German airline Lufthansa's reforms pay off

Frankfurt - Airline will achieve 2015 Ebit of over ?1.5b, says CEO

Lufthansa's drive to cut costs on its European routes and invest billions in its fleet are paying off, with the German airline enjoying a better than expected summer, its chief executive said on Friday.
Lufthansa has struggled to keep up with a fast-changing landscape that has seen rapid expansion by Gulf airlines and lower cost competitors with newer fleets.
Traditional rival IAG has responded more quickly, earning plaudits from investors for buying low-cost airline Vueling and for its tough negotiations with unions to lower overheads, with the success reflected in rising profits.
In a bid to reverse market share losses, Lufthansa is now also cutting costs and expanding budget services despite union protests, as well as fitting new business and first class seats and introducing a premium economy class.
"We have seen the strongest summer ever. Business has been substantially better in July and August than we expected," Carsten Spohr said. He said Lufthansa would therefore "comfortably" reach a target to post adjusted earnings before interest and tax of more than ?1.5 billion ($1.7 billion) this year.
Spohr said the Germanwings unit, which has been taking over much of Lufthansa's short-haul routes in Europe, would make a double-digit million euro profit this year, its first profit in years on the routes.
Lufthansa shares, in danger of dropping out of the main German blue chip index last week after falling 14 per cent this year, rose over six per cent on Friday, extending gains after Spohr's comments.
However, Lufthansa needs to do more to cut costs and to make the profits it requires to fund over ?38 billion worth of plane orders, according to analysts.
China's slowing economy is also posing problems for freight unit Lufthansa Cargo, though passenger demand, especially for premium seats, has been good thanks to a higher proportion of Chinese passengers, Spohr said.
Like IAG CEO Willie Walsh, 48-year old Spohr has taken a tough line with unions, saying the group's main brand will not grow its fleet unless cost cuts can be achieved.
But both Khoo and Strickland highlighted Walsh was negotiating when the economic backdrop was much tougher and the oil price was higher, making it slightly easier to impress on the unions the necessity of cost cuts. "Lufthansa needs to get the union into the mindset that radical reform is needed," Khoo said.

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