Lufthansa To Cut Costs, AUA Standoff Continues

Lufthansa aims to rein in its spending in the face of low demand for air travel and rising fuel prices, and is still fighting to contain concessions in its planned Austrian Airlines purchase.

According to a staff memo, the company plans to cut annual costs by EUR1 billion euros (USD$1.4 billion) by 2011 by cutting around 20 percent of the 2,000 administrative jobs in its passenger airline business.

Lufthansa is burdened by weak demand as well as a number of acquisitions it agreed to last year, including Austrian Airlines (AUA), Brussels Airlines and UK carrier bmi, racking up potential costs of close to EUR1 billion.

The company already pushed through a settlement with Sir Michael Bishop earlier this year to lower the cost of its purchase of his 50 percent plus one share stake in bmi, and is now struggling to limit the costs of its AUA acquisition.

Lufthansa had agreed to pay up to EUR377 million for AUA and has since had to offer the European Union some concessions on lucrative routes. To offset rising costs of the purchase, AUA on Wednesday approved a EUR150 million savings program.

AUA lost EUR429 million last year and has piled up more than EUR1 billion in debt, or more than five times its equity. It only survived this spring due to a EUR200 million lifeline from the Austrian government, two thirds of which it has used up.

PLAYING CHICKEN

Lufthansa is still in talks to obtain EU approval of the deal and is racing toward a July 31 deadline for agreement. The EU Commission said last week remedies the German carrier had offered so far were insufficient to allay competition concerns.

Austrian newspaper Der Standard earlier cited EU sources as saying Lufthansa had filed a new proposal to address the Commission's competition concerns, but the EU denied the report saying it had not received any fresh proposals.

In addition to cutting jobs and trying to contain the costs of the AUA acquisition, Lufthansa said in its staff memo it could also defer delivery of some aircraft from 2010, joining peers in putting off aircraft purchases to conserve cash. Airlines pay for new planes upon delivery.

Lufthansa has dozens of outstanding aircraft orders, including 15 A380 superjumbos for delivery between 2010 and 2015, which have a total list price of almost USD$5 billion.

Airlines around the world are struggling to cope with a drop in demand for air travel amid the global economic crisis. The International Air Transport Association has forecast that the world's airlines are likely to lose USD$9 billion this year.

"Unless market conditions change, our losses will increase significantly in the coming year owing especially to the rise in fuel prices," Deputy CEO Christoph Franz said in the memo.

Lufthansa had already said last month it planned a new cost-savings program as it warned it could post an operating loss this year, and it has promised to provide further details when it releases second-quarter results on July 30.