Thursday, November 24, 2011

Lufthansa Halts Investment

FRANKFURT—German air carrier Deutsche Lufthansa AG said Thursday it is taking the drastic step of halting investment in its business for six months to counter rising financing costs, the latest sign of how economic uncertainty is hurting the airline industry.

Lufthansa said the move affects all the group's divisions but will exclude investment in its aircraft fleet and necessary operational goods, a spokeswoman said. She didn't say how much the company aimed to save.

Lufthansa has ordered 202 aircraft through 2018 with a list-price value of €19 billion. These are unaffected by the stalled investment.

The company warned at the end of October that persistent economic uncertainty is clouding the aviation industry's growth prospects and that cost-cutting measures introduced so far won't be enough to offset weakening demand.

Last week, its German low-cost airline Air Berlin Plc also gave a downbeat earnings update, saying it no longer expects to post an operating profit in 2011 and gave a more pessimistic outlook for next year due to persistently high oil prices and increasingly uncertain economic prospects.

It reported a sharp drop in third-quarter profit, which it blamed mainly on Germany's aviation tax and weak demand for air travel to North African holiday destinations due to the political upheaval in that region.

Pressure on airlines is being felt elsewhere in Europe too. Air France-KLM is preparing an "action plan" that will be announced in the first quarter of 2012 after the company issued a profit warning on Nov. 9. It said that current cost-savings efforts won't be enough to offset the steep rise in fuel costs, volatile currency movements and the prospect of waning airline traffic in Europe.

It expects to post an operating loss in the three months through Dec. 31 and for all of 2011. However, in September the company decided to go ahead with plans to buy 100 wide-bodied airliners, split evenly between Airbus and Boeing Co. The airline had €3.4 billion of cash at the end of September, as well as credit lines for a total of €1.85 billion.

Despite the problems faced by its own sector, Lufthansa's announcement comes on the heels of positive macroeconomic data from Germany, and doesn't represent sentiment within other sectors of the economy.

Germany's Ifo research institute showed that German business confidence ticked up in November, reversing a four-month decline and offsetting rising concerns that Germany is being infected by the debt and banking crisis.

The closely watched business climate index rose to 106.6 as firms said they were less skeptical than before and that Germany's economy is doing well relative to its peers.

Other large German companies have no plans to cut investments.

Chemical giant BASF SE isn't planning any measures to halt investments. Lanxess AG, meanwhile, plans to keep its investments at a "high level" of €600 million in 2012.

German automakers also continue to spend. Daimler AG, for example, plans to increase its research and development investments in 2012 after spending more than €5 billion this year, its research chief Thomas Weber told local media Thursday.


http://online.wsj.com

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