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Lufthansa ramps up group cost-cutting measures

Lufthansa Group is accelerating restructuring efforts at its cargo division and subsidiaries Austrian Airlines and Brussels Airlines as the company faces pressure on earnings, particularly in Europe, and increased fuel costs.

Austrian will close its bases outside Vienna and "focus solely" on flights to and from the country's capital, Lufthansa says.

That plan and additional productivity improvements and personnel cost reductions should deliver efficiencies worth €90 million ($100 million) by the end of 2021, the group says.

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It previously disclosed a plan to replace Austrian's 18-stong Bombardier Q400 turboprop fleet with 10 Airbus A320s by 2021.

Brussels Airlines' network will be "realigned" and its operation more closely integrated with the group's mainline carriers Lufthansa, Swiss and Austrian in order to "significantly reduce unit costs", finance chief Ulrik Svensson said during a results call earlier today.

Additional measures will include administration cost cuts, fleet standardization, and productivity and process improvements in flight operations.

Lufthansa Cargo's Boeing MD-11 freighter fleet will be phased out in 2020, after the carrier previously planned to operate some of the 10 trijets until 2024.

However, the airline will introduce in 2020 two additional 777Fs, which will bring that type's fleet size to nine units.

Main-deck freighter capacity will decline 9% as a result of the MD-11F retirement, says Svensson.

Lufthansa Cargo delivered a €33 million loss during the first nine months 2019 – following a €162 million profit during the same period last year – as a result of "continuing weak demand, especially on Asian routes", the group says.

"In an increasingly challenging market environment, it is more vital than ever that we consistently take every action within our influence and further reduce our costs," states Svensson.

Lufthansa Group's third-quarter adjusted EBIT declined 8% to €1.3 billion, while revenue increased 2% to €10.2 billion versus the same period in 2018.

Fuel costs during the period rose by €171 million, which, Lufthansa says, was "primarily due to currency movements". But the group notes that cost reductions in other areas "only partly offset the increase" in the fuel bill.

Lufthansa, Swiss and Austrian's combined adjusted EBIT declined 23% to €1.6 billion during the first nine months 2019, compared with the same period last year.

Currency-adjusted unit revenue decreased 2.8%, while currency-adjusted unit costs excluding fuel were reduced by 0.8% during the January-September period.

Sevensson says the group sees a notable reduction in corporate demand for premium travel in its home market.

Non-premium ticket sales outperform premium travel demand, with the group's routes across the North Atlantic being the "best region", he says.

"Business over the North Atlantic remained strong… and even improved [during the third quarter] compared to 2018," the group says.

Eurowings' adjusted EBIT increased 39% to €169 million during the third quarter. But on a nine-month level, the budget carrier's adjusted EBIT loss grew to €104 million, from a €98 million loss during the period in 2018.

Nevertheless, Lufthansa asserts that a turnaround effort at Eurowings "is showing its first successes".

The point-to-point airline reduced nine-month currency-adjusted unit costs excluding fuel by 3.8%, while currency-adjusted unit revenue declined 1.8%.

Lufthansa has a target for Eurowings to reach profitability by 2021.

As part of the measures, commercial responsibility for Eurowings' long-haul flights will be handed to the group's network airline division by the end of 2019, Lufthansa disclosed earlier this year.

Eurowings' long-haul services will be pooled with the network carriers' flight operations in a similar manner to Swiss's leisure arm Edelweiss, the group says.

Chief executive Carsten Spohr said during the financial results call that the Eurowings brand will be maintained for touristic long-haul flights from Frankfurt and Munich.

He ruled out an adoption of the Lufthansa name as he views that as a premium brand.

For the full-year, Lufthansa has maintained its adjusted EBIT target of €2-2.4 billion, while it foresees revenue to grow at a single-digit rate.

In 2018, the group generated revenue of €35.8 billion and delivered an adjusted EBIT of €2.84 billion.

Network airline capacity will increase 4%, while Eurowings capacity will shrink 1% throughout the current year, the group says.

For 2020, Svensson foresees 2-3% capacity growth at the network airlines, and a single-digit decline for Eurowings.

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