Europe's Winter Doldrums

Unlike their counterparts in the United States, Lufthansa Group and Air France-KLM haven't figured out winter yet. Both reported big first quarter losses this week.

Dear readers,

We often hear that full-service Northern Hemisphere airlines always lose money when demand ebbs in the first quarter and that they spend the rest of the year trying to make it up. But some U.S. airlines this year proved that doesn’t need to be the case: Delta made a small profit, and United and Alaska claimed they would have made money if not for the Boeing 737 Max 9 grounding.

In Europe, though, two of the continent’s top airline groups are a long way from breaking even in winter. Lufthansa Group and Air France-KLM reported first quarter results on Tuesday, and the numbers were not good. Lufthansa Group, which struggled to contain intermittent worker strikes and cited softness in some markets, recorded a net loss of €734 million ($785 million U.S.) on total revenues of €7.4 billion. Even by first quarter standards, this was a rough result, as CEO Carsten Spohr made clear on Tuesday's earnings call.

"In our industry, the first quarter is the weakest due to seasonal factors, but nevertheless surprising, unfortunately — in a negative sense — is the size of our quarterly loss this year," he said.

His competitors at Air France-KLM, who did not have such acrimonious battles with labor in the first quarter, didn't do that much better. The group reported a net loss of €480 million on total revenues of €6.7 billion.

Beyond Lufthansa’s dicey relations with labor, European network airlines faced some first quarter issues that U.S. carriers did not, including more tepid short-haul demand, a slower recovery for managed corporate travel, and a pullback in the air cargo market, which accounts for more of their revenue than at U.S. airlines. They have also been hit harder by geopolitical issues, including the closure of Russian airspace, which makes many Asia routes take longer, and instability in the Middle East, where they fly more capacity than U.S. carriers.

The good news is that both Lufthansa Group and Air France-KLM report robust transatlantic demand, and with the busy spring and summer travel season nearly underway, the second and third quarters should be better. Longer term, they'd probably like to stem the first quarter losses, as United and Delta have done, but that's a problem for next year.

Let's look at the most interesting items from both earnings calls. First, to Lufthansa Group.

Spohr casts a lot of blame on outside forces

After admitting that a huge chunk of the group's losses could be blamed on strikes called by some Lufthansa (the airline) workers in the first quarter, which cost about €350 million, Spohr turned outward, telling analysts about all of the factors outside the company's control that are keeping it from reaching its potential.

First, the situation in the Middle East has "deteriorated" in recent months, which “has not only led to repeated cancellations of flights into the region, but it has also driven up the price of oil," Spohr said.

Second, he said, is taxes and fees, along with government regulations. Spohr told analysts that the costs, fees and charges assessed in Germany have increased by more than 80 percent since 2019. And he criticized yet another new tax increase that raised the Germany air traffic tax by about 20 percent starting today. "Companies like Lufthansa can compensate by flying more internationally, but for some parts of Germany, this means decreased connectivity," Spohr said. The CEO also bemoaned a new EU mandate requiring airlines to use a certain amount of Sustainable Aviation Fuel on every flight, beginning next year.

Third, Spohr took a swipe at the group's vendors and contractors, some of whom have not delivered what they promised.

"Various bottlenecks continue to limit the supply side of our industry," he said. "Delayed aircraft, delayed seats, delayed engines, unplanned engine overhauls, ongoing training requirements, [and,] in some cases, staff shortages at our ... airports and ground handling companies. As a result, our growth in the Lufthansa Group is lower than originally planned."

On last week’s episode of The Air Show (my podcast with Jon Ostrower and Brett Snyder), I noted that not all of these constraints are bad; on Tuesday, Spohr noted some of the positives. The most obvious one: the group owns Lufthansa Technik, a MRO that makes good money helping airlines extend the lives of older aircraft they now must keep because they can't get new ones. There’s also capacity. When airlines can’t get airplanes, seat supply drops and fares should rise.

"If a car company lacks production of cars, they can make it up in double shifts, night shifts, weekend shifts," Spohr said. “That will not work, neither in Seattle, nor in Toulouse. So these airplanes not being produced right now will be lacking for many years in the industry. And in my view, [this] will have a very healthy impact on the No. 1 formula of success for our industry, which is demand versus supply.”

Photo by Lukas Souza on Unsplash

Lufthansa is investing in digital solutions

It's an open secret that U.S airlines, especially United and Delta, are far ahead of the rest of the world with their digital offerings. Lufthansa Group is finally planning to catch up by adding features United and Delta have had for years. Spohr promised more customers soon will be able to track their bags on the mobile app and rebook themselves (or request refunds) during irregular operations. They'll also be able to book award seats on the mobile app.

European point of sale is improving

United, a Lufthansa Group joint venture partner, recently cited weakness in European point-of-sale, particularly in Germany. But for Lufthansa, Spohr said that business is improving.

"Momentum in our home markets has picked up markedly in the past couple of months, catching up with the existing strength of the U.S. market, which has been visible for quite some time," he told analysts. “We expect ... in summer, a strong performance in the intra-European travel, as well as a continued strength on the transatlantic now driven by good demand from both ends.”

Overall, the group is bullish on the next six months. CFO Remco Steenbergen said it’s a little early to make concrete predictions, but he told analysts to expect a “flattish kind of yield, perhaps a little bit up,” for the third quarter. About 40 percent of the third quarter is booked, so far, he said.

"There's still a significant part open for July, August, or September, which we still have to work on in the coming months," he said.