European airlines Lufthansa, Air France-KLM plan cost cuts

In response to wider first-quarter losses attributed to high customer payouts stemming from flight disruptions and labour disputes, two of Europe's prominent airline groups, Lufthansa and Air France-KLM, have unveiled plans to implement cost-cutting measures. The first quarter of the year typically presents challenges for airlines, marked by fewer bookings, but the extent of losses faced by both groups exceeded expectations due to costly strike actions and operational disruptions.

Air France-KLM announced its commitment to tightening spending for the remainder of the year, with initiatives including a freeze on hiring support staff and a focus on stabilising operations, particularly at its subsidiary, KLM. Similarly, Lufthansa disclosed plans to reduce operating costs, pause new projects, and intensify scrutiny on additional administrative staffing to generate savings at its core brand, Lufthansa Airlines, in a bid to mitigate heavy losses incurred from strikes.

During the first three months of the year, Lufthansa incurred expenses of 350 million euros ($374.82 million), primarily driven by increased staff wages and disruption costs from flight cancellations. Meanwhile, Air France-KLM faced a payout of 50 million euros to customers due to operational challenges at its Dutch carrier.

Despite efforts to navigate challenging operating conditions, Lufthansa recently revised its full-year outlook downwards following a series of costly industrial actions, causing its shares to dip. The airline anticipates earnings in the second quarter to fall below the prior-year level, citing customer reluctance to book flights in April and May.

Analysts point to ongoing disruptions and cancellations as key factors driving up costs for airlines, notwithstanding a gradual recovery in travel demand since the onset of the COVID-19 pandemic. Bernstein analyst Alex Irving highlights the potential impact of disruptions on consumer confidence, suggesting that passengers may gravitate towards airlines with more stable labour relations to mitigate risks.

While Air France-KLM maintains its 2024 outlook, it warns of a 2% year-on-year increase in costs for the second quarter. Despite these challenges, both airlines express optimism about the upcoming summer travel season, which is expected to witness heightened demand and serve as a potential offset for recent losses.

With collective bargaining agreements finalized, Lufthansa and Air France-KLM foresee minimal disruption from future strikes or labour negotiations for the remainder of the financial year. Furthermore, the resolution of geopolitical tensions in the Middle East is anticipated to contribute to improved performance on routes to affected destinations.

Looking ahead, Lufthansa aims to recuperate losses incurred from strikes in the latter half of the year, buoyed by a strong summer season with a notable uptick in bookings compared to the previous year. However, analysts remain cautious about the sustainability of this recovery, citing ongoing capacity constraints and rising maintenance costs within the aviation sector.

(With Reuters inputs)