Losing altitude Lufthansa Cuts Dividend, Costs

Lufthansa, Europe's largest airline group, will cancel its dividend following losses for 2014. Managers called on employees to support cost-cutting measures for the company to grow.
Which way now?

Lufthansa has proposed cancelling its 2014 dividend, as one of its cost-cutting measures. The board proposed the move after Germany's flagship airline posted a loss for 2014 of €732 million, or $831 million, with revenues remaining at €30 billion.

Finance chief Simone Menne said the loss was due to extraordinary negative effects including the sale of the IT infrastructure department and increased commitments for pensions.

Investors reacted to the news of the proposed dividend cut with disappointment and Lufthansa's share price fell by more than four percent on Friday. The stock was down another 1.1 percent at €13.13 by 1017 GMT.

Given the need to reduce expenses at Lufthansa, the decision was accepted by investors. "Lufthansa urgently needs every penny to restructure and renew its fleet," said Michael Gierse, a fund manager at Union Investment. "Therefore, we welcome the dividend's cancellation."

Lufthansa is in a tight spot. In its home European market, the airline is beset by low-cost competitors such as Ryanair and EasyJet, which fly back and forth between paired cities with high frequency and low costs. In 2013, Ryanair had an operating margin of 13.1 percent, while Lufthansa achieved a meager 2.3 percent.

The move not to pay the dividend is also a message to the company's staff. The company's management appealed to employees to cut costs so that Lufthansa can return to growth.

Karl Ulrich Garnadt, the head of passenger travel, offered the 33,500 employees of Lufthansa Passage an “alliance for growth and employment.”

At an information session for workers, Mr. Garnadt said: “We will defend our leading position in Europe; it's a hotly contested market, but we're not backing down.”

Lufthansa is working out the details of the alliance and will release these once the plans are complete.

In its home European market, the airline is beset by low-cost competitors such as Ryanair and EasyJet.

“This course of action depends on the constructive cooperation of all groups of employees and their representatives in establishing competitive cost structures,” Mr. Garnadt said. That way, he said, the company could increase its current 313 passenger planes under the Lufthansa brand to 340 by 2020. Moreover, an additional 1,300 flight attendants and 500 pilots could be employed in the core passenger business.

The proposal is a response by management to growing internal criticism about the company’s lack of a long-term vision, although Lufthansa's chief executive has presented several proposals that go beyond those of previous managers.

One of these moves is the launch of inexpensive long-distance flights that Lufthansa will offer under the Eurowings brand name. The company's low-cost airline Germanwings has specialized in short- and mid-range routes involving airports other than those in Frankfurt and Munich for almost two years. But no clear announcements have yet been made about the strategy for the premium business under the Lufthansa brand.

It remains to be seen whether pilots will accept the terms of the alliance. Lufthansa's pilots, including those at Germanwings, have gone on strike eleven times in the last 12 months in a dispute over early retirement. While Lufthansa's management is calling for significant cost-cutting as the price for the growth, many pilots believe that they are being called on to save so that the company can pay higher dividends to shareholders.

 

036-WTB excludes 2013 reference

 

There is speculation about other ways Lufthansa may cut costs, from cutting a layer of management, to turning operations at the Munich and Frankfurt hubs over to an external operating company. The latter would remove ground personnel from Lufthansa's expensive wage agreements. These are still just possibilities however; Lufthansa managers will work out details with labor representatives in the coming months.

The airline trumpeted a big offensive under the previous chief executive, Christoph Franz. One after another, decentralized European routes — those outside the company's Frankfurt and Munich hubs — were turned over to the low-fare subsidiary Germanwings. But in order to get the pilots' agreement, concessions had to be made — for instance, with regard to the salary scales of the pilots who switched from Lufthansa to Germanwings. In addition, Germanwings had to take over expensive services for frequent flyers in order to avoid alienating them.

Germanwings in its early years had lower costs than EasyJet, but these are now higher. Lufthansa is now taking a new run at the strategy, this time under the name Eurowings. To avoid the same expense problem that happened with Germanwings, Lufthansa's chief executive Carsten Spohr wants to limit the right of the pilots' union to have a role in management.

 

Jens Koenen writes about aviation for Handelsblatt. To contact the author: [email protected]