Lufthansa Says Pandemic Rebound Clouded as War Lifts Oil

(Bloomberg) -- Deutsche Lufthansa AG said the war in Ukraine will cloud prospects for a long-awaited recovery from the coronavirus pandemic as fuel prices climb and flights are diverted to avoid shuttered skies.

Europe's biggest airline cut its annual loss by two-thirds in 2021 as Covid curbs eased, according to a statement Thursday. Earnings this year should show a further improvement, but the Russian assault makes it impossible to provide an estimate, the German company said.

“Major uncertainties regarding the dramatic developments in Ukraine and the economic and geopolitical consequences of the conflict, as well as remaining uncertainties regarding the course of the pandemic, do not allow to provide a detailed financial outlook,” the company said.

Shares of Lufthansa traded 6.3% lower as of 2:23 p.m. in Frankfurt and have fallen 14% since Russian forces entered Ukraine, paring gains this year to 0.3%.

Lufthansa is the first major carrier to provide an earnings update since the extent of disruption from the invasion became clear, with widespread airspace closures that upended travel in eastern Europe and shut the shortest routes to Asia. Oil prices have surged above $110 a barrel, pushing up kerosene expenses, while Lufthansa says the Asia detours will cost a “single-digit-million-euro” amount per month.

Bernstein analyst Alex Irving said that “risks of exposure to the Russian sky remains high” for Lufthansa, mitigated by a relative lack of demand for business travel and routes to Asia following pandemic curbs.

Chief Executive Officer Carsten Spohr said the higher fuel and staff costs of avoiding Russia will be partially offset by not having to pay relatively high overflight fees. The carrier's maintenance arm has ended operations the country, restricting airline access to repairs and spare parts.

Lufthansa posted an adjusted loss of 2.35 billion euros ($2.6 billion) before interest and tax, aided by record cargo revenue. The figure beat its own guidance but fell slightly short of the average analyst estimate.

The carrier predicted improved Ebit as well as free cash flow this year, with improvements from April onwards after a tough first quarter that was impacted by the omicron variant of Covid.

External Costs

Still, increasing external costs will impact the entire airline industry this year, Lufthansa warned. The carrier is currently hedged on 63% of its fuel needs for 2022 at $74 a barrel.

While that's better than many airlines it falls short of the position at low-cost rival Ryanair Holdings Plc, which said Wednesday that it's 80% hedged at $63 a barrel through March next year. Even then the Irish carrier faces extra costs of 50 million euros from the 20% of fuel for which prices aren't protected.

Network carriers IAG SA, the owner of British Airways, and Air France-KLM reported lower degrees of hedging when publishing earnings earlier. 

Lufthansa Chief Financial Officer Remco Steenbergen told reporters the carrier will need to hike ticket prices to offset the rise in fuel and other costs.

Capacity should be above 70% of 2019 levels this year, improving from 40% in 2021, Lufthansa said. The figure should reach about 85% by the summer, with short- and medium-haul routes almost back to normal but inter-continental operations lagging behind.

IAG and Air France-KLM are bringing back seats faster, Irving said, with the BA parent targeting an 85% figure for the full year.

Bookings Gain

February sales were higher than at any time since the start of the pandemic as omicron concerns faded, with bookings for the Easter and summer holidays now almost at pre-pandemic levels. Demand is particularly strong for destinations in the U.S. and the Mediterranean, the carrier said.

The company said it's still planning a partial sale or listing of its Technik maintenance arm in 2023. It reiterated that it aims to sell the AirPlus credit card service and the remainder of its LSG catering business once the market recovers and it can get better prices.

Steenbergen said the company doesn't need to sell assets to hit its immediate cash and debt targets.

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