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Weakness In Europe’s Short Haul Market Causes Drop In Lufthansa In Q2 Earnings

Weakness In Europe’s Short Haul Market Causes Drop In Lufthansa In Q2 Earnings
Increasing competition and slack demand in the European air travel industry has resulted in a drop in the earnings of Lufthansa in the second quarter. The airline also issued a warning for the entire airline industry which it said would face challenging times for the rest of 2019.
There was a drop of 25 per cent year on year in the adjusted earnings before interest and tax for the second quarter at €754 million, the German carrier said in a statement on Tuesday. While there was an increase in revenues of 4 per cent year on year to €9.6 billion, the airline reported a drop in its adjusted Ebit margin to 7.8 per cent from 10.8 per cent.
For the low cost wing of the company Eurowings which has been disrupted by the acquisition of some of the operations of bankrupt Air Berlin, the adjusted Ebit losses came in at €16 million during the quarter.
“Our earnings are feeling the effects of tough competition in Europe and sizeable overcapacities, especially on our short-haul routes out of Germany and Austria,” said Ulrik Svensson, chief financial officer. “We are responding to this by further reducing our costs and increasing our flexibility. And with the turnaround plan which we recently presented, we also intend to make Eurowings a sustainably profitable airline.”
After issuing its second profit warning this year, a turnround plan for Eurowings was unveiled by Lufthansa in June. The turnaround plan of the company includes cutting down of costs at its loss making subsidiary by at least 15 per cent by 2022 and Lufthansa warned on Tuesday that the “risks of second-half year business trends falling short of their first-half year levels have increased”.
Despite the warnings, the airline did not revise its forecast and outlook of it achieving an adjusted Ebit margin of 5.5 per cent to 6.5 per cent for the rest of the year. For the entire year of 2019, an adjusted Ebit margin of minus 4 per cent to minus 6 per cent is expected to be reported by an adjusted Ebit margin of minus 4 per cent to minus 6 per cent, Lufthansa said.
"As we move into peak summer, messages of a tough environment continuing should leave investors cautious on demand for the rest of 2019," said Analysts at Bernstein.
There is no sign of backing down from the current fare war in the short haul market of Germany by neither Lufthansa nor Ryanair and headwinds to its earnings will continue top impact in the short term, said Gerald Khoo, analyst at Liberum, in a note to investors.
While the company expected more stable earnings from its service divisions, the performance of the divisions has apparently been under pressure, he added. "A full or partial disposal of the catering division is long overdue, but this could be a positive catalyst if a transaction is concluded," he said. 
Severe competition and softening demand has been affecting the entire short haul market of Europe. Since the end of January, there has been a drop of 30 per cent in the shares of Lufthansa.

Christopher J. Mitchell

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