact on the CO2 footprint.

The Boeing 787-9 and Airbus A350-900 aircraft that have been ordered will primarily be replacing four-engine aircraft. By the middle of the next decade, the entire long-haul fleet will have been modernized. The possible fuel savings alone add up to 500,000 metric tons per year. This is equivalent to a CO2 reduction of 1.5 million metric tons.

A consistent focus on cost
With the new, more economical aircraft, the operating cost compared to the earlier models will sink by around 20 percent. In addition to this, Lufthansa Group will be significantly reducing the diversification and complexity of its fleet over the next few years and taking seven aircraft types out of service, which will reduce cost and complexity for maintenance and the supply of replacement parts, among other things.

After the long-haul aircraft rollover, the company will be offering its customers one of the world’s most modern fleets. This will also involve a significant increase in comfort and reliability.

Sale of six Airbus A380 aircraft
In today’s session, the Lufthansa Group Executive Board also informed the Supervisory Board of the sale of six of its 14 Airbus A380 planes to Airbus. The aircraft will be leaving Lufthansa in 2022 and 2023. The parties have agreed not disclose the purchasing price. The transaction will not affect the group’s earnings performance.

Lufthansa continuously monitors the profitability of its world-wide route network. As a consequence, the group is reducing the size of its Airbus A380 fleet from 14 aircraft to eight for economic reasons. The structure of the network and the long-haul fleet, fundamentally optimized according to strategic aspects, will give the company more flexibility and at the same time increase its efficiency and competitiveness. This will of course also benefit Lufthansa’s customers.

Vicky Karantzavelou
Co-Founder & Chief Editor - TravelDailyNews Media Network | Website

Vicky is the co-founder of TravelDailyNews Media Network where she is the Editor-in Chief. She is also responsible for the daily operation and the financial policy. She holds a Bachelor's degree in Tourism Business Administration from the Technical University of Athens and a Master in Business Administration (MBA) from the University of Wales.

She has many years of both academic and industrial experience within the travel industry. She has written/edited numerous articles in various tourism magazines.