June 24, 2019 / 8:58 AM / 22 days ago

Lufthansa eyes cost cuts to return Eurowings to profit

FRANKFURT/BERLIN (Reuters) - Lufthansa’s budget airline Eurowings will aim to cut costs by 15% over the next three years and focus on short-haul flights as part of a plan to return to profit by 2021, the German carrier said on Monday.

FILE PHOTO: A Eurowings Airbus A319-100 takes off from Palma de Mallorca, Spain, July 29, 2018. REUTERS/Paul Hanna/File Photo

Lufthansa cited falling revenues at Eurowings as a major reason behind a profit warning on June 16. Eurowings’ revenue was forecast to drop sharply in the second quarter.

Eurowings expanded last year as it took over large parts of Air Berlin but is making a loss as it faces tough price competition from Ryanair, easyJet and Wizz in Europe.

Lufthansa said its Eurowings fleet would consist only of planes from the A320 family in future and it would seek to boost productivity at Eurowings by limiting itself in Germany to one air operator’s certificate from four currently - a move that should reduce its administrative and personnel costs.

Eurowings’ long-haul business will also be managed by Lufthansa in future.

Lufthansa earlier this month cut its expectations for annual earnings before interest and taxes to 2.0-2.4 billion euros ($2.3-$2.7 billion) from 2.4-3.0 billion euros previously.

Chief Executive Carsten Spohr told an investor conference in Frankfurt on Monday that management had underestimated how complicated it would be to integrate Air Berlin into Eurowings, adding: “They had too much to do in too little time.”

Brussels Airlines - the Belgian national flag carrier which Lufthansa took control of in 2016 - will therefore not be integrated into Eurowings, Lufthansa said. A turnaround plan for Brussels Airlines will be announced in the third quarter.

Lufthansa also said on Monday it would start pegging its dividend payout ratio to net profit to give the group more flexibility. It will pay out a regular dividend of 20-40% of net profit, adjusted for one-off gains and losses.

Spohr said Monday’s announcements sent “a clear signal that this company cares about its shareholders and tries to create value for them”.

Lufthansa shares were down 1.05% at 1341 GMT.

Lufthansa said its Network Airlines - made up of Lufthansa, Swiss and Austrian Airlines - would aim to use innovations in sales and distribution to help increase unit revenues by 3% by 2022.

Network Airlines will try to reduce unit costs by 1-2% a year, it added.

Network Airlines Chief Commercial Officer Harry Hohmeister told Lufthansa’s capital markets day the network wanted to expand its small market share in Africa and South America and boost turnover by 50% to almost 900 million euros by 2022.

Writing by Michelle Martin; Editing by Jane Merriman and Mark Potter

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