Lufthansa: DCC Has Neutral Financial Impact But 'Headwinds' In Some Markets

Lufthansa’s controversial new Distribution Cost Charge has not damaged business so far, according to executives during the company's third-quarter earnings call today.

"Implementation of DCC is broadly neutral on the bottom line as we see it today," said CFO Simone Menne. Chairman and CEO Carsten Spohr, cautioning that DCC was "only a few weeks down the line," said it has produced "no change in overall bookings in home markets," meaning Germany, Switzerland and Austria, but “some headwinds” in other markets.

Spohr added that it was "too early to say" what the longer-term impact of DCC will be but stressed that it is only one part of a wider new distribution and sales strategy intended to deliver €300 million in additional revenue over the next three years. He also noted “progress is continuing" in creating new direct distribution options.

"In recent weeks, great progress has been made on developing partnerships with various sales partners," noted the company's earnings report. "One important element here is the continued refinement and implementation of new, direct booking channels." Lufthansa German Airlines chief commercial officer Jens Bischof recently had said The Lufthansa Group is in “advanced talks" with technology providers to implement direct connect solutions.

“Lufthansa is expecting to report the best operating results in its history” for calendar year 2015, Spohr said. Third-quarter figures, which included one month with DCC in place, were positive. Traffic revenue climbed 3.9 percent to €7.3 billion, while passenger numbers rose 2.6 percent, revenue per seat kilometer grew 3.6 percent and load factor increased from 85 percent to 86 percent.

Meanwhile, if Lufthansa's DCC strategy was premised as a cost-savings move, it has not yet paid off. The company reported that its computerized distribution system costs rose by €43 million but did not add further color. The group's new distribution deals have it paying higher rates to GDSs, but those ostensibly are offset by the surcharge.

However, there are problems brewing. “For the remainder of the year, we have to assume the extraordinary performance of the first nine months will not continue,” said Menne. One problem, she noted, is that "demand has weakened noticeably in recent weeks." Another is that the outlook for yield—pricing, in other words—is "significantly weak," according to the presentation that accompanied the call. Stripping out currency fluctuations, quarterly yield fell 3 percent worldwide. It declined 3.9 percent in Europe, 3.6 percent in Asia/Pacific and 6.3 percent in the Middle East and Africa but climbed 0.3 percent in the Americas.

Even when pushed by analysts, Menne and Spohr were vague about reasons for the yield problems, although Menne said, “We believe the pricing environment is deteriorating again.” As the regional figures suggest, competition on long-haul routes from Middle Eastern carriers is a particular problem, and Spohr noted the withdrawal of service to, for example, Abu Dhabi. Neither executive drew any link from declining yield and demand to the DCC. GDSs, however, have pointed out that a move away from their channel could hit yield for Lufthansa because average fares sold through GDSs are higher than others.

In spite of such concerns, as well as worries about more potential strikes by employees, Lufthansa forecasted earnings before interest and tax of up to €1.95 billion for the full year of 2015, up from €1.17 billion in 2014. Lower oil costs have been the main driver, but the group also pointed to a better-than-anticipated customer response to new premium products, to significant improvement in point-to-point traffic and to capacity discipline.