Turbulence ahead for region’s airlines

Lufthansa’s chief executive said on Thursday that Middle Eastern airlines will be forced to introduce “structural changes” to their operating models as passenger demand falls short of capacity.

“I don’t believe we’re seeing temporary challenges and changes,” Carsten Spohr, Lufthansa’s chief executive, told analysts on a conference call to discuss Lufthansa’s full-year financial results.

“I’m very convinced that structural changes are needed, and maybe even more important it’s more and more visible to decision makers [in the Arabian Gulf] that they are needed. There’s just no way to fill all these aircraft on order.”

His comments came only days after Alexandre de Juniac, the International Air Transport Association’s (IATA) director general and chief executive, said that profitability among UAE airlines was expected to be lower in 2017 than in 2016 because of slower demand growth.

Emirates deferred the delivery of 12 A380s in December, after reporting a 75 per cent drop in six-month profits the previous month.

Etihad Airways said in December that it was cutting an undisclosed number of jobs in response to a global economic slowdown.

“Lufthansa has long been wary of the Gulf carriers’ developments,” said John Strickland, the director of JLS Consulting.

“Recently the stance has softened somewhat with the establishment of a partnership with Etihad, however, it’s clear that there is still a good deal of caution and that there is still a desire to see reduced capacity and competition from the region’s airlines as far as this impacts Lufthansa’s own traffic aspirations.”

Lufthansa signed a code-share deal with Etihad in December, encompassing routes between the UAE, Germany and South America, in an agreement seen as a prelude to a much closer relationship between the two national carriers.

“I’m glad to be partnered with that one partner [in the Middle East] who’s proven he’s not going for capacity growth alone but for partnerships and maybe we can play a role in rationalising the situation down there,” Mr Spohr told analysts on Thursday.

Lufthansa is in talks to add further code-sharing routes with Etihad and India’s Jet Airways, in which Etihad owns a 24 per cent stake.

Mr Spohr said that more planes could be added to Lufthansa’s deal to lease 38 planes from Etihad’s German affiliate Air Berlin.

The Lufthansa group on Thursday reported a better-than-expected 4.6 per cent rise in net income for 2016, sending its shares about 5 per cent higher to a one-year high.

However, the group, which also includes Austrian Airlines, Swiss, Brussels Airlines and Eurowings, further said that adjusted earnings before interest and tax would decrease in 2017, after dropping 3.6 per cent to €1.75 billion (Dh6.89bn) in 2016.

Fares across Europe are under pressure after weakening oil prices prompted airlines to add seats just as stuttering economies and a spate of terrorist attacks hurt demand. With crude prices rising, IATA predicts that European carriers will suffer a 25 per cent profit slump this year.​

* with additional reporting by agencies

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