Lufthansa Group has reported the best financial result in its history with profits soaring 70 percent to some €3 billion in 2017. The Group said its cost-cutting program had prompted the jump in profits, but expects earnings to slip this year primarily due to fuel price increases as well as lack of pilots and crew.

Lufthansa (LHAB) (LHA) , Germany’s biggest airline, released its annual financial report for 2017 on March 15, 2018, stating the group had achieved the “best result in its history”, benefitting from the bankruptcy of its smaller rival Air Berlin (AB1) last year. However, the company’s growth plans for this year are less optimistic with ongoing issues, meanwhile, competition in Germany’s market increases.

Profits record

According to its financial statement, Lufthansa Group – which includes Swiss, the newly bought Brussels Airlines, Austrian Airlines and budget brand Eurowings – achieved its best-ever results in 2017, with total revenues amounting to €35.6 billion ($44 billion), a 12.4 percent increase on the previous year, while margins rose almost three percentage points to 8.4 percent.

According to Carsten Spohr, Chairman of the Executive Board & CEO of Deutsche Lufthansa (LHAB) (LHA) , “Our endeavors of the past few years are paying off. Our modernization has a sustainable impact. We have achieved the best result in the history of our company.”

Lufthansa’s (LHAB) (LHA) adjusted earnings before interest and tax were €2.97 billion ($3.67 billion), compared to €1.75 billion ($2.16 billion) in the previous year, an increase of around 70 percent. Unit revenues rose 1.9 percent in 2017, and were up 2.3 percent in the fourth quarter.

Lufthansa (LHAB) (LHA) claims that its earnings growth was primarily driven by group’s airlines, including cargo. With a combination of cost reductions and strong demand, Lufthansa Cargo improved its adjusted EBIT by almost €300 million ($370 million) to €242 million ($298 million), the statement says.

The Group’s leading brands saw adjusted profits rise almost 50 percent to €2.3 billion ($2.8 billion) with a margin that reached almost 10 percent. Eurowings achieved a 7.3 percent margin with earnings of around €100 million ($123 million).

In its 2017 financial report, the company states it was able to lower its passenger airlines’ unit costs excluding fuel and currency factors. “This is in particular as passenger related costs were actually up due to higher load factors, the variable remuneration was higher in light of strong result development, and additional costs because of compensation paid for the flight cancellations at Air Berlin (AB1) burdened our cost as well,” says Ulrik Svensson, CFO of Deutsche Lufthansa (LHAB) (LHA) . “Excluding these one-off effects, we reduced our unit costs by 1.8 percent,” he added.

Based on the improved results, Lufthansa (LHAB) (LHA) proposes a dividend of €0.80 ($0.90) per share, a 60 percent increase of the pay-out compared to 2016. The company states it would aim to maintain this minimum level of dividend payment in the coming years.

For 2018, Lufthansa (LHAB) (LHA) anticipates a stable unit revenue development and further reduction of unit costs by 1 to 2 percent. Adjusted EBIT for the year expected to be only slightly below its record in 2017. “We will continue to consistently pursue our modernisation,” said Spohr. “And in doing so, we will retain our clear focus on reducing our costs and at the same time raising our quality. This is the only way to sustainably increase our profitability.” Spohr’s contract as chief executive was extended on March 14, 2018, for another five years.

However, Lufthansa’s (LHAB) (LHA) fuel bill is anticipated to be roughly €700 million ($863 million). The company says the rise would be “largely offset” by cost cuts but not entirely, which means its record performance is unlikely to be repeated.

Competition in home market

Lufthansa (LHAB) (LHA) has seen its shares surge by 85 percent over the last year, establishing a near monopoly in the service of German market. Following the collapse of Air Berlin (AB1) , in October 2017 Lufthansa (LHAB) (LHA) took over about 50 percent of its rival‘s assets including grounded planes and airport slots to add flights. At the time, the company seemed poised to consolidate 95 percent of Europe’s biggest market, New Europe news agency explains.

Due to competition concerns, Lufthansa (LHAB) (LHA) had to give up its plan to acquire the Austrian leisure carrier Niki from Air Berlin (AB1) , and is now in a race with other carriers such as EasyJet and Ryanair to fill the gap left in the market by the collapse of what was once Germany’s second-largest airline, Reuters reports.

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Lufthansa announced quitting the pursue of Niki as part of the latest concessions made on December 13, 2017 in the course of the intended acquisition of parts of the Air Berlin Group. Consequently, Niki ceased operations.
 

EasyJet and Ryanair have both used the failure of Air Berlin (AB1) to jump-start their operations in Germany, where low-cost carriers were lacking. Thus, Lufthansa (LHAB) (LHA) is now adopting a more cautious approach, focusing instead on expanding its budget unit Eurowings, news agency Skift writes.

However, the build-up of Eurowings has been taking longer than expected, which is one of the reasons why the Lufthansa (LHAB) (LHA) group will trim its capacity plans – the initially planned capacity of 12 percent increase that the company announced back in January 2018, is now set at 9.5 percent for this year.

The concerning issue that the German airline is facing are the delivery delays of the ordered A320neos, following subsequent Pratt & Whitney engine problems. Lufthansa (LHAB) (LHA) currently has 10 A320neos in its fleet compared to expectations for 20. In addition, there have been delays to deliveries of the Bombardier CSeries, Reuters summarizes.

The German carrier says it is struggling with the lack of aircraft and crew, and with other carriers expanding, there is little spare capacity in the market available to rent via wet leases. “We have a nice problem - too many passengers and too few planes”, Spohr was quotes as saying by Reuters.

Lufthansa (LHAB) (LHA) is therefore in talks with Niki Lauda on leasing crewed planes from his Laudamotion airline. Lauda bought Niki, the airline he founded but which ceased operations following the collapse of Air Berlin (AB1) , after Lufthansa (LHAB) (LHA) dropped its plans to purchase it.

The Lufthansa Group, with its subsidiaries – Eurowings, Swiss, Brussels Airlines, and Austrian Airlines – has recently overcome an industrial crisis. After acquiring 3000 pilots from Air Berlin (AB1) , the German carrier intended to transfer them to Eurowings, but the pilot union rejected the labor agreement proposal, refusing the prospects for the airline to promptly take on the former Air Berlin (AB1) staff in November 2017. Eventually, Lufthansa (LHAB) (LHA) was able to settle with its 5,400 pilots with a single one-off payment of €582 million ($718 million), Skift writes.

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Lufthansa announced signing collective labor agreements with German Airline Pilots Union Vereinigung Cockpit on December 14, 2017.