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Deutsche Lufthansa (DE:LHAG) AG halted capacity expansion at its Eurowings low-cost arm after the group’s first-quarter margins were squeezed by rising fuel bills and overcapacity that’s sparked a Europe-wide fare war.
Europe’s biggest airline is abandoning plans to increase capacity at Eurowings by 2 percent this year. Earlier this month, Lufthansa issued a profit warning that attributed a plunge in earnings before interest and tax on fuel prices, cheap airline tickets and tough comparisons with year-earlier figures.
The decision to dial back growth at Eurowings comes after the German carrier in March said it would slow group capacity increases to 1.9 percent this summer from the 3.8 percent previously planned in an effort to bolster prices. Revenues for airlines across Europe have been crimped by a capacity glut and fuel-price squeeze that’s forced eight airlines out of business since the summer.
“We are confident, though, that we will see a recovery in our unit revenues as early as the second quarter,” Lufthansa Chief Financial Officer Ulrik Svensson said. “Our confidence is based above all on our favorable booking levels for the months ahead.”
Lufthansa dropped as much as 3.1 percent in Frankfurt trading. The shares were down 1.1 percent at about 22 euros at 10:10 a.m. They’ve gained about 12 percent this year.
The company has used Eurowings to defend itself from low-cost carriers in its home market, often racking up losses. Having said that Eurowings will break even this year, its parent needs to rein in growth to achieve this, according to Davy Research analyst Stephen Furlong.
The company said Tuesday it still expects an adjusted earnings before interest and taxes margin of between 6.5 to 8 percent this year. Lufthansa anticipates that conditions in the aviation market will improve later this year.
The airline said it expects 2019 fuel costs at its network airlines to be 600 million euros ($671 million) higher than in 2018, above the 550 million euros it previously predicted. Kerosene prices have surged this year as U.S. President Donald Trump ratchets up trade sanctions on Iran, a major crude oil producer.
Lufthansa said earnings at its cargo division slumped amid an ongoing contraction in global trade. Germany’s export champions, users of Lufthansa cargo services, are struggling to find buyers for their products amid simmering trade tensions
The European airline industry is coming off a tough year, with bad weather, air-traffic-control strikes and trade conflicts among factors that have weighed on profit. Irish low-cost giant Ryanair Holdings Plc has warned that fares will remain depressed.
American Airlines Group Inc., the world’s biggest airline, last week cut its earnings forecast due to rising fuel costs and the worldwide grounding of the 737 max.
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