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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 the carrier 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, wrapping up a dismal set of results for European carriers after the coronavirus grounded virtually all passenger flights.

Lufthansa has set a goal of slashing headcount by about 22,000 as it trims its fleet by at least 100 planes to clamp down on expenses and pay back some 9 billion euros in German aid. Like its full-service peers IAG SA and Air France KLM, the German carrier faces a slow recovery because the long-haul flights it profits from most 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.”

The shares rose 6.8% as of 9:04 a.m. in Franfurt, as investors welcomed the clampdown on spending, including on new aircraft.

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 slow pace of labor negotiations, Spohr said.

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Lufthansa’s workforce is already down 8,300 from a year ago, it said Thursday. It’s 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.

Lufthansa hasn’t yet delivered on an earlier package of measures, said Nicoley Baublies, managing director of the UFO cabin-crew union.

“There are two options now: either we carry this package over the line together, or we must force through Lufthansa’s necessary promises by dispute,” Baublies said. “To threaten forced redundancies is not necessary and even violating contracts as far as cabin crew are concerned.”

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.

Spohr reported strong progress in re-negotiating the aircraft-delivery schedule and adjusted payments with manufacturers Airbus SE and Boeing Co. Lufthansa said it plans to take just 23 jets this year and 12 next.

That’s helped it more than halve capital spending targets, to about 1.3 billion euros in each of 2020 and 2021, from an earlier target of about 3.5 billion euros.

The company “is evidently taking the need to generate cash seriously,” Sanford C. Bernstein analyst Daniel Roeska said in a note. “However, the rest of the restructuring was light on incremental detail, and there was less clear language around the need for division sales or fleet sales. That is something management needs to make a central pillar of the next few years.”

Industry Woes

The report follows huge losses reported last week by Lufthansa’s biggest rivals. British Airways owner IAG reported 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 German carrier is being saddled with a mountain of debt and higher interest payments after tapping 9 billion euros in government aid to avoid insolvency, of which it has received 2.3 billion euros since the start of July.

A sale of assets including a stake in the group’s aircraft-maintenance arm and the rest of its in-flight catering business could be one way of reducing the burden, analysts have said, though the group didn’t mention disposals in its statement.

Shares of Lufthansa have declined 49% so far this year, compared with a 45% decline in the six-member Bloomberg EMEA Airlines Index.

(Updates with today’s trading, analyst comment from fifth paragraph)

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