British Airways Parent Wins Favor as Revamp Beats Lufthansa

British Airways parent IAG SA (IAG) won investors’ praise for the speed it’s applying to the turnaround at its unprofitable Spanish unit, contrasting with the cool reception Deutsche Lufthansa AG (LHA) received for its own efforts.

International Consolidated Airlines Group SA reported operating profit of 245 million euros ($324 million) for the second quarter, compared with a 4 million-euro loss a year earlier, helped by a lower deficit at Iberia that broke a negative trend at the Spanish arm that had lasted 11 quarters. At Lufthansa, reported operating profit fell 27 percent to 431 million euros on stagnant sales of 7.89 billion euros.

IAG rose as much as 5.1 percent, the most in three months, while Lufthansa dropped 5.3 in Frankfurt as investors questioned the pace at which Chief Executive Officer Christoph Franz is turning around Germany’s largest carrier. Both airlines are implementing thousands of job cuts, with IAG saying today the 1,700 reductions so far are only the beginning.

“Lufthansa staff costs have not improved to the extent we would have liked while Iberia’s have progress much more,” said Donal O’Neill, a Dublin-based analysts at Goodbody Research.

Falling Yields

IAG rose as much as 15.2 pence and traded at 309 pence as of 11:00 a.m. in London, bringing the gain this year to 67 percent and making the company the third-best performing stock on the Bloomberg World Airlines Index of 31 members. Lufthansa has advanced 5 percent this year. The stock traded a 14.86 euros at 12:04 p.m. in Frankfurt, the worst performer on Germay’s benchmark DAX Index.

London-based IAG, Europe’s third-largest airline, said passenger revenue per available seat kilometer rose 2.8 percent in the first six months, while Lufthansa reported a 1 percent decline. In the second quarter, yields at Lufthansa declined 2.5 percent, after rising 0.9 percent in the first, and 3 percent in the fourth quarter last year.

IAG CEO Willi Walsh has built a reputation for turning around ailing airlines, and he overruled Spanish unions this year that threatened to sabotage his cost-cutting efforts with drawn out strikes. Lufthansa has also suffered from several work stoppages this year as employees protest Franz’s effort to lift profit and operate more discount flights.

Missing Expectations

Yields on Lufthansa’s Asia-Pacific routes declined 9.5 percent in the second quarter, while declining 6.6 percent on routes to the Middle East and Africa. Chief Financial Officer Simone Menne said the weakness on Asian routes will continue.

“Earnings and sales are well below our expectations. Progress on cost savings is slow,” said Ruxandra Haradau-Doeser, an analyst in Frankfurt at Kepler Cheuvreux.

High labor costs and competition from low-cost rivals such as Ryanair Holdings Plc (RYA), Europe’s largest, and EasyJet Plc (EZJ) have driven Europe’s network carriers to revamp operations to stem losses. Air France-KLM has set a target to reach earnings of 2.5 billion euros to 3 billion euros, with IAG targeting a 1.6 billion euro operating profit the year after when Lufthansa wants to deliver a 2.3 billion euro operating profit.

IAG said British Airways accounted for a profit of 247 million euros, while Iberia trimmed its loss to 35 million from 93 million euros, with Walsh calling the trend “clearly positive.” The company has cut 1,700 of at least 3,140 jobs with 700 more to depart before year-end.

Faster Progress

Employee costs were 5.2 percent lower in the second quarter at IAG than in the year-ago period. By contrast, personnel expenses rose 27 percent at Lufthansa to 1.82 billion.

“Results suggest faster progress eliminating costs is being made at Iberia,” said Damian Brewer, a London-based analyst at RBC Capital.

Iberia is targeting a new agreement with unions to achieve further cost cuts and productivity gains beyond those in the current mediation, unit CEO Luis Gallego told analysts. The effort is aimed at achieving profitable growth and would open the door to fleet renewal that could include buying as many as 32 Airbus SAS A350-900 long-range jets and 12 Boeing Co. 787-9s.

Air France-KLM (AF), Europe’s largest airline group, which last week said it would deliver an operating profit this year, announced a further 2,600 job cuts to be implemented before 2015 on July 31. The carrier also is consolidating its regional operations in a new entity, HOP! and is cutting fares on some routes by stripping out benefits such as free hold baggage and air miles.

British Airways also has changed pricing at some flights out of Gatwick airport to fend of low-fare rivals. “The cost base has been adjusted quite significantly,” Walsh said, with planes flying with more passengers on board than before.

Lufthansa’s effort to shift more short-haul operations to its low-cost unit is also gaining traction, and the company said Germanwings is being “extremely well received.” Forward books are “very satisfying,” she said.

IAG has benefited from “some easier wins” early on, with Lufthansa’s major cost savings due at the tail end of its cost cutting effort, O’Neill said.

To contact the reporters on this story: Robert Wall in London at rwall6@bloomberg.net; Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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