Lufthansa Steps Up Measures to Cut Costs 

(Bloomberg) -- Deutsche Lufthansa AG warned that compulsory dismissals are likely in Germany amid slow progress in talks with unions, stiffening its tone as it braces for years of reduced demand.

Europe's biggest airline posted an adjusted operating loss of 1.7 billion euros ($2 billion) in the second quarter -- its biggest ever -- wrapping up a dismal set of results for carriers in the region after the coronavirus grounded virtually all passenger flights.

Lufthansa has set a goal of slashing 22,000 full-time positions as it trims the fleet by at least 100 planes to clamp down on expenses and pay back some 9 billion euros in state aid. Like full-service peers IAG SA and Air France KLM, the German company faces a slow recovery because the long-haul flights it most profits from remain largely idled amid travel restrictions and flareups in the coronavirus pandemic.

“We are experiencing a resetting in global air traffic,” Chief Executive Officer Carsten Spohr said in the release. “We do not expect demand to return to pre-crisis levels before 2024. Unfortunately, the outlook is clearly worse than expected.”

The shares traded 1.6% lower as of 12:18 p.m. in Frankfurt, erasing earlier gains of as much as 8% and taking the decline this year to 51%.

Avoiding forced redundancies is no longer realistic even in Germany, where the company had planned to rely on voluntary departures, given the reduction in demand and the “disappointingly” slow pace of labor negotiations, Spohr said.

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Lufthansa said its workforce is already down 8,300 from a year ago. It has also detailed moves to cut 20% of management and 1,000 office posts.

The reference to forced cuts points to rising tension with unions, which hold considerable clout at German companies, as talks have now taken eight weeks longer than planned while discussions with two of three unions haven't produced agreements yet.

Spohr said he's hopeful that a deal with cabin crew that's due to be put to members of the UFO union can avoid compulsory layoffs, but that forced redundancies among pilots are likely after no agreement was reached. The Vereinigung Cockpit labor group didn't respond to calls seeking comment.

Losses Ahead

Lufthansa said earnings will be clearly negative in the second half, with a further significant decline in the full-year figure after losing 2.9 billion euros in the first half. Cash flow won't turn positive until some time in 2021.

The CEO reported strong progress in re-negotiating the aircraft-delivery schedule and adjusted payments with manufacturers Airbus SE and Boeing Co., with Lufthansa planning to take 23 jets this year and 12 next. That's helped it more than halve capital spending targets to about 1.3 billion euros for each year.

The company “is evidently taking the need to generate cash seriously,” Sanford C. Bernstein analyst Daniel Roeska said in a note, adding the spending cuts are “the best news today.” Still, management must now make it a priority to sell units and aircraft to keep debt in check, the analyst added, after a sale and leaseback transaction involving the A350 model.

Lufthansa is considering a partnership or public offering of a minority stake for its Technik maintenance arm, Spohr said, while cautioning that the company won't engage in any “fire sales.”

A rights offering for the group is also an option, but Lufthansa's share price must first recover for that to make sense, the executive said. The sale of European catering operations to Gategroup Holding AG, agreed last year but delayed by the pandemic, should close this quarter, he added.

Industry Woes

The report follows huge losses reported last week by Lufthansa's biggest rivals. British Airways owner IAG posted a record loss of 1.36 billion euros, more than the biggest shortfall it previously suffered in a year, while Air France-KLM had a 2.61 billion-euro deficit.

Lufthansa is currently offering about 40% of its usual short-haul capacity and 20% on long-haul routes. Those figures will increase to around 55% and 50%, respectively, in the fourth quarter.

The carrier, which has its main base at Frankfurt airport, is being saddled with a mountain of debt and higher interest payments after tapping 9 billion euros in German aid to avoid insolvency, of which it has received 2.3 billion euros since the start of July.

Spohr confirmed that the bailout will be trimmed to take account of funding from Austria, Belgium and Switzerland.

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