Lufthansa, Air France-KLM to cut costs after tough first quarter

By Joanna Plucinska, Rachel More and Diana Mandia

BERLIN/LONDON/GDANSK (Reuters) – Two of Europe’s top airline groups, Lufthansa and Air France-KLM, announced plans to cut costs after reporting wider first-quarter losses on Tuesday as they faced high customer payouts due to flight disruptions and labour disputes.

The first quarter is often a loss-making one for airlines, with fewer bookings. But this year’s was worse than expected for the groups amid expensive strike action and disruption due to capacity limits and cancellations.

Air France-KLM said it would tighten spending for the rest of the year, including a freeze on hiring support staff and a vow to stabilise operations, particularly at carrier KLM.

Germany’s Lufthansa said it would cut operating costs, pause new projects and increase scrutiny on additional administrative staffing to make savings at its core brand Lufthansa Airlines to stem heavy losses from strikes.

The carrier spent 350 million euros ($374.82 million) in the first three months of this year after agreeing higher wages for staff and dealing with disruption costs from cancellations, while Air France-KLM had to pay customers 50 million euros due to operational challenges at its Dutch carrier.

Earlier this month, Lufthansa slashed its first-quarter full-year outlook following a wave of costly industrial action, sending its shares down. They didn’t move much in early trading on Tuesday after the results were announced.

On Tuesday, it said earnings in the second quarter would be below the prior-year level as customers were reluctant to book in April and May.

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The results show airlines are still grappling with higher costs, dragged up by disruption and cancellations tied to limited capacity and geopolitical turbulence, despite a recovery in travel demand since COVID-19 lockdowns paralysed the sector.

“Disruptions may dissuade some passengers from booking on that airline, preferring a lower-risk approach of using airlines and airports with more stable labour relations,” said Bernstein analyst Alex Irving in a note.

Air France KLM (OTC:AFLYY) maintained its 2024 outlook, but warned that costs would still be up 2% year-on-year in its second quarter.

“As anticipated, our operating income was impacted by disruption costs and a slower cargo business. We nonetheless remain confident in our ability to achieve our 2024 unit cost outlook,” Air France-KLM Chief Executive Ben Smith said in a statement.

Air France-KLM shares were down 3.9% in early trading on Tuesday.

Lufthansa and Air France-KLM’s shares are among the worst performers compared to other European airlines this year.

SUMMER RECOVERY

Even so, hopes that summer demand would make up for the losses from recent months are strengthening as Europe prepares for one of its busiest travel seasons since the pandemic.

Both Air France-KLM and Lufthansa said their collective bargaining agreements were done and they did not expect further disruption from strikes or labour talks for the remainder of the financial year.

Lufthansa hopes to claw back its strike-related losses in the second half of the year, pointing to a strong summer season with bookings up 16% compared with last year.

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In the second half of the year, the group’s operating result is expected to be higher than in the previous year, it said, adding that savings measures were planned at its core brand Lufthansa Airlines to stem heavy losses there from the strikes.

“Our planes remain well-filled throughout. One thing is already clear: It will be another very strong summer,” Lufthansa Chief Executive Carsten Spohr said.

But with repair and maintenance costs set to keep rising and capacity constraints ongoing in the sector, some analysts have questioned whether strong demand will be enough to lift airlines out of their financial troubles.

($1 = 0.9338 euros)