Lufthansa posts large Q1 loss – European overcapacity takes a toll

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Lufthansa posted a significant first quarter 2019 loss yesterday of US$380 million.

In the same quarter last year it made a profit of US$52m, though mostly on the basis of AirBerlin’s demise and having to take up the slack.

Much of the loss this year was a rise in fuel prices, accounting for $202 million but significantly, Europe-wide overcapacity is a growing problem.

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Three pillars of airline profitability are fuel costs, capacity matching and labour costs. The later Lufthansa has under control with wide ranging pay and productivity agreements, after several years of pilot and cabin crew strikes.

Fuel costs vary constantly and there’s every indication, with up to 3 million barrels a day likely to be removed from the world market, by another outbreak of violence in Libya, on top of US imposed sanctions on Iran, which have reduced their exports, that prices may rise up to $10 a barrel quite quickly to $70. In airline terms this is even more significant than it is to car owners as Avgas is expensive to refine, but untaxed, so any change isn’t cushioned by subsidies or stockpiles, and most Avgas is used within three days of refining, in Europe and the US its often less than 24 hours.

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The overcapacity issue is something only cutting frequencies and aircraft numbers will resolve. This is the hardest to affect as commitments are made to passengers and aircraft need to be used. Short term leases are easily dumped, but the strategic storage of aircraft is expensive, off leasing early is filled with penalty clauses and costs. If the aircraft is owned outright, then only using it to its fullest extent makes business sense – but you can’t keep flying it half empty. Anything less than 75% seat utilisation on any flight is considered poor and unprofitable.

Pricing of course, is damaged by excess capacity as everyone undercuts each other to get those bums on seats. Sooner or later someone has to take the plunge and rein in sales and capacity, or profits vaporise. European airlines are going to have to decide what they do next and really fast.

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