Leisure travel demand boosts Lufthansa, but costs bite

On Thursday, Deutsche Lufthansa, the German airline group, expressed optimism regarding travel demand, especially in lucrative premium classes. However, investors remained concerned about high costs eating into profits, causing the share price to fall. Quarter-through-June unit costs at Lufthansa were higher than the previous year, following rival Air France-KLM's decision to increase their forecast for costs this year.


Shares in Lufthansa dropped by 5.4% to 3.35 euros by 0845 GMT. Lufthansa attempted to alleviate worries by stating that it anticipated rising costs to stabilize in the latter half of the year. Furthermore, productivity improvements in 2024 would support a reduction in unit costs. Deutsche Bank analysts remarked that the market was not pleased with Air France-KLM's higher non-fuel unit cost guide last week, and there was a risk of the same happening here. They added that higher costs at Lufthansa would likely be balanced out by higher yields.


Lufthansa said that bookings for August to December were consistently above 90% of pre-pandemic levels, prompting the group to expand its capacity to 88% of the 2019 level in Q3. Since the easing of COVID-19 restrictions, airlines have benefited from a surge in leisure travel, although there has been concern that the growth in demand - and subsequent strong earnings - could lose steam in the autumn season as high inflation begins to squeeze passenger spending. IAG, Lufthansa's rival, stated last month that it was "mindful" of uncertainty in the broader economy, despite reporting a consensus-beating quarterly profit, while Ryanair was cautious about the demand for the remainder of 2023.

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Lufthansa, which owns the Austrian Airlines, SWISS, and Eurowings brands, appeared to be more optimistic about the market outlook, announcing that it would be returning two more A380 superjumbos to scheduled service this year, with more to follow, as well as new Boeing 787s and Airbus A350s in the coming year. On long-haul routes, the increase in capacity will mainly come from an expansion of connections to Asia, given the reopening of major markets such as China and Japan. From April to June, Lufthansa's adjusted earnings before interest and tax nearly tripled to 1.09 billion euros ($1.19 billion), slightly surpassing the consensus for 1.04 billion, from 341 million the previous year. For the entirety of 2023, the airline now anticipates an adjusted EBIT of more than 2.6 billion euros, up from last year's 1.5 billion, as previously predicted.

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