Lufthansa pares growth plans after fare war weighs on profit

Frankfurt. Deutsche Lufthansa AG cut its growth plans after a slide in fares and higher fuel costs weighed on 2018 earnings.

The stock fell the most in 3 1/2 months on Thursday after the German carrier said it will slow capacity increases to 1.9 per cent this summer from the 3.8 per cent previously planned in an effort to bolster prices and cope with limited room for extra flights at airports.

Lufthansa is putting a brake on expansion as it focuses on profitability after a year in which an industry-wide glut in seats combined with severe weather and air traffic control strikes to erode margins. European rivals have warned that a fare war will make for a tough summer, with Ryanair Holdings Plc, the region’s top discounter, cautioning last month that conditions could get tougher.

Chief Executive Carsten Spohr said that earnings had been held back despite the best revenue performance in Lufthansa’s history. Capacity growth across the sector should slow to 3 per cent in Europe this summer, providing some relief for yields, a measure of fares, the airline forecast.

Lufthansa dropped as much as 5.2 per cent, the most since Dec. 4, and was 4.5 per cent lower at 21.80 euros as of 9:18am in Frankfurt. That pares gains this year to 11 per cent after the shares fell 35 per cent in 2018.

The carrier’s adjusted earnings before interest and tax fell 7 per cent to 2.8 billion euros ($3.2 billion) last year, versus an average analyst estimate of 2.75 billion euros. The figure was boosted by a 122 million-euro accounting gain from capitalising engine overhauls.

The company is targeting an adjusted Ebit margin of 6.5 per cent to 8 per cent for 2019, suggesting profitability may erode further from a 7.9 per cent margin in the prior 12 months. Discount arm Eurowings is targeting break even after booking 170 million in costs from integrating jets from failed rival Air Berlin.

Fuel costs are expected to rise by 650 million euros, though that’s lower than previously forecast. Lufthansa on Wednesday said it would buy 40 new twin-engined wide-body jets, helping it retire thirsty four-turbine models that many rivals have already eliminated.