The clouds may be lifting for Europe's national airlines.
Deutsche Lufthansa AG (LHA.XE) and Air France-KLM (AF.FR) Wednesday
reported stronger-than-expected third-quarter earnings partly from
cost-saving programs currently under way, though the German flag
carrier said it will have to step up its cost-cutting efforts to
restore its European air-passenger business to profit.
Hit hard earlier this year by high fuel prices, continued
competition from discount airlines on short-haul routes, and the
euro-zone economic crisis that has reduced demand for business
travel, Europe's two biggest carriers by passenger numbers reported
third-quarter net profit well above analysts' expectations.
The sturdy results, the promise of more cost cutting at
Lufthansa, and relatively optimistic outlook at Air France-KLM were
enough to send their shares sharply higher in early trading.
Lufthansa shares jumped 6.7%. Air France-KLM's rose 7.2%.
The airlines are both in the process of cutting thousands of
jobs to help restore their domestic operations to profitability,
restructuring their airline subsidiaries, keeping aircraft on the
ground rather than flying them empty, and looking at ways to
capitalize on relatively robust demand on many long-haul
routes.
Lufthansa's net profit in the three months through September
rose 30% to 642 million euros ($832 million), a near 30% rise from
a year earlier, as revenue climbed 6.1% to EUR8.31 billion. The
airline said the absence of losses from U.K. regional carrier BMI,
which was previously sold to British Airways parent International
Consolidated Airlines Group SA (IAG.LN), as well as the initial
effects of its EUR1.5 billion cost-cutting program helped offset
the impact of high fuel prices and a strike by cabin crew earlier
this year.
At Air France-KLM, net profit rose to EUR306 million, above
forecasts of EUR267 million and up from EUR14 million a year
earlier. The increase largely reflects a rise of EUR210 million in
the value of fuel-hedging contracts and the first positive effects
of a radical restructuring plan that aims to cut EUR1 billion in
costs and improve efficiency.
The strong performance from the airlines follows a similarly
good third quarter at smaller rival Finnair Oyj (FIA1S.HE), also
benefiting from cost cutting undertaken this year, which reported
sharply higher third-quarter net profit last week.
But like the Finnish airline, Lufthansa warned it will have to
cut costs further if it is to upgrade its fleet of passenger jets
without having to take on too much more debt. At present, Lufthansa
has 168 aircraft on order for delivery through 2018 with a list
price of around EUR17 billion.
"Our current results, and particularly those of [our core brand]
Lufthansa Passenger Airlines, do not suffice to remain competitive
in the long run," said Chief Executive Christoph Franz.
Still, Mr. Franz said there is evidence that the group is
becoming more efficient. Lufthansa is set to exceed its 2012
savings target of EUR280 million with its Austrian Airlines unit
set to return to profit.
New cost-cutting measures will include the bundling of aircraft
maintenance operations across the world into one international
organization. Other measures include a centralization purchasing
across the entire company, through which Lufthansa expects to wring
out savings of EUR500 million.
Lufthansa is sticking to its forecast of turning in operating
profit of around EUR500 million this year, before restructuring
costs of around EUR100 million, compared with EUR820 million last
year. Third-quarter operating profit rose 6.2% to EUR648 million.
Analysts had forecast EUR465 million.
Air France-KLM's yields from passenger operations rose by 6.3%
in the third quarter as traffic increased 0.9%. Passenger revenue
increased 7.9% to EUR5.69 billion, partly due to a favorable
currency effect, but the yield from cargo operations rose by only
0.7%, reflecting the weakness in economic activity.
Write to Jan Hromadko at jan.hromadko@dowjones.com and David
Pearson at david.pearson@dowjones.com
Copyright (c) 2012 Dow Jones & Company, Inc.
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