Lufthansa steps up cost cuts as results beat forecasts

FRANKFURT Wed Oct 31, 2012 9:53am EDT

File phot of air planes flying over the Fraport airport, next to a Lufthansa aircraft tail fin, in Frankfurt, September 4, 2012. REUTERS/Kai Pfaffenbach/Files

File phot of air planes flying over the Fraport airport, next to a Lufthansa aircraft tail fin, in Frankfurt, September 4, 2012.

Credit: Reuters/Kai Pfaffenbach/Files

FRANKFURT (Reuters) - Deutsche Lufthansa will widen its cost-cutting drive to counter rising fuel prices and sluggish growth in its core market, it said on Wednesday after announcing better-than-expected results.

Lufthansa shares gained 6.6 percent to the top of Germany's blue-chip DAX index after cost savings helped its third-quarter operating profit rise to 648 million euros, beating the consensus of 479 million euros in a Reuters poll.

Lufthansa warned some of the additional cuts it plans would be "painful", which some analysts said could indicate more job cuts. The carrier said it would not provide details before the end of the year.

"The environment in which we have to operate is getting more and more demanding," said the German airline's Chief Executive Christoph Franz.

Lufthansa has already frozen investments, announced job cuts and is combining its loss-making European short-haul unit with its low-cost carrier Germanwings to improve its earnings.

But recent economic data shows business sentiment in its core markets in Germany, Austria and Switzerland - so far relatively robust in the crisis - is deteriorating as companies struggle with a bleaker economic outlook.

"The climate is becoming rougher," Franz said.

Europe's biggest airline by revenue had already warned in September that gains from its cost-cutting programme - dubbed SCORE - would be offset by high jet fuel prices and a slowing economy, as well as fees and materials costs.

COST OF FUEL

Fuel costs, which gobble up a third of traffic revenues, surged in the third quarter after jet fuel climbed back above $1,000 per tonne in September, or 14 percent higher than last year. A stronger U.S. dollar also makes it more expensive for Lufthansa to buy fuel.

Lufthansa said it expected its fuel costs to rise 1.1 billion euros to about 7.4 billion this year.

Europe's established airlines, hit by competition from discount carriers and Gulf rivals, are restructuring to reduce costs. Among others, Air France-KLM (AIRF.PA) is shedding about 5,000 jobs, with Lufthansa cutting 3,500.

Analysts expect IAG (ICAG.L) to announce a new restructuring plan for Iberia on November 9, having completed one for British Airways last year. Loss-making Scandinavian airline SAS (SAS.ST) said on Tuesday it would slash costs and sell assets.

For Lufthansa, a focus on slimming down its cost base is already paying off. In the third quarter, its operating profit exceeded forecasts thanks partly to a strong performance by its revamped Austrian Airlines business, recovering from years of losses.

Revenues rose 6.2 percent to 8.31 billion euros, above a consensus of 8.229 billion.

DZ Bank analyst Robert Czerwensky said the figures were very good but that they could weaken Lufthansa's position in talks with cabin crew, who went on strike in September, causing more than 1,000 flight cancellations.

Rival Air France-KLM also reported a rise in operating profits for the quarter on Wednesday. The third quarter is traditionally strong a period for European airlines which usually benefit from summer travel.

Lufthansa reiterated its 2012 forecast that operating profit would be in the mid-hundreds of millions of euros. That does not include restructuring costs, which it said it now expects to be no more than 100 million euros this year as talks with unions on some measures planned as part of SCORE are dragging on. (Reporting By Marilyn Gerlach; Editing by David Goodman and Jason Webb)

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