On the same day in early December Lufthansa demonstrated its management's ability to deal not only with the current crisis with a crucial labour agreement, but strike an important deal for its future fleet make-up with a long-awaited order for the Airbus A380.

After weeks of tough talks, it sealed a deal with two of its major unions - the Ver.di public service workers and Vereinigung Cockpit pilots union - on a package of measures that will save it €210 million ($190 million) this year. Critically the agreement avoids any job cuts, at least until the end of 2002, making Lufthansa one of the few carriers not making compulsory redundancies in Europe. However, its headcount in Germany will fall by 1,700 by natural wastage.

The move, which avoids the need for costly severance, sees Lufthansa bringing its costs into line with its reduced capacity. It has cut back operations by 13%, rather more than the 8-10% of many other European carriers, notes Mike Powell, analyst at Dresdner Kleinwort Benson. Although its transatlantic services have been badly hit, Lufthansa's Africa, Caribbean and Asian routes have fared reasonably well and there are even the first signs that cargo could be picking up in the final quarter, he said.

Analysts believe that Lufthansa may still make a small operating profit in 2001: estimates range from €24 million to €150 million. There is no prospect of a rapid bounce-back in 2002, but lower fuel prices, the cost savings and a recovering market could ease the carrier to a €760 million operating profit, says Powell. By contrast, Schroder Salomon Smith Barney analyst Andrew Light puts the figure nearer c200 million, but both expect a return to the 2000 level of c1 billion in 2003.

The market's confidence in Lufthansa was demonstrated in December as a €750 million convertible bond issue, delayed following the September attacks, was 18 times over-subscribed.

The carrier's own confidence in its long-term vision has been underlined by the order for 15 A380s. These will start coming on line in late 2007. By then the future of its congested main hub at Frankfurt will be clearer with decisions on a fourth runway and third terminal due by 2004. If either project does not get the go ahead, and the runway faces severe local opposition, the demand for the A380 to relieve congestion may be greater than ever, says Powell.

Source: Airline Business