Lufthansa's Third-Quarter Profit Plummets 9%: Airlines Face Competition and Rising Costs

The German airline group Lufthansa (GER:LHA) has reported a notable decline in its third-quarter operating profit, dropping by 9% compared to last year, which has raised significant concerns for stock traders. For the quarter, Lufthansa's operating earnings reached 1.3 billion euros (approximately $1.41 billion), aligning with the analysts' forecasts but still reflecting the challenges faced by the company amid stiff competition and rising expenses.

CEO Carsten Spohr elaborated on the company's difficulties, pointing out that issues such as delayed aircraft deliveries, scheduling issues at German hubs, and regulatory hurdles are adversely affecting its flagship brand. The summer months, typically the peak season for European airlines, didn't bring the expected relief, with rising operational costs and geopolitical uncertainties, notably the ongoing crisis in the Middle East, impacting performance.

After announcing the results, shares in Lufthansa took a hit, plummeting by 2.68% at 1152 GMT. This downturn wasn't isolated; competitors like Wizz Air, International Airlines Group, and easyJet (LON: EZJ) also saw declines in their stock prices following the news.

The airline's passenger division, which encompasses its primary brand as well as subsidiaries like Austrian Airlines and Swiss International, reported an operating profit of 1.2 billion euros for the quarter, down from 1.4 billion euros in the same period last year. A significant contributor to this decrease was a 234 million-euro drop in profits from its core Lufthansa brand. Analysts suggest that the slow recovery of corporate travel, which has been crucial for the airline, played a role in this downturn.

According to Bernstein analyst Alex Irving, Lufthansa's situation is particularly challenging, citing that the airline had been heavily reliant on corporate traffic prior to the pandemic. Spohr has indicated skepticism about a return to 2019 levels of business travel, especially in Germany. The airline's competitive struggles are exacerbated by the advantage Chinese carriers have enjoyed by flying over Russian airspace—leading Lufthansa to suspend its Frankfurt to Beijing route. In the Asia-Pacific region, airfares fell by 14% in the third quarter, further complicating the company's recovery efforts.

In response to these headwinds, Lufthansa has initiated a turnaround program for its core brand, aiming to restore profitability after a rocky start to the year. The company hopes to benefit from stable or increasing ticket prices in the upcoming year and continued demand for bookings. However, it has already issued two profit warnings this fiscal year due to strike-associated costs. By 2026, the anticipated impact of cost-reduction strategies is expected to yield a gross operating profit increase of approximately 1.5 billion euros.

Lufthansa remains committed to its full-year projection, maintaining an operational profit target ranging between 1.4 billion and 1.8 billion euros, while aiming for an 8% operating profit margin in the mid-term. Nonetheless, doubts linger regarding the feasibility of achieving this goal by 2026, with analysts forecasting a profit margin of just 4.3% for the financial year 2024. Spohr acknowledged that, had it not been for the lackluster performance of the core Lufthansa airline, the group would have likely already met its 8% margin target, highlighting the uphill battle the airline faces due to soaring regulatory and personnel costs within the German market.