Lufthansa Deepens Cost Cuts to Boost Profit as Oil Rises
Deutsche Lufthansa AG (LHA), Europe’s second-biggest airline, aims to increase profit this year by deepening spending curbs to stave off an industrywide threat to earnings from fuel prices.
Lufthansa, which posted net income of 1.1 billion euros ($1.6 billion) in 2010, will accelerate cost cuts as oil prices are likely to continue rising, Chief Executive Officer Christoph Franz said today at the annual shareholders’ meeting in Berlin.
“All of the group’s business segments and the group headquarters are continuing to implement or intensify their cost-reduction programs,” Franz told investors. “We are optimizing processes and reducing costs everywhere.”
Carriers’ earnings will slump almost 50 percent this year as oil prices limit the benefit of the economic recovery, the International Air Transport Association said March 2. Crude oil touched a 2 2/1-year high yesterday. Cologne, Germany-based Lufthansa is reducing spending at its main brand while working to make its Austrian Airlines and British Midlands units profitable with job cuts and a focus on more lucrative routes.
Lufthansa’s profit last year was its biggest since 2007, helped by a recovery in air travel, higher fares on long- distance flights and a one-time tax gain of 400 million euros. The company forecast on March 17 that fuel costs will rise by about 1.6 billion euros this year to 6.8 billion euros. Lufthansa is Europe’s No. 2 airline after Paris-based Air France-KLM (AF) Group, based on passenger traffic.
Sticking to Forecast
The German carrier stuck to forecasts that sales will rise as passenger and freight traffic increase and that operating profit, or revenue minus expenses and adjusted for gains and losses related to assets or financial investments, will increase from the 382 million euros earned last year. Lufthansa is hiring 4,000 people, including pilots, flight attendants and ground employees, to support expansion plans.
Lufthansa rose as much as 0.6 percent to 15.26 euros and was up 0.1 percent as of 2:35 p.m. in Frankfurt trading. That narrowed the stock’s decline this year to 7.1 percent.
The Lufthansa brand has a goal of reducing costs by 1 billion euros from 2008 through 2011. At least 350 million euros in savings from the program are due this year. Austrian Airlines is likely to break even in 2011, while British Midland, also known as BMI, will post a loss, Franz said.
Group earnings in 2010 were burdened by pilot strikes, a Europewide flight ban resulting from an ash cloud emanating from an Icelandic volcano and heavy snowfall in the region.
Earthquake, Turmoil Effects
IATA, the airline industry’s main trade group, said today that growth in air travel slowed last month as the Japanese earthquake on March 11 and political turmoil in the Middle East and North Africa curbed demand. Those events reduced Lufthansa’s first-quarter operating profit by about 38 million euros, Franz said. The carrier is scheduled to publish quarterly figures on May 5.
“Any hopes that 2011 might turn out to be a ‘normal’ year were obliterated by the events that occurred in Japan,” Franz said. “We must always plan for turbulence.”
Lufthansa is proposing a dividend of 60 cents a share on 2010 earnings after dropping the payout a year earlier. Franz said today that conditions for paying a dividend will probably be fulfilled in 2011 as well, even as a new aviation tax in Germany poses a “major competitive disadvantage.”
http://www.bloomberg.com/news/2011-...fit-gain-as-cost-cuts-offset-fuel-s-rise.html
