Friday, December 16, 2011

Lufthansa to Detail Cost Cuts


FRANKFURT—German airline Deutsche Lufthansa AG Friday said it will detail a cost-cutting program in the first quarter next year as it tries to improve its operating profit margin in the face of tough competition from low-cost carriers on European routes and long-haul rivals.

"In the new and constantly changing environment in which we operate, it takes an enormous effort simply to aim to grow with the market," Lufthansa's Chief Executive Christoph Franz said in the employee newsletter Lufthanseat.

He said the company is "fine-tuning" its cost cutting program and will be able to provide more detailed information about it in the first quarter of the new year.

Mr. Franz, who took the reins at Europe's largest flag carrier by market value early this year, said Lufthansa will turn in an operating profit this year but it will be "well below the figure we require in order to secure our company and our jobs in the future."

Mr. Franz's comments come amid a fast-deteriorating economic outlook in Europe and as airlines face challenges from rising costs, and Lufthansa isn't alone in looking to slash costs.

Air France, one of the two operational divisions of the Air France-KLM group Thursday denied a French press report that it plans 2,000 job cuts through attrition and a hiring freeze as part of a broad austerity plan to shore up its finances. The airline is still working on cost-cutting measures that will be presented to management and employee representatives in mid-January.

Air France-KLM has been hit by a steep rise in operating costs, notably its fuel bill, and is expected to report a full-year operating loss after issuing a profit warning in November.

"Lufthansa's margin targets are high and the economic environment is worsening," said Hartmut Moers, an analyst at WestLB Research. The airline has little choice but to eliminate loss-making activities and lower costs, Mr. Moers said.

Mr. Franz has becoming increasingly worried about Lufthansa's near-term prospects since the airline cut its profit outlook for 2011 in mid-September. It announced more cost cuts at the end of October as well as plans to expand its Germanwings no-frills unit to turn around its unprofitable short-haul business in Europe.

Lufthansa also put unprofitable U.K. airline British Midland International up for sale. Negotiations are underway with International Consolidated Airlines Group SA and Virgin Atlantic.

In late November, Lufthansa suspended non-aircraft investment and essential operating capital expenditure for six months to combat rising financing costs.

The prospect of more cost savings is "a further sign that Franz is very motivated and committed to increasing profitability," said Frank Skodzik, an analyst at Commerzbank.

Late on Friday, Lufthansa shares were up 1.7%, outperforming the local market.

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