Published on March 20th, 2016 | by Jim Lee0
Lufthansa Group significantly increases profit for 2015, despite setbacks and as its Irish operations thrives
“2015 was a good year for the Lufthansa Group in economic terms,” according to Carsten Spohr, Chairman of the Executive Board and CEO of Deutsche Lufthansa AG. “The doubling in the passenger airlines’ result is not only due to lower fuel costs, but also to the favourable developments in our passenger volumes and to our capacity discipline. The result also confirms that our focus on quality in both the premium and the point-to-point segment is the right approach. And the very good results from Lufthansa Technik and LSG Sky Chefs further affirm that the Lufthansa Group is on the right track” he added.
With its strategic realignment progressing well, the Lufthansa Group increased profit significantly in 2015 leading to the following highlights;
- Adjusted EBIT increased by 55% to €1.8 billion,
- Passenger airline profits doubled due to higher revenues and lower fuel costs,
- Germanwings and Eurowings make positive earnings contribution,
- Strong revenue and earnings growth at Lufthansa Technik and LSG SkyChefs,
- Dividend proposal of €0.50 per share 2016,
- Adjusted EBIT expected to be slightly above the previous year,
- Slight increase in earnings expected for passenger airlines,
- Unit costs excluding fuel and currency impacts to be reduced,
- Targeted expansion of Eurowings.
In 2015, the Lufthansa Group generated revenues of €32.1 billion, a 6.8% increase on the previous year. The Adjusted EBIT, the leading indicator of economic success, increased by 55% to €1.8 billion. Hence, the result sits within the forecast range defined by the Group last October, even with an earnings impact of some €100 million, as a result of strikes in the fourth quarter.
With the exception of Lufthansa Cargo, all business segments contributed to the significant earnings improvement. The Adjusted EBIT for the Group’s passenger airlines more than doubled, and the two biggest service companies, Lufthansa Technik and LSG SkyChefs, both posted double-digit percentage earnings growth.
The airlines of the Lufthansa Group – Austrian Airlines, Brussels Airlines, Eurowings, Lufthansa and SWISS – transported 107.7 million passengers in 2015, which is a new record. The Group carried 1.6% more passengers than in the previous year. At the same time, the company carried out more than one million flights, and achieved the highest ever seat load factor of 80.4%. This corresponds to an increase in capacity utilisation of 0.3 percentage points compared to 2014.
The Lufthansa Group further improved its financial stability in 2015. The year-end equity ratio stood at 18%. Liquidity increased, net indebtedness declined, free cash flow increased significantly to more than €800 million and Deutsche Lufthansa AG’s ratings were confirmed. Return on capital employed (ROCE) also improved significantly to 7.7%. As a result, the Lufthansa Group created value of €323 million in 2015.
Mr. Spohr continued “With the Germanwings tragedy, 2015 was an emotionally very challenging year for the Lufthansa Group.”
“The numerous strikes were also a further burden. Nevertheless, we continued to successfully work on our Group’s future viability. And our strategic realignment is progressing well” he noted.
He went on “For 2016 we are aiming to increase our result for the Lufthansa Group again.”
“We aim to enhance the profitability of our hub airlines by further modernising their fleets and further increasing efficiency. We will only grow capacity where our cost structures are competitive. We will expand Eurowings substantially and enlarge the route network. We will foster innovations in all business areas and make travel for our customers even more pleasant and simpler through digitalization and corresponding new offers” he concluded.
Earnings of the Passenger Airline Group doubled
The Lufthansa Group’s good result is mainly attributable to the significant increase in its passenger airlines’ earnings. The Adjusted EBIT of the Passenger Airline Group amounted to €1.5 billion (compared to €701 million for 2014), doubling the Adjusted EBIT margin to 6.1%.
The Adjusted EBIT of Lufthansa Passenger Airlines increased by 143% to €970 million. Results for Eurowings (including Germanwings) are also consolidated in these numbers. Eurowings alone (which will be reported separately from 2016 onwards), achieved an Adjusted EBIT of €8 million on revenues of €1.9 billion – a performance which not only meets, but exceeds, the ambitious 2015 target of a break-even for the Group’s point-to-point business. SWISS International Air Lines achieved earnings of €429 million, an increase of 54%, and an EBIT margin of 9.4%. Austrian Airlines also posted clearly positive earnings of €52 million (compared to €9 million in 2014).
Cargo weaker, service companies continue to grow
The earnings contribution of Lufthansa Cargo declined 40% to €74 million. The airfreight market had seen sizeable overcapacities from the beginning of the 2015 summer flight plan onwards, with a correspondingly negative impact on Lufthansa Cargo’s load factors and yields. Cargo earnings were also depressed by the strike actions at Lufthansa Passenger Airlines in the important fourth-quarter period.
Lufthansa Technik and LSG SkyChefs continued their growth. Excluding gains from exchange rate movements, both companies raised their revenues by almost 10%. Lufthansa Technik posted earnings of €454 million, up 19.5%; and LSG SkyChefs’ earnings rose 12.5% to €99 million.
Dividend of €0.50 per share proposed
On 28th April 2016, the Supervisory Board and Executive Board of Deutsche Lufthansa AG, will propose to the Annual General Meeting, that a dividend of €0.50 per share, be distributed for the 2015 financial year. This would represent a total dividend payment of €232 million, which is in line with the company’s general dividend policy. “Our dividend policy is clear and comprehensible,” says Simone Menne, Chief Officer Finance of Deutsche Lufthansa AG. “We are committed to making continuous dividend payments to our shareholders in the years ahead.”
Forecast for 2016
The Lufthansa Group expects to again slightly improve its Adjusted EBIT in 2016. The forecast does not, however, include any impact on earnings from possible strikes. The group is progressing an agreement with staff on new pay and pension deals, with last year seeing both pilot and cabin crew strikes, costing the carrier €231 million in lost earnings in 2015. On a positive note, arbitration talks began on 19th January. Prior to the arbitration, a new collective wage settlement as well as a new agreement for the future pensions and transitional benefits of Lufthansa cabin staff had already agreed with the Independent Flight Attendants’ Organization (UFO). The collective wage agreement will be valid until 30th September 2016. The arbitration talks will continue until 30th June 2016. For this period, industrial peace will be obligatory. The arbitration will be led by the former Prime Minister for Brandenburg, Matthias Platzeck. For 2015 the approximately 19,000 cabin staff will receive a single payment in the amount of €3,000. Wages were increased by 2.2% effective 1st January 2016. Parallel to the arbitration, talks have also begun between the management of Eurowings and UFO regarding work conditions in that low-cost segment.
Once again, the Group’s passenger airlines are expected to be prime drivers of earnings growth. However, with the sizeable expansion of Eurowings’ long-haul operations and intensified competition low cost rivals such as Ryanair and easyJet, yields are likely to decrease significantly. Eurowings is adding more seats in Europe and especially Germany and putting pressure on ticket prices
But cost reductions are also expected, largely due to the low oil price, but also in the form of lower unit costs at constant currency, excluding fuel costs. “We will not be unduly influenced by the current low fuel costs,” emphasises CFO Simone Menne. “They will provide a welcome tailwind for our 2016 results, too; but cost discipline remains one of our paramount tasks. We must lower the unit costs at our hub airlines. This is and remains the key to maintain our competitiveness.”
One major driver in this respect will be the further enhancements to the efficiency of the aircraft fleet: this year alone, the Lufthansa Group will take delivery of 52 new, state-of-the-art and fuel-efficient aircraft, including two Airbus A350XWBs, that will replace older A340s. Lufthansa, which recently signed an agreement with Iran Air to increase cooperation between the two companies, is considering selling some of its Airbus A340-300s to Iran Air, the Iranian flag carrier.
“Iran Air needs support – which had been denied (because of sanctions). We are looking at whether Iran Air is perhaps a customer to take those planes from Lufthansa. The A340s will be exchanged one-to-one by the A350s” according to Mr. Spohr.
Looking at the component airlines within the group, Lufthansa Passenger Airlines expects to post a slightly-improved Adjusted EBIT for 2016. SWISS International Air Lines however, expects its 2016 EBIT result to be slightly down on the previous year, owing primarily to the currency situation of the Swiss franc. Austrian Airlines again expects a significant improvement in its earnings performance. In addition, the Eurowings Group is expecting a slightly negative result for the year, largely because of the present investments in its growth activities.
Lufthansa Cargo expects to report slightly improved earnings for 2016. With growing pricing pressure and costs for growth projects, Lufthansa Technik anticipates a significant decline in its earnings for the year owing to increasing cost pressure and costs for growth projects. LSG SkyChefs also expects a slight decline in earnings, as a result of the expenditure required to realign its business model. The Group’s other segments are likely to post significantly better results compared to the previous year.
In conclusion, Mr. Spohr emphasised that the management team would, “consistently press ahead with the further development of the Lufthansa Group throughout 2016” adding “The Lufthansa Group stands on three strong pillars now: Europe’s leading hub airline system, the leading point-to-point airline in our home markets, and the world’s strongest aviation service companies. This all gives us more strategic options than any other aviation group. That is a strong starting point from which to benefit in a wide range of ways from the future growth of the global air transport sector. As long as we can further align our cost structures to market levels, the Lufthansa Group has great prospects in all its business segments.”
Lufthansa to add more than 4,000 new employees in 2016
The Lufthansa Group will add more than 4,000 new employees in 2016, with approximately 2,800 of these being flight attendants. They will be spread across the different airlines of the Lufthansa Group as follows:-
- Lufthansa 1,400 (800 in Frankfurt and 600 in Munich)
- SWISS 800 (in Zurich)
- Eurowings 360 (in Vienna, Düsseldorf and Hamburg)
- Austrian Airlines 200 (in Vienna)
- Lufthansa CityLine 30 (in Munich)
The new flight attendants will be recruited using two kinds of entry-level contracts. The first, a permanent position with a part time factor of 83%, in which flight attendants fly full time in summer and part time in winter. The second, is a two year contract with a part time factor of 50%, which can be extended once every two years. In this model, flight attendants work full time in summer, followed by six months free time. Entry to this type of contract is possible from November to January. In both models salary and social insurance are paid over twelve months. New employees take training courses over twelve weeks in order to become flight attendants.
The Lufthansa Group is also hiring 240 pilots, of which 140 will be for Eurowings in Austria and Germany and 100 for Austrian Airlines. Both first officers and captains are required. Further pilots are also needed for SunExpress in Germany. The joint subsidiary of Lufthansa and Turkish Airlines operates long-haul flights on behalf of Eurowings.
The Lufthansa Station in Munich is looking for 150 new employees for their passenger service at the airport. The new colleagues will be deployed in taking care of passengers at the check-in or at the Lufthansa transfer and ticket counters in the multiple award winning Terminal 2. Lufthansa will hire station employees for one year on a full time basis.
Finally, just as it does every year, in 2016 Lufthansa will be giving numerous apprentices a start in their professional career. The beginners will be trained in over 30 different careers at different locations.
Lufthansa focuses on big data and analytics technology
Lufthansa is driving digitalisation in air travel forward. Its aim is to always be on the scene to support customers and make their trip more enjoyable with the Lufthansa app – at the airport, the lounge, and at the gate. To do this, Lufthansa is the first airline at its Munich hub to test so-called location-based services. If the customer has activated the location-based services on their smartphone, Lufthansa can refer them via the Lufthansa app to exactly the offers and services relevant to their current location and that will make their stay more comfortable.
In the test phase, customers in Munich receive an offer for entry into the Business Lounge for €25. This personalised push message is sent to the passenger located in the vicinity of a lounge, if they don’t yet have automatic lounge access through customer status or booking class. This works via so-called ‘iBeacons’, installed at relevant points in the terminal. An extension of location-based services into other airports is also planned in the coming months. The Business Lounge offers the customer food and drinks “all inclusive“ as well as a pleasant atmosphere for working and relaxing.
Another convenience is the personalised offer for a Lufthansa Economy Class customer to be able to purchase an upgrade to Business Class. This has already been implemented in short and medium-haul flights, and is currently being tested on five long-haul flights: from Munich to Los Angeles and Seoul, and from Frankfurt to Delhi, Shanghai and Toronto.
The further development of the electronic baggage receipt in the Lufthansa app is another example of how Lufthansa is progressing in digitisation and use of big data and analytics technologies. Most recently, Lufthansa guests can use their digital baggage receipt to see where their baggage is currently located. Upon arrival, the app informs the guest of the exact baggage carousel. This service is currently available at the airports in Frankfurt, Munich, Stuttgart, and Milan, and will be rolled out further. To consolidate all relevant digitalisation programmes in the IT sector, Lufthansa has appointed Dr. Roland Schütz Chief Information Officer (CIO) of all Lufthansa Group airlines.
Lufthansa and SITA develop next-generation baggage tracing service
Lufthansa is also planning to speed up the repatriation of delayed or mishandled bags to passengers, when it launches easy-to-use baggage tracing technology, jointly developed with global air transport IT specialist SITA.
The new-generation WorldTracer® system provides Lufthansa agents access to a new, user-friendly desktop interface that makes it easy to record delayed baggage and trace the missing bags, no matter where in the world they are. The new interface allows ground handlers, airport operators and airlines to access WorldTracer’s global baggage data, while integrating it with their own reservation or operations systems, providing a rich data set that helps quickly trace a missing bag. The new WorldTracer desktop application will be available to all agents across the Lufthansa group in 2016. Given SITA WorldTracer’s global presence, with 450 airlines and ground handlers at more than 2,500 airport locations, the new system makes deployment of the new interface across a global network easy and cost-effective.
While the development of this new application was funded by Lufthansa and SITA, it will be made available to the broader air transport community as part of SITA’s ongoing investment in WorldTracer. SITA also recently launched the WorldTracer Tablet which allows mobile agents to roam the airport, helping passengers to report mishandled baggage and trace their status.
The Lufthansa Group has invested heavily in the improvement of its fleet and services throughout the last few years. As part of this, 17 new aircraft were taken into service by the Lufthansa Group in 2015. A further 251 aircraft will be added by the Group airlines’ fleet over the next ten years. In addition, passenger comfort has been noticeably enhanced, through cabin refurbishment in all classes, improvements in on-board services and the availability of the FlyNet® broadband internet connection. In addition to upgrades and refurbishment, ongoing scheduled maintenance is undertaken.
As part of this programme, Lufthansa has completed the first major overhaul on an Airbus 380, of which it has 14 in service. The work, an intermediate layover (IL)-check, was carried out by Lufthansa Technik Philippines (LTP) and involved D-AIMA; Lufthansa’s first A380 was delivered on 19th May 2010 and named ‘Frankfurt am Main’. The task required 90,000 working hours and a two-month layover in Manila. The aircraft had previously completed a total of 2,671 flights in 23,595 flight hours.
Separately, Lufthansa has confirmed that the first ten A350-900s of the 25 of the type it has on order from Airbus Industrie, will be based at its Munich hub, from January 2017. It will use them to gradually replace its fleet of 24 A340-600s. The aircraft will accommodate 293 passengers: 48 in Business Class, 21 in Premium Economy and 224 in Economy Class.
Meanwhile, the introduction of its latest short haul aircraft, the Airbus A320neo, has not gone well. First of all, Airbus missed the end of 2015 delivery target for A320neo. On 30th September, Airbus confirmed it had to ground the first Pratt & Whitney powered A320neo for a second time during its flight-test campaign, after finding a “minor problem” in one of its PW1100G engines, following hot-weather trials in Al Ain, in the United Arab Emirates. At the time the company insisted that the incident would not affect plans to deliver the first aircraft by the end of the year. The delay did however result in an effective change in launch customer, as Qatar Airways, balked at talking the first aircraft with a temporary operating restriction.
The first Lufthansa Airbus A320-271N, D-AINA (c/n 6801), ex D-AXAQ, was handed over in Hamburg, after a delay of three weeks, caused by what Airbus officials described “as problems with documentation” for the PW1100G. The aircraft was delivered Hamburg/Finkenwerder – Frankfurt on 22nd January as the LH9922, in a 40 minute flight in a low key event (see below). Lufthansa was finally able to celebrate the delayed official ceremonial delivery of the aircraft on 12th February at Hamburg-Finkenwerder. Present was Carsten Spohr, Airbus President and CEO Fabrice Brégier and the President of Pratt & Whitney Robert Leduc and 700 invited guests and media staff. The first two aircraft were presented to the attendees, although by that stage, D-AINA had already flown scheduled services. After the ceremony, the A320neo took off from Hamburg- Finkenwerder on a special flight with guests and media staff bound for Frankfurt Using flight number LH9917. It made a short stopover at Hamburg’s Fuhlsbüttel and the aircraft was adorned with a special logo. ‘First to fly A320neo – Less noise. Less fuel. Less CO2’ placed at the rear fuselage.
Lufthansa’s initial experiences with the A320neo have been positive and clearly show that the 15% lower fuel consumption mark has not only been achieved, but even slightly exceeded. The significantly quieter engines also increase customer comfort on-board and provide relief to residents near airports, by reducing noise emissions. To address the problems with the PW1100G, the manufacturer is working on hardware changes and a software update, which will be completed in April. The hardware fix is being installed on current-production engines, due for delivery in June, and will retrofit engines made earlier. Until those changes are made, the engine has to idle for three minutes following start-up before it can taxi under its own power. Lufthansa was scheduled to take delivery of its second A320neo on 12th February, but refused to take delivery, until the engine issues are resolved. For the moment, and pending completion of the engine fix, its first aircraft operates on only two domestic routes between Hamburg and Munich. “We could fly to other destinations, but we would need more engineers in those locations,” Mr. Spohr has said. “The engine issues are slowly improving, but we’re not there yet,” he added. He is reported as saying that Lufthansa was receiving compensation from Airbus until it could make full use of the A320neo, although an Airbus spokesperson declined to comment, citing customer confidentiality.
2015 sets new record for Lufthansa at Dublin Airport
The Lufthansa Group had its most successful year ever at Dublin Airport in 2015, carrying almost 550,000 on its Dublin routes, representing a 13% increase on 2014. Figures released show that almost three quarters of its passengers from Dublin are making onward connections to the airline’s worldwide network, through its Frankfurt, Munich and Zurich hubs.
In a comment, Christian Schindler, Lufthansa’s Regional Director UK, Ireland & Iceland said; “Once again Dublin has proved to be a key market within Lufthansa’s route network. Despite a challenging last quarter of the year the demand for our services has continued to grow, proving once again that discerning travellers appreciate how Lufthansa continues to respond to the challenges of the travel market”.
“In 2015 the most popular onward destinations for Lufthansa’s Dublin Airport passengers included; Moscow, Sofia, Vienna, Tel Aviv, Belgrade, Tokyo, Athens and Kiev” he added.
………… and finally
The International Air Transport Association (IATA) has called on the German government to focus on improving the competitiveness of the German air transport sector in the development of its national aviation policy. Government policies must eliminate burdensome taxation, ensure cost-efficient airport infrastructure to meet demand and enable access to reformed and modernized air traffic management systems. Specifically IATA called for the German government to:
- Abolish the €1 billion German departure tax, which would support job creation, boost trade, and make Germany a more attractive destination, for both tourism and business.
- Impose no further night flight restrictions at German airports. It notes that the 2010 ban on night flights at Frankfurt has seen increased trucking of cargo from Germany to other European air cargo hubs, resulting in higher costs and greater carbon emissions.
- Address uncertainties over the opening of Berlin Brandenburg Airport, which has suffered years of delay and cost overruns. Full operations at Berlin Brandenburg Airport are not now expected to commence before the end of 2017 or even in 2018.
- Take leadership in the modernisation of European air traffic management to address the inefficiencies of the current fragmented air traffic management system that leads to delays, increased costs and unnecessary carbon emissions.
IATA notes that Aviation supports the German economy by underpinning 1.12 million jobs and €77 billion in GDP. It believes that these benefits are under pressure because of onerous taxes, airport infrastructure challenges and the overall inefficiency of European air traffic management. However, the development of a national aviation policy is an opportunity to address these issues and doing so will boost Germany’s economic competitiveness by strengthening the foundations on which aviation provides crucial connectivity.