Transatlantic Demand, Cargo Help Stanch Losses at Lufthansa

Photo credit:  Lufthansa

Lufthansa’s airlines continued to bleed cash during the second quarter, but the group believes the recovery — fueled first by transatlantic demand — is gathering steam and will be solidly underway by the end of the year.

The group’s network carriers, which in addition to Lufthansa include Swiss, Austrian, and Brussels Airlines, report the transatlantic market has once again become Lufthansa’s most profitable market. This is despite the fact that traffic almost completely originates in the U.S. The Biden administration is expected to lift the restrictions on European citizens entering the U.S., which Lufthansa Group CEO Carsten Spohr says will unleash strong demand for travel. “The North Atlantic is back to being our most important and most profitable intercontinental market, even though we more or less can only sell tickets on one side of the ocean,” he said.

Business travel, which now is a small fraction of 2019 levels, is showing some signs of strength. “I think there’s not a single businessman or businesswoman who does business with the U.S. who doesn’t want to go there in the fall,” Spohr said on the company’s second-quarter earnings call today. But business travel is expected to return more slowly in Europe than in the U.S., where carriers are forecasting that business travel could be 60 percent of 2019 levels in the next quarter, Spohr admitted. He pointed to intra-European travel restrictions for the disparity.

But the group’s real area of strength was shorthaul European traffic, particularly to leisure destinations. Spohr said the carrier will continue to allocate capacity to leisure destinations, both shorthaul and longhaul, through this year. Visiting friends and relatives traffic also is picking up, particularly to Africa and South and Central America. Asia-Pacific traffic remains depressed, although Sporh believes it will start to recover by the end of the year as vaccination rates in several Asian countries ramp up and travel restrictions begin to fall.

Capacity gradually is coming back online. In its network airlines group, Lufthansa’s capacity at the beginning of the quarter was 25 percent of the same period on 2019, but had risen to 40 percent by the end of the quarter. The growth in capacity was even sharper at Eurowings, which operated only 10 percent of its 2019 capacity when the quarter began and ended the quarter at 40 percent of 2019. Load factors at Eurowings rose to 70 percent, again fueled by shorthaul European leisure demand.

Lufthansa ended the quarter with 734 aircraft across all its operating units, or 23 fewer than at the end of last year. Spohr said the group is retiring nine fleet types, including its Airbus A380s, A340-600s and -300s; MD-11s, Boeing 767s and Austrian’s 777s. The group plans to retire 150 aircraft, 115 of which have already been removed from the fleet. The group took delivery of one leased A350 and will eventually shift from being a 90 percent owned fleet to a mix of owned and leased aircraft, Spohr said.

Lufthansa’s non-airline divisions performed strongly and helped offset the losses at its airlines. Lufthansa Technik and catering saw business spike, especially as U.S. carriers added more flights during the summer.

But the real star was Lufthansa Cargo. The unit delivered record profits in the quarter, €326 million ($386 million), up from €299 million in 2020. Spohr attributed the growth to ever-increasing demand for e-commerce shipments, especially in Europe. Yields are high as, with much of the world’s longhaul international flights operating a fraction of their pre-pandemic frequency, belly-hold space is at a premium. Lufthansa is adding another Boeing 777F to its fleet, bringing the total at the end of the quarter to 14. And it is acquiring two A321Fs for European package freight. Lufthansa Cargo reported €640 million in profits in the first half and is on track to report €1 billion in profits by yearsend, “higher than ever before in the history of Lufthansa Cargo,” Spohr said.

The group is focused on trimming costs and has reduced its headcount by 30,000 employees since the pandemic began. Most recently, it reduced its workforce by 3,000 in Germany and will let another 2,000 employees go this year. The group also is seeking to reduce headcount at Swiss by 2,000 employees.

Lufthansa reported a second-quarter loss of €952 million, which is a 43 percent improvement over last year. The airlines division reported losses of €1.2 billion. Revenues rose 70 percent year-over-year to €3.2 billion.