Lufthansa manages small profit on global turbulence

After managing a small profit in the first half of the year, Lufthansa chairman and CEO Wolfgang Mayrhuber announced Thursday that the airline will cut a billion euros of costs between now and 2011.

"The figures speak for themselves. Crises ruthlessly reveal the weak points and we shall act," Mayrhuber said in a statement. The company said it would outline where it planned to make cuts in the coming weeks.

Revenues fell over 15 percent from the same period last year to 10.2 billion euros. Profits fell from 677 million euros for the first half of 2008 to eight million in the first half of this year.

"They were within the range of expectations, although I also think the expectations were no longer very high because we're all aware that the market is bad," Frank Skodzik, an analyst with Commerzbank in Frankfurt, told Deutsche Welle.

The airline carried a total of 33.2 million passengers in the first six months of 2009, a decrease of 4.8 percent from the same period a year earlier. Lufthansa's freight division suffered as well, with a 20 percent drop in first-half traffic to 788,000 tons. The airline has cut freight capacity by 30 percent.

Demand from premium customers collapses

Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift:  First-class lounges have emptied out as premium customers fly economy class

Lufthansa, like other airlines, is suffering in particular from the collapse in demand from business and first class travelers who are no longer willing to spend thousands on air travel.

As a result, analyst Per-Ola Hellgren with Landesbank Baden-Wuerttemberg (LBBW) estimated that Lufthansa has had to cut prices in the forward part of the cabin by up to 30 percent, as compared to five percent in economy class.

"People who were flying premium increasingly say we don't want to do that, it's too much money, we need to save," Hellgren said in an interview with Deutsche Welle. "Lufthansa has to reduce their prices much more in that segment in order to keep the seats reasonably filled."

There's very little the company can to do increase revenues in the highly-profitable premium class in the current environment said Commerzbank's Skodzik.

"The extent that the premium business recovers depends on how much and how fast the economy improves," Skodzik told Deutsche Welle.

Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift:  CEO Wolfgang Mayrhuber announced a billion euro cost cutting plan on Thursday

Middle Eastern rivals taking advantage of crisis

Lufthansa also faces a threat from Middle East-based carriers such as Emirates, which are able to offer a similarly luxurious experience at lower costs on highly-profitable routes such as New York to Shanghai.

"For Emirates, their business model is based on the assumption that Dubai is a lot cheaper than Frankfurt or Heathrow," LBBW's Hellgren said. "They have a benefit in this market environment, that they can offer a fairly decent premium class arrangement for less money than Lufthansa."

Having already made previous rounds of cost-cutting that trimmed administrative expenses, Hellgren said the only way Lufthansa would be able to achieve the billion euros in cost-cutting that is has pledged will be through cutting capacity, which means grounding aircraft and laying off crews.

While those cost cuts should be enough to see Lufthansa through 2011, the company will be in a difficult position when the economy begins to recover, Hellgren said.

"When demand increases again at a later date, they'll have to increase capacity and those cost savings are simply gone," said Hellgren.

Author: Brett Neely
Editor: Sam Edmonds