Cost battles cloud horizon after bright summer for Lufthansa, Air France-KLM
By Victoria Bryan and Cyril Altmeyer
BERLIN/PARIS (Reuters) - Lufthansa and Air France-KLM reported better than expected third-quarter results on Thursday, thanks to cheaper fuel and strong seasonal demand, but warned they still needed to cut costs to compete with more nimble rivals.
Lufthansa also raised its profit forecast for the full year, predicting its highest ever adjusted operating profit of between 1.75 and 1.95 billion euros ($1.92-2.14 billion) this year.
But shares in both airline groups dropped after the results, with traders citing profit-taking after a recent strong run and concerns over continuing disputes with labour over their cost cutting programs.
"Given the highly competitive nature of the industry, structural changes and self-help measures carry much higher importance than any short term favourable market environment," Commerzbank analyst Johannes Braun said.
Both groups are battling to bring costs down to a level where they can compete with budget carriers like Ryanair and easyJet in Europe and with more efficient Gulf carriers and other rivals in their mainstay long-haul markets.
But the improved results threaten to make the task of winning their workforces round to making more cuts that much more difficult, analysts say.
IAG's boss Willie Walsh has been praised for managing to cut costs at both British Airways and Iberia, but travel markets at the time were still weak and Iberia was struggling to survive.
In contrast Lufthansa has already been hit by over a dozen pilot strikes over 18 months while Air France has had to lower its sights on cost cuts after recent stormy negotiations ended with managers fleeing a meeting and scrambling over fences.
Lufthansa's main cabin crew union was quick to point out on Thursday that the biggest improvements in the results came from the core Lufthansa brand. The union has set a deadline of this Sunday for Lufthansa to make an improved offer in wide-ranging talks covering pay, pensions and working conditions.
"We think the pay department should take a look at the profit and loss sheet before Nov. 1," union head Nicoley Baublies tweeted.
However, both Lufthansa and Air France-KLM said their third-quarter results were flattered by temporary factors and warned of fare competition hotting up.
"It's something that can't last, not least because we don't have enough visibility for the winter season when we see quite significant increases in (industry) capacity on European long-haul, and even more so intra-Europe," Pierre-Francois Riolacci, finance director of the Franco-Dutch carrier said.
He was speaking after the airline reported a third-quarter operating profit that almost quadrupled to 898 million euros on revenues that rose 10.8 percent to 7.415 billion euros, ahead of the average of analysts' forecasts for a profit of 694 million and revenue of 7.24 billion.
Results for the comparable quarter last year had been hit by a pilots' strike.
Meanwhile Lufthansa Chief Executive Carsten Spohr said his group was facing 700 million euros of headwinds in terms of additional costs each year, due to inflation and expenses such as airport user charges, and that the reason why results this year had improved at its core airlines business was because it had restricted growth.
"We are at a turning point in the industry," he said. "We will require decisions that will be difficult for unions. We are aware of that and we respect it."
($1 = 0.9121 euros)
(Editing by Greg Mahlich)
