Lufthansa, Air France-KLM to cut costs after tough first quarter

Two of Europe’s top airline groups, Lufthansa (LHAG.DE) and Air France-KLM (AIRF.PA), have announced cost cuts after labour disputes and high customer payouts linked to flight disruptions deepened first-quarter losses.

The first quarter is often a loss-making one for airlines, with fewer bookings, but this year’s was worse than expected for the two groups due to expensive strike action and disruptions due to capacity limits and cancellations.

Air France-KLM said it would tighten spending for the rest of the year, including a freeze on hiring support staff.

Germany’s Lufthansa said it would cut operating costs, pause new projects and increase scrutiny of additional administrative staffing at its core brand Lufthansa Airlines to stem heavy losses from strikes.

The carrier spent 350 million euros ($374.8 million) in the first three months of this year after agreeing higher wages for staff and dealing with costs from cancellations. Air France-KLM meanwhile had to pay 50 million euros in compensation mostly to customers of its Dutch carrier.

Earlier this month, Lufthansa slashed its full-year outlook following a wave of costly industrial action, sending its shares down. They were little changed in early trading on Tuesday after the final first-quarter results were announced.

On Tuesday, it said earnings in the second quarter would be below the prior-year level as customers were reluctant to book in April and May.

The results show airlines are still grappling with higher costs, exacerbated by disruptions and cancellations tied to limited capacity and geopolitical turbulence, despite a recovery in travel demand since COVID-19 lockdowns.

“Disruptions may dissuade some passengers from booking on that airline, preferring a lower-risk approach of using airlines and airports with more stable labour relations,” said Bernstein analyst Alex Irving in a note, referring to Lufthansa.

Air France-KLM maintained its 2024 outlook, but warned that costs would still be up 2 per cent year-on-year in its second quarter.

“As anticipated, our operating income was impacted by disruption costs and a slower cargo business. We nonetheless remain confident in our ability to achieve our 2024 unit cost outlook,” Air France-KLM CEO Ben Smith said in a statement.

Air France-KLM shares were down 3.6 per cent at 1152 GMT.

Lufthansa and Air France-KLM’s shares are among the worst performers among European airlines this year.

 

SUMMER RECOVERY

Even so, hopes that summer demand would make up for recent losses are strengthening as Europe prepares for one of its busiest travel seasons since the pandemic.

Both Air France-KLM and Lufthansa said their collective bargaining agreements were done and they did not expect further disruption from strikes or labour talks for the rest of the financial year.

The fallout from war in the Middle East is also settling, Smith said.

“We’re cautiously optimistic that Tel Aviv and Beirut (passenger numbers) will come back to the levels that they were at prior to October,” he told a press call.

Lufthansa hopes to claw back its strike-related losses in the second half, pointing to a strong summer season with bookings up 16 per cent from last year.

Ticket prices are also expected to stabilize, Lufthansa CEO Carsten Spohr told journalists on a press call.

“We see a kind of flattening of prices, with no further hikes after increases in the last few years,” Spohr said.

In the second half, the group’s operating result is expected to be higher than a year before, and it has already chosen a new Chief Financial Officer ahead of Remco Steenbergen’s departure in the coming weeks.

“Our planes remain well-filled throughout. One thing is already clear: it will be another very strong summer,” Spohr said in a statement.

However, he conceded on an analyst call that demand recovery, particularly from China, is moving more slowly than expected.

And with repair and maintenance costs set to keep rising and capacity constraints ongoing in the sector, some analysts have questioned whether strong demand will be enough to lift airlines out of their financial troubles.

($1 = 0.9338 euros)