Lufthansa Sees Low-Cost Success as Cabin Upgrade Costs Rise

Deutsche Lufthansa AG (LHA), Europe’s second-largest airline, said losses at the Germanwings discount unit will shrink this year while costs for upgrading cabins and lounges will top 500 million euros ($682 million) through 2015.

The operating loss at Germanwings will be cut by 90 million euros as the unit starts to take over short-haul routes outside Lufthansa’s Frankfurt and Munich hubs, according to a website posting. The unit aims to break even by 2015, while the wider short-haul business, including Germanwings and flights feeding long-haul routes, should show a first profit in 5 years in 2013.

Eliminating losses in European point-to-point traffic is among the most important tasks of the so-called Score program that seeks to lift Lufthansa’s operating profit to 2.3 billion euros by 2015. The company has ordered planes worth 23 billion euros at list prices this year in order to regain ground lost to low-cost and Gulf carriers that operate younger fleets.

Project costs, which include installing new business class seats on long-haul planes, upgrading lounges and introducing a premium-economy service next year, will amount to 120 million euros this year and about 300 million euros next, before declining to below 100 million euros in 2015, Lufthansa said.

Fleet Plans

Lufthansa was trading 2.6 percent higher at 14.49 euros as of 3:55 p.m. in Frankfurt, valuing the Cologne-based carrier at 6.66 billion euros. The shares have gained 1.7 percent this year, lagging behind the Bloomberg World Airlines Index’s 17 percent return. Air France-KLM Group (AF), Europe’s biggest airline by traffic, is up 7.7 percent and British Airways parent IAG SA (IAG), the No. 3, has surged 85 percent.

At Lufthansa’s mainline business, capacity, the number of seats times the distance flown, will rise about 1 percent this year and jump 5 percent next as the company adds bigger planes and scraps its first class offering on some jets. Capacity will rise 4 percent in 2015 and about 3 percent in 2016, it said.

While Lufthansa’s fleet won’t grow beyond 400 planes through 2016, seat growth will come from using larger planes, eliminating first-class from part of the long-haul fleet and flying longer legs, Carsten Spohr, who heads the passenger airline unit, said at an analyst briefing in London. Previous capacity plans had called for as many as 480 aircraft, he said.

A380s, 747s

Planes without a first-class service will operate to Bangkok and destinations in Canada, India and Africa, while Lufthansa will use incoming Airbus SAS A380 superjumbos to fly to Miami and Shanghai and employ Boeing Co. 747-8s on routes including Mexico City and Sao Paolo, the executive said.

Spohr, a trained pilot and potential successor to Chief Executive Officer Christoph Franz, who last month announced his planned departure, said Lufthansa is discussing commercial cooperation with Air China Ltd. (601111) and may deepen a venture with Japan’s ANA Holdings Inc. (9202) amid strong competition on Asia trips.

Germanwings expects demand to rise by 5 percent this year, while the load factor, a measure of occupancy, should improve by 2.9 percentage points and the yield by 4.5 percent, Thomas Winkelmann, who heads the unit, said today.

While Germanwings will also use Bombardier Inc. (BOMB)’s CRJ900 regional jets through 2015, the goal is to make the low-cost unit an all-Airbus operator, Spohr said, without disclosing when the CRJ’s might go.

To contact the reporter on this story: 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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