Lufthansa needs a deeper overhaul: CEO

Lufthansa chief executive Carsten Spohr said the German airline needs a deeper overhaul after acknowledging the most expansive saving plan to date was swept away by higher costs and falling ticket prices.

While the plan dubbed “score” generated €2.5bn in profit for the group in the three years through 2014, the benefits were almost entirely eaten up by adverse effects, Mr Spohr said yesterday as he announced earnings.

“In the past, we didn’t always have the necessary courage to act,” Mr Spohr said. “We can cut costs, we just can’t do it fast enough. Now we are forced to implement structural changes.”

Mr Spohr had to cut financial targets twice in his first year as CEO as Lufthansa remains locked in a conflict with pilots over retirement benefits that led to 10 strikes last year.

To better compete in Europe, Lufthansa is moving much of its traffic to Eurowings, a new unit it claims can operate 40% cheaper.

Operating profit at the maintenance unit, Lufthansa’s most profitable, fell last year, as did earnings at the catering business, Lufthansa said. That matched declines at the Swiss unit, Lufthansa’s most profitable airline brand, and Austrian. Brussels failed to generate net income.

Earnings before interest and taxes, adjusted for book gains or losses on disposals, extraordinary appreciation or depreciation and non-recurring pension-fund transactions will rise to more than €1.5bn this year from €1.2bn in 2014. The new measure is being introduced to better compare Europe’s second-largest carrier with rivals.

“Given the results that we achieved in our core business, we can no longer regard sticking to inherited uneconomic structures as an option for the future,” Mr Spohr said. “The competitive pressures on our airline will only further increase.”

Lufthansa is feeling the strain from low-cost airlines and Persian Gulf rivals that have contributed to depressed fares in Europe for a second consecutive year. The carrier last month said it won’t pay a dividend for last year after charges tied to pension obligations, the disposal of a computer business, and costs to hedge fuel prices led to a loss.

Fuel costs will amount to about €6bn this year. That corresponds to a decline in fuel expenses of 11% this year, after 5.1% in 2014. Yields, a measure for average fares, will be “significantly negative” this year, after falling 3.1% in 2014, the carrier forecast. Capacity will rise about 3%, while unit costs excluding fuel should be reduced “slightly.”

“We still see evidence that the external competitive and structural market may be changing faster than the pace at which Lufthansa can change, on the cost and revenue front,” Damian Brewer, an analyst at RBC Capital Markets in London, said in a note.

Bloomberg