AFLYY Air France ADS (PK)

By Robert Wall and Friedrich Geiger 

European airlines are catching a break amid signs a sharp fall in ticket prices is abating, but rising oil prices are damping enthusiasm.

Deutsche Lufthansa AG on Thursday joined some of its biggest rivals in suggesting unit revenue this year is falling less dramatically than last, on greater capacity discipline and an improving economic outlook.

Air France-KLM SA said last month that bookings at the start of the year were stronger than in 2016, while British Airways parent International Consolidated Airlines Group SA, known as IAG, said last month that corporate bookings on trans-Atlantic routes were recovering, as it projected a rise in operating profit this year.

However, fuel costs are expected to wipe out other savings. Lufthansa's fuel bill is expected to increase by EUR350 million ($375 million) this year, driven by rising oil costs and the strong dollar. The airline group is expected to pay EUR5.2 billion at the pump this year. Air France-KLM also expects to spend more on fuel this year than last. IAG expects fuel-costs roughly on par with the year prior after a sharp retreat in 2016.

Lufthansa has been struggling to close a competitiveness gap with its rivals, particularly rapidly expanding budget airlines such as Ryanair Holdings PLC, Europe's largest carrier by passenger numbers, which is expanding aggressively in Germany. The German flag carrier has been pushing for labor concessions to reduce costs.

The company predicted that adjusted earnings before interest and taxes this year would be slightly below last year's EUR1.75 billion.

Earnings at its big legacy airlines Lufthansa, Swiss, and Austrian Airlines are expected to retreat, though improve for its point-to-point carriers such as budget unit Eurowings. Analysts were encouraged that earnings weren't expected to retreat further.

Shares in Lufthansa were up 4.8% in Frankfurt.

The German airline's net profit rose 4.6% in 2016 to EUR1.78 billion ($1.91 billion). But revenue declined 1.2% to EUR31.66 billion in a market environment that Chief Executive Carsten Spohr called very demanding." He warned of potential more turmoil after a year in which bookings were hit by terrorist attacks throughout Europe.

The airline said its unit costs, excluding fuel and currency effects, fell 2.5% last year and that it will likely see similar reductions in 2017.

On Wednesday, Lufthansa said it had reached an agreement with its pilots union for a long-term labor pact to 2022 that should end repeated strikes. The airline is expecting costs for those pilots to fall 15% as a result. Strikes, not just by pilots, cost Lufthansa EUR100 million last year.

Mr. Spohr said strikes in recent years cost the airline EUR500 million and affected 8 million passengers

Lufthansa also said two moves agreed last year to help consolidate Europe's fractured airline industry should boost earnings this year. Last year, Lufthansa agreed to acquire the share of Brussels Airlines it didn't already own and to rent some planes from rival Air Berlin PLC -- principally to expand its Eurowings budget airline. Mr. Spohr said Eurowings, which had an operating loss last year, would be profitable this year even as its fleet grew to more than 160 planes from around 90.

Write to Robert Wall at robert.wall@wsj.com and Friedrich Geiger at friedrich.geiger@wsj.com

(END) Dow Jones Newswires

March 16, 2017 12:09 ET (16:09 GMT)

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