"Lufthansa"

The Lufthansa Group’s recently released Q2 2024 financial results present a complex picture of an airline industry in transition.

While the Group saw a 7% increase in revenues, reaching €10 billion, its profitability took a significant hit.

The operating profit (Adjusted EBIT) fell to €686 million from €1.1 billion in the same period last year, with net profit declining to €469 million from €881 million.

These figures underscore the challenges faced by even the most established players in the global aviation market.

Driving Forces Behind Revenue Growth

The revenue growth was primarily fueled by two key factors:

• An 11% expansion in passenger flight operations, reflecting the continued recovery of air travel demand post-pandemic.
• A robust 16% revenue increase in the Maintenance, Repair, and Overhaul (MRO) segment, highlighting the Group’s diversified business model.

This growth demonstrates Lufthansa’s ability to capitalize on the resurgence of air travel and the increasing need for aircraft maintenance services as global fleets return to full operation.

Headwinds Impacting Profitability

Despite the revenue increase, Lufthansa faced several headwinds that significantly impacted its bottom line:

• Ticket Price Normalization: After a period of high fares driven by pent-up demand and limited capacity, prices are beginning to stabilize across all regions, particularly in Asia.
• Labor Disputes: Strikes at Lufthansa Group companies and external partners resulted in costs exceeding €100 million, highlighting the ongoing challenges in labor relations within the aviation sector.
• Inflationary Pressures: A 10% rise in operating expenses, attributed to both expanded operations and general inflation, squeezed profit margins.
• Capacity vs. Demand Balance: While Lufthansa increased its capacity to 91% of pre-crisis levels, the slight decline in seat load factor to 82% suggests that supply may be outpacing demand in some markets.

Passenger Segment Performance

The passenger airline segment, which includes Lufthansa Airlines, SWISS, Austrian Airlines, and Brussels Airlines, showed mixed results.

While total revenue for this segment grew by 4.5% to €8 billion in Q2, Adjusted EBIT fell to €581 million from €965 million in the previous year.

This discrepancy between revenue growth and profit decline points to the challenges of maintaining profitability in a highly competitive market with rising costs.

Lufthansa Airlines: A Focal Point for Concern

Lufthansa Airlines, the Group’s flagship carrier, emerges as a particular area of concern. The airline’s Q2 Adjusted EBIT of €213 million represents a substantial €300 million decrease from the previous year.

Several factors contribute to this underperformance:

• Weak performance in the key Asia-Pacific market
• Operational inefficiencies
• Aircraft delivery delays causing fleet management issues
• Rising costs in Germany
• New collective labor agreements increasing personnel expenses

In response, Lufthansa Airlines has launched a comprehensive turnaround program. This initiative aims to enhance revenue through a range of focal points.

These include premium product offerings, improving customer experience, optimizing network planning and productivity, fleet simplification, and expanding subsidiary airlines.

This is a broad scope, and the success of this program will be crucial for the Group’s overall performance in the coming years.

Market Dynamics and Future Outlook

Despite the challenges, the global demand for air travel remains robust, particularly among leisure travelers.

Lufthansa Group reports that bookings through October are more than 10% higher than last year, with strong interest in both European and long-haul destinations.

The continued popularity of premium class tickets is a positive sign for potential revenue growth.

However, the Group has adjusted its annual outlook, now expecting an Adjusted EBIT of €1.4 to €1.8 billion for the 2024 financial year.

This revised forecast reflects the ongoing challenges at Lufthansa Airlines and the critical importance of Lufthansa Cargo’s performance in the fourth quarter.

Conclusion

Lufthansa Group’s Q2 2024 results reflect the complex dynamics of the post-pandemic aviation industry.

While passenger numbers and revenues are growing, profitability remains under pressure due to a combination of internal and external factors.

The Group’s ability to successfully implement its turnaround program at Lufthansa Airlines, manage costs, and navigate the evolving competitive landscape will be crucial in determining its future success.

As the industry continues to evolve, Lufthansa Group’s performance serves as a bellwether for the broader aviation sector. It highlights both the opportunities and challenges that lie ahead in an increasingly competitive and cost-sensitive market.

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The European Commission has initiated a comprehensive investigation into the €6 billion German state aid recapitalization measure for Deutsche Lufthansa AG.

This probe aims to determine whether the state aid aligns with EU regulations. The decision by the EU Commission to launch this investigation follows a complex legal journey.

It highlights the delicate balance between supporting critical industries and maintaining fair competition in the European market.

Aid Package Background

The Lufthansa support grant was initially approved in June 2020 under the COVID Timeout Framework. Basically, the aid package was designed to bolster Lufthansa’s financial position during the unprecedented challenges posed by the coronavirus pandemic.

However, the General Court annulled this decision in May 2023, casting doubt on the measure’s compatibility with EU state aid rules.

The aid package consists of three main components:

• A €306 million equity injection
• A €4.7 billion Silent Participation I, resembling a non-convertible equity instrument
• A €1 billion Silent Participation II, structured as a convertible debt instrument

In exchange for this substantial support, Lufthansa agreed to several conditions. These included restrictions on dividend payments, limitations on management compensation, and the divestment of up to 24 slots per day at Frankfurt and Munich airports.

These commitments were intended to offset potential market distortions resulting from the state intervention.

EU Commission’s Investigation Focus

The Commission’s new investigation will focus on several key areas:

• Lufthansa’s eligibility for the aid
• The necessity of mechanisms to encourage state exit from the company’s capital
• Share pricing considerations for potential conversion of Silent Participation II
• Lufthansa’s market power at airports beyond Frankfurt and Munich, particularly Dusseldorf and Vienna
• The appropriateness of structural commitments imposed on the airline

This thorough examination allows both Germany and interested third parties to provide input. It thus ensures a comprehensive review of the aid package’s implications.

The Commission emphasizes that the investigation’s initiation does not predetermine its outcome.

Summary: A Complex Balancing Act

The Lufthansa case underscores the complexities of balancing economic support for crucial industries with the preservation of fair competition within the EU.

As the aviation sector continues to navigate the aftermath of the pandemic, the outcome of this investigation could set important precedents for future state aid decisions in the region.

The Commission’s approach reflects its commitment to maintaining a level playing field in the European market while acknowledging the extraordinary circumstances brought about by the COVID-19 crisis.

As the investigation unfolds, stakeholders across the aviation industry and beyond will be watching closely, recognizing the potential far-reaching implications of the final decision.

This case highlights the ongoing challenges faced by governments and regulatory bodies in supporting key industries during times of crisis while adhering to established competition rules.

The final verdict on Lufthansa’s aid package could influence future policy approaches to industry support and market regulation in the EU.

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The European Commission has granted conditional approval for Deutsche Lufthansa AG’s (Lufthansa Group) planned acquisition of a 41% stake in ITA Airways (Italia Trasporto Aereo S.p.A.).

This move marks a significant development for both airlines, paving the way for closer integration while strengthening Lufthansa Group’s presence in Italy.

Carsten Spohr, CEO of Deutsche Lufthansa AG, expressed enthusiasm about the approval, highlighting the benefits for passengers, employees, and the European aviation industry.

He anticipates welcoming ITA Airways and its talented workforce to the Lufthansa Group family soon.

This move, Spohr believes, sends a positive signal for a robust European air traffic sector that can compete effectively on a global scale.

Acquisition Details and Timeline

The acquisition, originally agreed upon in May 2023, will see Lufthansa Group invest €325 million through a capital increase to secure the minority stake.

The agreement includes options for Lufthansa to acquire the remaining shares at a later date.

Following the implementation of specific remedies agreed with the EU Commission and potential approval from other non-EU authorities, the transaction is expected to finalize in Q4 2024.

Upon closing, ITA Airways will become the fifth network airline within the Lufthansa Group, retaining its brand identity.

The Italian carrier will leverage synergies across various areas, including global sales, the Miles & More loyalty program, and aircraft and fuel purchasing.

This integration is expected to strengthen ITA Airways’ financial standing and solidify Italy’s position as Lufthansa Group’s fifth “home market,” becoming its second-largest revenue generator after Germany and the USA.

Focus on Customer Benefits and Competition Enhancement

Lufthansa Group and ITA Airways plan a swift integration process. With nearly 5,000 ITA Airways employees joining the fold, the Lufthansa Group’s corporate culture will gain further international diversity.

Rome-Fiumicino, a prestigious five-star Skytrax-rated airport, will become Lufthansa Group’s sixth hub and its southernmost gateway.

Customers will benefit immediately through code-sharing, allowing them to combine offerings from both airlines, creating over 1,000 new transfer options, particularly to South America, North Africa, and the Middle East.

ITA Airways will further enhance competition within Italy, currently dominated by low-cost carriers.

The airline’s existing focus on quality and premium service, combined with its “Volare” loyalty program’s integration with Miles & More, will provide passengers with a seamless travel experience.

Additionally, lounge access will be mutually available, and ITA Airways is aiming for Star Alliance membership in the near future.

Strengthening Global Position

“The acquisition of ITA Airways strengthens Lufthansa Group’s internationalization,” Carsten Spohr emphasizes.

This move expands the network and destinations offered to customers, extends the premium offering with the Rome hub, and strategically connects the network to future markets in the southern hemisphere.

Despite concessions made to address competition concerns, Spohr believes the investment strengthens Lufthansa Group’s global position.

The company is committed to making ITA Airways a successful part of the group, ensuring its future as a prominent international airline brand that will contribute to Lufthansa Group’s continued European leadership.

While the approval allows for commercial and operational cooperation upon closing, both airlines will operate independently until then.

The agreed-upon concessions with the European Commission involve transferring slots at Milan-Linate Airport to a competitor.

It will also mean surrendering certain routes in neighboring markets where Lufthansa Group and ITA Airways currently compete.

Additionally, feeder flights from Rome to competitor hubs will improve competition on long-haul routes from Rome to North America.

About ITA Airways

Founded in November 2020 and commencing operations in October 2021, ITA Airways boasts a modern fleet of 96 Airbus aircraft and a workforce of nearly 4,860 employees.

The Rome-based carrier transported almost 15 million passengers last year and currently serves 69 destinations.

Its hub in Rome presents an ideal location for expanding the joint network towards Africa and Latin America, offering passengers enhanced connectivity to the southern hemisphere.

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The Lufthansa Group is taking a proactive step towards sustainability with the introduction of an Environmental Cost Surcharge.

This surcharge aims to offset the rising costs associated with stricter environmental regulations, ultimately paving the way for a more sustainable future for air travel.

A Growing Regulatory Landscape

The impetus behind the Environmental Cost Surcharge lies in a wave of environmental regulations.

The European Union’s (EU) “Fit for 55” program mandates a minimum two percent blend of Sustainable Aviation Fuel (SAF) in flights departing from EU member states starting January 1, 2025.

This represents a significant shift from traditional jet fuel, offering a more environmentally friendly alternative.

Additionally, adjustments to the EU Emissions Trading System (EU ETS) and international programs like CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) further contribute to the rising costs for airlines striving for greener skies.

Balancing Sustainability with Affordability: Impact on Travelers

The Environmental Cost Surcharge will apply to all Lufthansa Group flights departing from a broader region encompassing the 27 EU countries, the United Kingdom, Norway, and Switzerland.

Travelers can expect a surcharge ranging from €1 to €72, depending on the specific route and fare class.

This fee will be levied on all tickets issued from June 26, 2024, for flights departing on or after January 1, 2025.

The exact surcharge amount will be transparently displayed during the booking process, allowing travelers to make informed choices.

Lufthansa Group and Sustainability

The Environmental Cost Surcharge is just one piece of the puzzle in the Lufthansa Group’s comprehensive sustainability strategy.

The Group remains dedicated to achieving carbon neutrality by 2050, a bold and ambitious goal. To realize this vision, they have set a target of halving their net CO₂ emissions compared to 2019 levels by 2030. This is multi-pronged approach and includes several key strategies.

Fleet Modernization

Investing in newer, more fuel-efficient aircraft is a cornerstone of the Group’s strategy. Modern planes emit less CO₂ per passenger, significantly reducing their environmental impact.

Flight Operation Optimization

Utilizing innovative flight planning techniques and air traffic management systems allows for shorter routes, smoother operations, and ultimately, less fuel consumption.

Sustainable Aviation Fuel (SAF)

The Lufthansa Group actively advocates for the development and wider adoption of SAF. This cleaner-burning fuel offers a significant reduction in lifecycle CO₂ emissions compared to traditional jet fuel.

Empowering Sustainable Choices

The Group recognizes the importance of passenger and corporate participation in achieving sustainability goals.

They offer programs that allow passengers on Lufthansa flights to offset their carbon footprint through various initiatives. Additionally, they collaborate with businesses to develop sustainable cargo transportation solutions.

Understanding the Regulatory Landscape

For a deeper understanding of the rising costs prompting the Environmental Cost Surcharge, let’s delve into the key environmental regulations shaping the aviation industry:

• EU SAF Quotas: As mentioned earlier, the EU’s “Fit for 55” program mandates a gradual increase in SAF blending, reaching 70% by 2050.

While this shift is crucial for long-term sustainability, it presents a significant cost challenge for airlines in the near future.

• EU Emissions Trading System (EU ETS): Established in 2012, the EU ETS controls CO₂ emissions within the European Economic Area (EEA) through a certificate trading system.

Airlines must acquire and surrender allowances based on their emissions, creating a financial incentive to reduce their carbon footprint.

Similar programs operate in Switzerland (CH-ETS) and the UK (UK-ETS) for flights between these regions and the EEA.

• CORSIA: This international program was established by the International Civil Aviation Organization (ICAO) in 2016.

CORSICA offsets CO₂ emission growth in international aviation by requiring airlines to purchase certificates since 2021.

This scheme covers emissions exceeding a baseline established by the ICAO, representing 85% of 2019 aviation emissions for the period 2024-2035.

The Bottom Line

The Lufthansa Group’s Environmental Cost Surcharge signifies a proactive approach towards a more sustainable future for air travel.

While it represents an additional cost for travelers on Lufthansa flights, it highlights the Group’s commitment to environmental responsibility and transparency.

By collaborating with regulatory bodies, fuel producers, and passengers alike, the aviation industry hopes to chart a course towards a greener future.

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Lufthansa City Airlines, the newest member of the Lufthansa Group, is ready commence flight services.

Launching operations on June 26, 2024, the carrier will take to the skies with its first flight (VL2508) departing Munich at 9:10 AM local time.

This inaugural service will be operated by the carrier’s Airbus A320neo aircraft, carrying passengers to Birmingham Airport (BHX).

Shortly after, on July 23rd, a second aircraft – an Airbus A319 – will join the fleet, serving the routes to Berlin, Hamburg, and Bordeaux.

Flight Operations Commence

This marks the beginning of Lufthansa City Airlines’ ambitious expansion plans, which include adding more destinations across Europe and continually growing their network.

The airline boasts a forward-thinking fleet built around the fuel-efficient Airbus A320 family and the modern Airbus A220-300.

Passengers can expect the renowned Lufthansa customer experience, coupled with the comfort and efficiency of these cutting-edge short and medium-haul aircraft.

“Lufthansa City Airlines is firmly committed to establishing itself as a leader in the European short and medium-haul market, operating from key hubs like Munich and Frankfurt,” says Jens Fehlinger, Managing Director of Lufthansa City Airlines.

“This significant investment in the future strengthens Germany’s position as a major aviation hub and creates exciting new job opportunities.”

Route Coverage and Growth Plans

Bookings for Lufthansa City Airlines flights have been open since April through the familiar Lufthansa Group sales channels.

The initial schedule features flights from Munich to Birmingham, Düsseldorf, Cologne, Hanover, and Bremen. Come July 27th, the second Airbus A319 will take over routes to Bordeaux, Hamburg, and Berlin.

The airline’s growth plans extend beyond the initial five Airbus A320 family aircraft. In the coming year, Lufthansa City Airlines will actively add at least eight more A320neos and acquire additional A319s to their fleet.

The Airbus A220-300 takes the lead position in Lufthansa City Airlines’ future fleet. Airbus will begin deliveries of an order of 40 aircraft in 2026.

About the Lufthansa Group

The airline Group was originally formed in 1994 through the merger of Deutsche Lufthansa AG and Deutsche BA. Since then, the Lufthansa Group has grown into a global aviation powerhouse.

It comprises several renowned airlines, including Lufthansa, SWISS, Austrian Airlines, Eurowings, and now, Lufthansa City Airlines.

Together, these carriers offer an extensive network spanning over 330 destinations in more than 100 countries.

The group is a member of the Star Alliance, the world’s largest airline alliance. This provides passengers with even greater connectivity and travel options.

Summary

Bookings for Lufthansa City Airlines flights have been open since April through the familiar Lufthansa Group sales channels.

The initial schedule features flights from Munich to Birmingham, Düsseldorf, Cologne, Hanover, and Bremen.

Come July 27th, the second Airbus A319 will take over routes to Bordeaux, Hamburg, and Berlin.

As Lufthansa City Airlines expands its network and fleet, passengers can expect a seamless booking experience. This is achieved through established Lufthansa Group channels.

With the launch of this new airline, the Lufthansa Group further strengthens its position as a leader in European aviation.

It offers short-haul passengers a wider range of travel options, modern aircraft, and the trusted Lufthansa customer experience.

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 Lufthansa Cargo is expanding its reach in southern Germany with the launch of freighter operations from Munich Airport (MUC), starting July 6, 2024.

This marks a first for the hub, which will now utilize an A321 freighter for a twice-weekly connection to Istanbul Airport.

This new route complements Munich’s existing belly network, offering increased capacity and flexibility.

Munich Airport Launch

“We’re excited to provide our customers with this enhanced service,” said Ashwin Bhat, CEO of Lufthansa Cargo.

“The new freighter connection strengthens our global network and offers businesses in southern Germany a reliable and efficient option for air cargo transportation.”

“Munich Airport boasts ideal infrastructure for fast and dependable cargo movement, further facilitating global trade through this key European hub.”

“This launch reflects our commitment to continuously aligning our network with evolving customer needs.”

Jost Lammers, CEO of Flughafen München GmbH, echoed the positive sentiment. “The introduction of regular cargo flights to Istanbul by Lufthansa Cargo is a significant development for both Bavarian exporters and Munich Airport.”

“The airport’s growing cargo importance is evident in the above-average growth rates we’ve seen this year. Lufthansa Cargo’s presence will further solidify Munich’s position as a leading cargo hub.”

Munich Cargo Hub

Lufthansa Cargo’s Munich hub spans an impressive 38,000 square meters. Notably, it incorporates the state-of-the-art, CEIV-certified Pharma Hub MUC.

This is specifically designed for the optimal storage and handling of temperature-sensitive pharmaceutical products.

This specialized facility, along with the extensive RFS network for seamless road transportation, allows Lufthansa Cargo to handle a vast array of goods and product categories at the Munich hub.

Previously, cargo movement primarily relied on belly capacity aboard Lufthansa, Brussels Airlines, Discover Airlines, Austrian Airlines, and SunExpress passenger aircraft.

This expansion by the carrier signifies a significant boost for Munich Airport’s cargo operations and strengthens its position as a crucial European airfreight hub.

With the new freighter service and advanced facilities, businesses in southern Germany gain a reliable and efficient channel for global trade.

About Lufthansa Cargo AG

Revenue of 3.0 billion euros and a transport performance of 7.5 billion freight ton kilometers was acheived in 2023. This firms Lufthansa Cargo as one of the world’s leading companies in the transport of airfreight.

The company currently employs around 4,150 people worldwide. Lufthansa Cargo’s focus is on the airport-to-airport business.

The route network covers around 300 destinations in more than 100 countries. It employs both freighter aircraft and cargo capacity from passenger aircraft.

These are operated by Lufthansa, Austrian Airlines, Brussels Airlines, Discover Airlines and SunExpress, as well as trucks. The majority of the cargo business is presently handled via Frankfurt Airport.

In 2023, important milestones were reached, such as the investment in the continuous expansion of the B777F fleet.

The carrier also saw the expansion of short- and medium-haul networks with A321 freighters. Last year also saw the continuation of its Sustainable Aviation Fuel program.

In 2024, Lufthansa Cargo plans to successively equip its B777F fleet with Sharkskin technology, implement further digital services and contribute to reducing CO2 emissions through sustainable logistics solutions.