Lufthansa profit in a tailspin

Lufthansa plans to cut jobs, add new airliners and revamp its low-cost subsidiary, Germanwings, in a bid to reverse a performance slump and take on the Middle East carriers. Kai Pfaffenbach / Reuters

Lufthansa, the world's largest airline group by revenue, has emerged from the first year of its most ambitious efficiency push ever, as it fights back against fierce competition from the Middle East.

Undeterred by a slump in performance - at €524 million (Dh2.52 billion), the group's operating profit was down 36 per cent on the figure for the previous year - the airline outlined an ambitious programme to cut jobs, add new airliners to its fleet, and revamp its low-cost subsidiary, Germanwings.

However, Christoph Franz, the group's chief executive, warned, as he presented Lufthansa's 2012 financial results in Frankfurt yesterday, that there were tough economic times ahead and restructuring costs would limit operating profit growth this year and next.

"In the current year, our main focus will be on ensuring the successful implementation of individual projects and measures in our restructuring programme. But 2013 will be a particularly challenging year for our companies and their employees," said Mr Franz.

The programme - dubbed "Score" - is Lufthansa's response to the growing threat from emerging Middle East airlines, such as Etihad Airways, Emirates Airline and Qatar Airways, which have been steadily eroding the German carrier's international market share; and fierce competition from low-cost carriers on its European routes.

Following the announcement the company's shares were up 3.2 per cent in early trading, outperforming a 0.9 per cent rise in Germany's DAX index.

The group includes its core airline, Lufthansa, as well as subsidiary airlines Swiss, and Austrian, Germanwings and Lufthansa Technik, the engineering and maintenance division.

As part of "Score", the group implemented about 800 measures last year to improve earnings and cut costs.

"As a result, the company was able to achieve a structural earnings improvement of €618m in the first year of the programme, about €300m more than originally planned, added Mr Franz. "Making better use of synergies in purchasing, coordinating flight plans between airlines, adjusting capacities and lowering staff costs through more efficient processes in administrative areas have all played a role."

Under the "Score" programme 3,500 jobs will be cut, while the savings will help to fund the group's largest ever fleet renewal programme that includes 236 new airliners to be taken into service up to 2025 at a list price of €22bn. Lufthansa also suspended its dividend payout for last year to help finance the planes. The aim is to boost operating profit to €2.3bn in 2015.

Lufthansa was the only major European legacy airline to post a net profit for last year. Revenue for the Lufthansa Group in the financial year 2012 came to €30.1bn, an increase of 4.9 per cent on the previous year. Traffic revenue improved by 4.3 per cent to €24.8bn. The group generated an operating profit of €524m in 2012, down by €296m compared with the previous year. Earnings per share improved to €2.16.

Operating expenses rose by 4.3 per cent in the previous year to €31.7bn. One of the main reasons was the €1.1bn rise in fuel costs, which came to €7.4bn in total. This represents an increase of 17.8 per cent. Included in this amount is a positive contribution of €128m from fuel hedging.

"The oil price is expected to remain high and the underlying economic conditions for air traffic challenging. Global economic performance is fraught with great uncertainty and the crisis in Europe has not yet been overcome," said Mr Franz.

"Nevertheless, the Lufthansa Group expects to achieve an operating profit in 2013 which is higher than that of the previous year. Score gained considerable momentum during the past year.

"Early successes are already visible and can be measured. Our goal remains the same: with an operating profit of at least €2.3bn which we intend to achieve, we will actively promote and shape the process of change in the European airline industry."