Lufthansa’s surprise speed in ending strike will help reach year’s earnings target

Deutsche Lufthansa AG, Europe’s second-largest airline, said it’s confident of reaching its full-year earnings targets as a savings plan starts to take hold and after the carrier averted more strikes with a pay accord.

The company predicted higher operating profit and sales for this year, after reporting a first-quarter loss of 359 million euros, unchanged from a year earlier. Lufthansa rose as much as 5.8 percent, the most in six months, after the carrier reached the agreement with workers yesterday on pay. Markets were closed in Germany on May 1 because of a public holiday.

“The agreement with the unions is a positive surprise as we feared a longer lasting dispute,” said Jochen Rothenbacher, an analyst at Equinet in Frankfurt. “The conditions should be acceptable for Lufthansa, as the annualized pay rise is in the region of CPI growth.” He raised his recommendation to “hold” from “reduce” today.

Chief Executive Officer Christoph Franz is seeking to wring more savings from the company with a plan that includes eliminating 3,500 jobs and transferring all continental traffic outside its main hubs to its Germanwings low-cost brand. The airline plans to lower costs and increase sales to lift operating profit to a record 2.3 billion euros by 2015,

Lufthansa’s passenger airline reduced its first-quarter operating loss by 15 percent to 363 million euros, while the cargo, maintenance, and catering units posted higher profit, the company said in a statement today.

Union Agreement

The company settled with unions yesterday on pay improvements of ground staff and employees at other departments, avoiding more strikes that have hobbled the airline in past weeks.

“We took another step towards our target of sustainable earnings improvements in the first quarter,” Chief Financial Officer Simone Menne said in a statement today.“Nearly all the group companies improved their result.”

The airline rose as much as 88 cents to 15.95 euros in Frankfurt, the most since the end of October. Lufthansa has advanced 13 percent this year, valuing the company at about 7.2 billion euros.

The Cologne-based company expects to spend 7 billion euros on fuel this year, 200 million less than previously predicted. Spot prices for European jet fuel have declined 13 percent this year. The company’s share of premium revenue on long-haul flights dropped 3.3 percentage points to 51.6 percent in the quarter.

Fuel Cost

“The reduced guidance for fuel costs is a positive, as is the agreement with Ver.di union yesterday,” said Ruxandra Haradau-Doeser, an analyst at Kepler Capital Markets in Frankfurt. “The market will feel comfortable with 2013 earnings expectations, while we will have to carefully watch to what extend long-haul yields continue to be diluted from the larger proportion of economy class seats.”

Lufthansa had costs of 64 million euros tied to the efficiency program in the quarter, and expects the full-year number to be at about the same level of last year, which stood at 160 million euros.

Analysts expect Lufthansa’s full-year operating profit to almost double this year from the 524 million euros earned in 2012, data collected by Bloomberg show. For the first quarter, the analysts had predicted a loss of 323 million euros.

The carrier said it will add less capacity on long-haul flights than previously planned, while its offerings on short- haul services will be reduced less than planned. In total, capacity will rise 1 percent this year, unchanged from a March 14 forecast.

Lufthansa adjusted last year’s earnings to account for the way it books employee benefits. Sales in the first quarter were little changed at 6.63 billion euros, in line with estimates.

Lufthansa is still negotiating a wage accord with pilots, whose union Vereinigung Cockpit, representing some 5,500 cockpit staff, said it demands an improved offer by May 13.

Air France-KLM, the largest carrier in the region, will report first-quarter earnings tomorrow, with British Airway’s parent IAG SA following May 10.

–Editor: Benedikt Kammel

To contact the reporter on this story: Richard Weiss in Frankfurt at [email protected]

To contact the editor responsible for this story: Benedikt Kammel at [email protected]