By Joanna Plucinska, Rachel More and Ilona Wissenbach
LONDON/BERLIN/FRANKFURT (Reuters) -German airline group Lufthansa reported a fall in third-quarter operating profit on Tuesday as its flagship brand struggles with low yields, competition with international airlines and spiralling costs.
Third-quarter operating profit of 1.3 billion euros ($1.41 billion) was largely in line with the expectations of analysts polled by the company, but 9% lower than a year earlier.
"Delayed aircraft deliveries, punctuality issues at our hubs in Germany and regulatory disadvantages are impacting our core brand," CEO Carsten Spohr said in a statement.
The third quarter, which includes the busy summer months for travellers, is usually the strongest for European airlines, but rising costs, unpredictability tied to the crisis in the Middle East and plane delivery delays continue to weigh on results.
Shares in Lufthansa were down 2.68% at 1152 GMT after the results were announced. Shares in Wizz Air, British Airways owner IAG and easyJet (LON:EZJ) also dropped.
Lufthansa's passenger airlines, which include its namesake brand as well as carriers such as Austrian Airlines, Swiss International and Eurowings, generated an operating profit of 1.2 billion euros in the third quarter, down from 1.4 billion euros a year earlier.
The drop was driven mainly by a 234 million-euro decline in the result of its core brand Lufthansa Airlines, the company said in a statement. A slower recovery in corporate travel also contributed, analysts said.
"They probably face the toughest industrial backdrop out of any European airline - they were the most dependent on corporate revenue pre-pandemic," Bernstein analyst Alex Irving told Reuters.
Spohr told journalists in a media briefing that he doesn't believe business travel globally and especially in Germany will return to 2019 levels.
The airline has also repeatedly complained about its struggle to compete with Chinese carriers still able to fly over Russian airspace, prompting Lufthansa to suspend its Frankfurt to Beijing route.
Yields, a proxy for airfares, fell 14% in the Asia-Pacific region in the third quarter, the company reported.
"The fact that Lufthansa now must remove one of its oldest routes, Frankfurt-Beijing, from its flight schedule shows how much the balance of international competition is shifting," a Lufthansa spokesperson told Reuters in an email.
"European airlines are in an extremely unequal competitive position with China, as well as with airlines from the Persian Gulf and Bosphorus."
TURNAROUND
The group has launched a turnaround programme at its core brand in an effort to recover after a difficult earnings year to date. That will be spurred on by stable or rising ticket prices next year, Spohr said, as well as continued demand in bookings.
Lufthansa has already issued two profit warnings this financial year as it grappled with costs tied to strikes.
By 2026, the cost-cutting measures will have a gross effect on operating profit of around 1.5 billion euros, according to the company.
Lufthansa confirmed its outlook for the full year, targeting group operating profit in a range of 1.4 billion to 1.8 billion euros, and maintained 8% as a mid-term target for its operating profit margin. Analysts have cast doubts on whether this can be achieved by 2026.
The profit margin for the 2024 financial year is expected to come in at 4.3%, according to a company-led analyst consensus.
Spohr said that if it wasn't for the poor performance of the core Lufthansa carrier, the group would have already achieved the 8% margin on the back of the airlines' performance.
All in all, the high regulatory and personnel costs in the German market are making it difficult to bounce back, executives said.
($1=0.9251 euros)