Lufthansa Cargo overcomes slower demand for big Q3 profit

Deutsche Lufthansa AG’s cargo business in the third quarter bucked the industry trend of falling demand and deteriorating rates amid economic headwinds, delivering strong bottom-line performance that heavily contributed to the overall group’s profitability as it recovers from the COVID-19 crisis.

Ongoing disruptions to worldwide supply chains supported air demand as global trade softened and, combined with a lingering shortfall in capacity across the industry compared to 2019, slowed the fall in freight rates, Lufthansa (DXE: LHA) said in Thursday’s earnings report. The airline was able to outperform the market despite a difficult operating environment, which included diverting flights around Russian airspace because of the Ukraine war and ongoing COVID lockdowns in China. 

Global air cargo demand through September is down more than 2% compared to the same period last year and year over year (y/y) for October is down 16%, according to WorldACD. 

Lufthansa Cargo recorded a 31% increase in revenue to $1.1 billion versus Q3 2021 and nearly double the amount in 2019. Adjusted earnings before interest and taxes rose to $331 million, 10% above last year’s record level. In the first nine months of the year, the cargo subsidiary achieved an operating profit of $1.3 billion and is on track for a full-year figure that exceeds last year’s $1.7 billion record. 

Average cargo yields remained well above pre-COVID levels, especially on routes to Asia, even though airfreight capacity on passenger aircraft increased substantially as the airline restored more international routes in the wake of the pandemic. For the nine-month period, yields were nearly a third higher than in 2021.

Lufthansa Cargo’s third-quarter capacity increased 24% due to increased space availability in passenger aircraft, especially on trans-Atlantic routes. Shipment capacity is now at 80% of pre-pandemic levels.

The extra capacity largely explains why load factors fell 11 points to 55.5 despite a 2% increase in sales based on weight and distance.

Lufthansa Cargo is a top-15 cargo carrier based on volume, with a fleet of 11 Boeing 777 cargo jets. The company also operates five 777s in a joint venture with DHL Express called AeroLogic. 

It expanded capacity in October with the addition of a second converted Airbus A321 freighter that is being used on short- and medium-haul routes in and around Europe in response to rising demand from e-commerce companies for same-day delivery.

Lufthansa said it recently renewed leases for two 777 freighters for seven years until 2031.

The logistics division’s continued revenue and yield growth during Q3 came as a handful of other airlines reporting so far have registered modest revenue declines compared to 2021. It continues to play an outsized role in supporting the financial health of Lufthansa after serving as a lifeline during the pandemic when passenger business disappeared and continues to do so. 

Passenger recovery

The Lufthansa Group, which includes Austrian Airlines, Brussels Airlines and Swiss, nearly doubled revenue and achieved net income of $809 million after losing money in the 2021 third quarter. Nearly half of earnings came from cargo and Lufthansa Technik, the maintenance and overhaul division.  

Due to high demand and yields — up 23% from 2019 — the passenger segment returned to profitability. Demand is high for business class, with leisure travelers increasingly booking premium seats. 

Lufthansa has reduced its debt load by a third since the start of the year and is achieving about 90% of savings targeted for 2024 and beyond under its restructuring program. 

During the period, Klaus-Michael Kuehne, the former chairman and largest shareholder in Switzerland logistics giant Kuehne+Nagel, raised his stake in Deutsche Lufthansa to 17.5% after the German government sold off its remaining interest. Kuehne’s holding company is now Lufthansa’s largest shareholder. 

Lufthansa also reached contract agreements with ground handlers and pilots. A couple of one-day strikes by those unionized groups cost the company $70 million during Q3. 

“The Lufthansa Group has economically left the pandemic behind and is looking optimistically into the future,” Lufthansa CEO Carsten Spohr said in a statement. “After all, the desire to travel and thus the demand for air travel continues unabated. Now we are focusing on the future and launching the biggest product renewal in our history. We are investing in 200 new aircraft and offering perspectives for our employees around the world. It remains our ambition to further strengthen our position among the top five airline groups in the world.”

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