Lufthansa's new management team has the wind at its back as it goes up against the airline's pilots.
Deutsche Lufthansa AG’s pay skirmish with its pilots, already among the best paid in Europe, stands in contrast to rival IAG SA’s success in slashing wages – – and reaping investors’ reward in the process.
While IAG Chief Executive Officer Willie Walsh forced through a 14 percent pay cut at Spanish unit Iberia, together with similar deals wrung from cabin crew and ground staff, Lufthansa faces demands for a double-digit pay hike, backed up by a strike ballot that’s coming to a showdown this week.
The disparity highlights Lufthansa’s challenge to deliver on earlier promises of savings and efficiencies at a time when analyst earnings forecasts trail the company’s own by more than 20 percent, according to data compiled by Bloomberg. Meanwhile, estimates for IAG’s prospects match Walsh’s own, the data show.
“IAG has established greater credibility with investors, who tend to talk about how much IAG will beat its 2015 target by, or how much it will raise it by,” said Gerald Khoo, an analyst at Liberum Capital in London. “Credibility is earned by saying you are going to do something and then doing it.”
Lufthansa’s last pilot-pay round ended in a walkout which erased 2,825 flights in 24 hours. The current ballot to approve strike action ends today, with the result due tomorrow.
IAG will earn 1.76 billion euros ($2.43 billion) in operating profit next year, based on seven estimates, in line with the company’s 1.8 billion-euro goal. For Lufthansa, 10 analysts indicate earnings of 2.09 billion euros, short of the 2.65 billion euros sought.
The relative success in controlling costs is reflected in the shares, with IAG, as International Consolidated Airlines Group SA is known in full, gaining 62 percent in the past year, more than three times Lufthansa’s 19 percent advance.
Lufthansa’s previous savings drive came up short in 2011, achieving an annual reduction of 640 million euros versus the 1 billion euros targeted. The new plan, aimed to lift operating profit by 1.8 billion euros annually by 2015, now includes measures that might contribute almost 3 billion, Lufthansa says
At IAG, it’s probably only a matter of time before the 2015 earnings target is lifted to 2 billion euros, Donal O’Neill, an Goodbody Stockbrokers analyst in Dublin, said after the company revealed premium traffic grew 5.2 percent last month, spurred by demand for North Atlantic flights at BA.
IAG last year cut 2,507 jobs at Iberia, including 192 pilot posts, with wage and headcount reductions delivering 196 million euros in savings.
“Analysts were extremely pessimistic on Spain and Iberia, and IAG has shown they can cut costs,” said Robin Byde, an analyst at Cantor Fitzgerald in London. “That has lead to a lot of enthusiasm.”
Entry-level pay at Iberia, which employs 1,300 pilots, has been cut to 35,000 euros a year for new starters, less than half the previous level. Wages for existing pilots have been cut by 14 percent and frozen until 2015, and gains after that will depend on margins at a unit that lost 166 million euros in 2013.
Lufthansa, which earned 697 million euros last year, led by a 495 million-euro profit at the main passenger airline that Carsten Spohr will lead until he becomes group chief executive officer on May 1, wants more than 5,000 pilots to accept pay rises tied to financial performance for three years.
Lufthansa, which has also revised terms for pensions and early retirement, has held 10 rounds of talks with pilots. All the measures are aimed at boosting productivity to enhance competitiveness, personnel manager Peter Gerber said.
Entry-level pay for first officers at the German airline stands at 55,500 euros, or 73,000 with overtime. Senior captains can earn 260,500 euros.
Pilot costs Lufthansa 1 billion euros a year, helping to push annual operating expenses to 30.8 billion euros in 2013 — the highest among 40 carriers in the Bloomberg World Airlines Index. At 30 billion euros, it also had the highest revenue.
Lufthansa’s high base means cost inflation of 2 percent adds almost 500 million euros to annual expenses, Deutsche Bank analyst Michael Kuhn said in a note on March 10.
Iberia generated 4.1 billion euros in sales last year, 22 percent of the total for IAG. First officers at the U.K. arm start on annual salaries of about 33,000 pounds.
Walsh has done a “pretty good job,” aided by the trans- Atlantic recovery, said Cantor’s Byde, adding that Iberia must now show it can achieve profitable growth, while at Lufthansa, 2014 is shaping up to be a crucial year.
“Spohr is taking over at a very interesting time,” he said. “Their efficiency program includes very ambitious projects.”
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Photo credit: Lufthansa aircrafts sit on the tarmac at Frankfurt airport. Ralph Orlowski / Reuters