Lufthansa Cargo profits wiped out in Q3

Friday, 03 May 2024

Operating income for Deutsche Lufthansa AG’s cargo division collapsed to near zero during a seasonally weak third quarter, and the company indicated full-year segment earnings would be similarly sour despite expectations for a slight uptick in shipment volumes during the final months of the year.

Lufthansa Cargo’s pretax profit plunged 100%, from $352 million (331 million euros) to $1 million year over year (y/y) behind a 43% drop in core transportation revenue to $771 million due to the airfreight market’s ongoing correction from the pandemic peak when cargo operators raked in cash because grounded passenger planes eliminated a huge amount of supply. 

With economic uncertainty growing amid elevated inventories, freight demand is subdued while the recovery in passenger operations has created excess cargo capacity, resulting in summer rates that were 40%, or more, lower than in 2022. 

Lufthansa Cargo, the 16th-largest airfreight carrier by volume, operates 16 Boeing 777 freighters on long-haul routes and three Airbus A321 converted freighters for same-day e-commerce customers within Europe. Lufthansa Cargo also manages the belly cargo for Lufthansa Airlines, Austrian Airlines, Brussels Airlines, Eurowings, Discover and SunExpress. It is scheduled to receive another factory-built 777 freighter this quarter.

The airline’s cargo capacity across its freighters and passenger aircraft increased 7% and distance-based sales increased 5% y/y. The ratio of cargo space filled dipped nearly a point to 56.4%.

Average unit revenues were 41% lower during the quarter but were 45.6% better than before the COVID crisis.

Load factors and cargo sales for the Lufthansa Group (DXE: LHA) were slightly lower than for Lufthansa Cargo by itself, reflecting the decline at subsidiary Swiss International Air Lines. SWISS manages its own cargo operations.

“Given the marketwide normalization in the wake of the coronavirus pandemic, the Lufthansa Group expects to see a decrease in freight rates and thus a significant decline in revenue [and] … thus predicts an adjusted earnings before interest and taxes significantly below the previous year’s level,” the earnings report said.

Lufthansa Cargo’s finances have deteriorated since the start of the year. Operating income was 92% lower in the second quarter year over year and is down 85% year-to-date through September.

Management echoed recent volume signals from other sources that the market has bottomed out.

“Volumes are gradually ticking up as well, so we forecast tonnage to grow year-on-year in the fourth quarter. Lufthansa Cargo is expected to generate a solid profit in the mid-double-digit millions in the fourth quarter,” CFO Remco Steenbergen said on a call with analysts.

Air cargo volumes have edged up marginally during the past couple of months on a sequential basis, but the traditional late-year shipping surge for the holidays has underperformed recent history. Freight intelligence firm Xeneta reported Wednesday that even with a 2% upswing month over month, volumes are at a five-year low. Pricing has firmed up, with rates now about 30% lower than a year ago. 

Lufthansa Cargo’s operating expenses decreased 9% because of reduced need to charter extra flights, lower fuel expenses and cost initiatives. 

Lufthansa’s cargo business underperformed competitors such as Air Canada, American Airlines, Delta Air Lines, United Airlines, IAG Cargo (British Airways) and Air France-KLM, which experienced third-quarter revenue declines in the 30% to 36% range. Most of them, with the exception of Air Canada and AFKLM, don’t fly freighters.

Lufthansa said it fitted two more 777 freighters with AeroShark technology, a new surface film modeled on shark skin that reduces air resistance and fuel consumption. A total of four Lufthansa Cargo aircraft are now flying with the high-tech coating. AeroShark was developed by Lufthansa Technik and BASF. The film is applied when aircraft face regular maintenance layovers. 

Lufthansa in August promoted Frank Bauer to CFO of Lufthansa Cargo. He previously was controller and head of risk management for the Lufthansa Group.

Lufthansa Cargo operates 11 aircraft under its own brand. Five aircraft are chartered from AeroLogic, a joint venture with DH Express, and operated by AeroLogic on behalf of Lufthansa Cargo. 

Total Group revenues increased 8% to $10.9 billion, a record for the third quarter. The company had a profit of $1.6 billion, the second best in its history, due to strong travel demand and yields that were 25% above 2019 levels.