May 5, 2015

Despite Germanwings crash and pilots’ strike, Lufthansa’s loss narrows

Though posting a smaller operating loss in the first quarter this year, Lufthansa have confirmed that they still need to reduce operating costs further to become competitive and profitable. Their finance chief, Simone Menne, said “We are in need of an urgent solution, we cannot afford to burden our customers further.” Lufthansa is aiming to lower costs to enable them to be more competitive with rivals from the Gulf and Turkey, as well as other low-cost carriers in Europe. Lufthansa have declared a first quarter adjusted loss before interest and tax of €167m (US$186m), mainly due to cheap oil, but they have made it clear that pension fund provisions had swelled to €10.2bn due to low interest rates.
The ongoing dispute with pilots has been costly, though there is the possibility that matters relating to grievances concerning remuneration for pilots who retire early may be nearer resolution after Lufthansa made a new mediation proposal last week to bring an end to the row, though the pilots are yet to respond. The tragic crash of the Germanwings A320 saw demand fall briefly, but returned to normal after a few days. Simone Menne has made it clear that overall the crash had not affected operating profits, while their insurers are picking up the costs resulting from the accident. Although the euro is down more than 11 percent against the dollar for this last quarter, it managed to boost Lufthansa’s revenue, though simultaneously reducing the benefit of cheap oil which is priced in dollars, meaning the anticipated fuel bill for 2015 has risen from €6.2bn (US$7bn), against an earlier estimated €6bn (US$6.8bn).
Pressure on Lufthansa also comes from airlines such as IAG, the parent company of British Airways and Iberia, which has managed to cut costs and has reported a profit for the first quarter, while Ryanair reported a 16 percent rise in April passenger numbers on Tuesday. Combining the costs of the pilots’ strike with the costs of expansion of their low-cost airline, this will see Lufthansa spend approximately €100mn (US$113.4m) in just the first half of 2015. Lufthansa have confirmed their target for 2015 adjusted earnings before interest and tax (EBIT) in excess of €1.5bn (US$1.7bn).



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