Lufthansa's second-quarter results contain a sentence the airline would probably prefer read quickly and moved past: despite hedging more than 80 percent of its fuel needs, adjusted operating profit fell 56 percent to 383 million euros, driven largely by 750 million euros in extra kerosene costs tied to the war in Iran.
For readers unfamiliar with corporate risk management, a fuel hedge is a financial instrument airlines buy specifically so that a war in a major oil-producing region does not do this to their quarterly results. Lufthansa bought one. It covered more than four-fifths of the airline's exposure. The airline's profit was cut in half anyway.
CFO Till Streichert told analysts the company had offset "around 60 percent" of the higher fuel costs through ticket price increases, with further increases planned for the second half of the year. This is also, technically, a hedge against losing money. It is just called "charging customers more" instead. Unlike the other one, it appears to be working exactly as designed.
Strikes by cabin crew unions around the airline's 100th-anniversary celebrations in April cost a further 150 million euros. Lufthansa Cityline, the regional subsidiary, was wound down earlier than planned, cutting roughly 20,000 European flights from the summer schedule. The group has revised full-year guidance down from "clearly above" last year's 1.96 billion euros to a range of 1.7 to 2.2 billion.
CEO Carsten Spohr, asked whether passengers would keep paying, was unambiguous: "The people want to fly, and they can afford it, even at higher prices." Full-year fuel costs are now projected at 8.7 billion euros -- itself 200 million euros lower than May's estimate, because, per Spohr, refining capacity has recovered and new supply chains, including from Nigeria, have come online. Which is to say: the crisis the hedge was bought for is already easing, on the company's own telling, and the hedge still did not do what a hedge is for.
Lufthansa did note one piece of good fortune. Gulf rivals Emirates and Qatar Airways were forced to temporarily close their hubs during the fighting, handing Lufthansa market share it did not have to buy. The Gulf carriers are, in Spohr's words, now back with "everything in the air" and pricing aggressively. No hedge was required for that part.
Nobody on the call asked what, precisely, the 80-plus percent hedge ratio was priced against, or why a war whose fuel-price shock is already normalizing still cost the airline three-quarters of a billion euros before ticket prices caught up. Lufthansa's own numbers answer the question anyway: hedging reduces exposure. It does not, on this showing, eliminate it, and the difference between those two words turned out to be worth 383 million euros in one quarter alone.
Lufthansa operates its own corporate training academy, the Lufthansa Aviation Training campus near Frankfurt, primarily for pilots and cabin crew. Nothing in its published curriculum currently covers derivatives. This publication offers no view on whether that should change. We merely note the gap, and the 383 million euros it adjoins.
X. Voidwriter