German airline Lufthansa's aircraft park at Frankfurt am Main airport, western Germany. Picture: AFP PHOTO/ BORIS ROESSLER
German airline Lufthansa's aircraft park at Frankfurt am Main airport, western Germany. Picture: AFP PHOTO/ BORIS ROESSLER

Frankfurt — Germany’s Lufthansa sent shockwaves through the European airline sector on Monday as it cut its full-year profit forecast, with lower prices and higher fuel costs compounding the effect of losses at its budget subsidiary Eurowings.

The warning follows gloomy comments in May from Irish budget airline Ryanair, which vies with Lufthansa for top spot in Europe in terms of passengers carried. Air France-KLM also reported a widening quarterly loss in May.

In a statement on Sunday, Lufthansa forecast annual earnings before interest and taxes (ebit) of €2bn to €2.4bn, down from the previously targeted €2.4bn to €3bn.

“Yields in the European short-haul market, in particular in the group’s home markets, Germany and Austria, are affected by sustained overcapacities caused by carriers willing to accept significant losses to expand their market share,” it said.

European airlines are locked in a battle for supremacy, with a surfeit of seats holding down revenues and higher fuel costs adding to the pressure. A number of smaller airlines have collapsed over the past two years.

Lufthansa cited falling revenue from its Eurowings budget business as a key reason for the profit warning. “The group expects the European market to remain challenging at least for the remainder of 2019,” it said.

It also pointed to high jet fuel costs, which it said could exceed 2018’s figure by €550m, despite a recent fall in crude oil prices.

Shares in Lufthansa hit a two-year low of €15.40 for their highest intraday loss in three years. They were down 12% at €15.55 by 9am GMT.

Rivals were also caught up in the turbulence, with shares in Ryanair, British Airways owner IAG, Wizz Air, Air France and Easyjet falling by up to 4.4%.

Ryanair CEO Michael O’Leary in May warned of the effect of what he called “attritional fare wars” and said four or five European airlines were likely to emerge as the winners in the sector.

“No signs that anyone is prepared to reduce capacity, therefore we would anticipate the wave of consolidation in European short haul is not over,” said analyst Neil Wilson, analyst at London-based broker market.com.

Trade war, oil prices

Earlier in June, global airlines slashed a widely watched industry profit forecast by 21% as an expanding trade war and higher oil prices compound worries about an overdue industry slowdown.

Lufthansa’s problems are centred on its European business, with a more positive outlook for its long-haul operations, especially on transatlantic and Asian routes.

Eurowings management is due to implement turnaround measures to be presented shortly, Lufthansa said, adding that efforts to reduce costs had so far been slower than expected.

Lufthansa’s adjusted margin for ebit was forecast at 5.5% to 6.5%, down from 6.5% to 8% previously, it said.

The airline said it would make a €340m provision for in its first-half accounts, relating to a tax matter in Germany originating in the years from 2001 to 2005.

The Network airlines unit — its core brand, Swiss and Austrian Airlines — is expected to reach an adjusted ebit margin of 7% to 9%, down from 7.5% to 9.5%.

For its Eurowings business, the forecast was for minus 4% to minus 6%, against about flat previously.

Reuters