Lufthansa, Air France Record Profits May Spark Labor Strife

  • Union at Lufthansa says managers should take account of growth
  • Air France gives pilots until January for accord to halt cuts

Air France-KLM Group and Deutsche Lufthansa AG reported surging third-quarter earnings on declining fuel prices and robust summer traffic. The downside for the carriers is that the growth could undermine efforts to push through restructuring plans with workers.

The gains, while a relief to investors, pose a risk to management moves to win union cooperation for cost-cutting strategies. The two airlines, Europe’s biggest, are reorganizing to confront low-cost competition at home and Middle East rivals on intercontinental routes. Both companies have been hampered by strikes for more than a year as employees protest reorganization measures.

“How do we explain to our staff that we need to carry on making big efforts while the group delivers such strong results?” Air France-KLM Chief Financial Officer Pierre Riolacci said on a conference call with analysts today. The company “is getting better, but it’s not doing well,” and “that’s what we keep telling our staff.”

Airlines worldwide are poised to report record full-year earnings for 2015. Paris-based Air France-KLM delivered its best third-quarter profit numbers in at least a decade on Thursday, while German competitor Lufthansa raised its 2015 forecast after operating profit in the three-month period surged 51 percent.

Air France-KLM fell as much as 5.4 percent in Paris trading, the steepest intraday decline since Sept. 22, while Lufthansa dropped as much as 8.9 percent in Frankfurt in the sharpest slide in 16 months, reversing gains earlier in the day for both stocks.

“We remain skeptical of the longer term outlook for Lufthansa’s labor costs,” said Oliver Sleath, an analyst at Barclays Plc in London. “With oil at around $50 and Lufthansa potentially about to post its highest-ever annual operating profit, the unions are unlikely to take kindly to cuts to their collective labor agreements.”

Cockpit staff have fought changes ferociously at Cologne-based Lufthansa. Pilots have walked out 13 times since April 2014, generating extra costs of about 350 million euros ($383 million), until a German court ruled the action illegal last month. Wage and benefit talks with flight attendants have been halted repeatedly, and the cabin crew union said it’s preparing to strike if a Nov. 1 deadline passes without an agreement.

Route Risk

The final phases of Air France-KLM’s Transform 2015 restructuring program are still awaiting agreements from the Air France brand’s pilots on productivity measures, Riolacci said. Unless the employees reach a deal with the airline by early 2016, it will scale back the routes network and fleet and fire people to reduce the workforce, he said. Until now, the airline has limited job cuts to not replacing people who quit or take early retirement. Some 1,000 positions are slated to go in 2016.

Lufthansa’s nine-month operating profit jumped 71 percent, even with the costs of pilots’ strikes early this year plus a two-day walkout in September that was halted by a German court. The German company said Thursday that fourth-quarter demand and ticket pricing are eroding, and Chief Executive Officer Carsten Spohr told journalists on a call that he’s seeking employee cooperation to revive growth.

“We now want to discuss with our wage-talk partners how to make our hub airlines able to grow again,” Spohr said. “The businesses haven’t grown since 2011, and they shrank last year. More and more employees do understand that, and they do understand that strikes don’t get us closer to that common goal, but will make us drift further apart.”

Thursday’s earnings and improved outlook only seemed to strengthen labor leaders’ resolve to seek better terms in talks with Lufthansa.

“Management has two more days to make us an offer, and we hope they will look at this quarterly report” as they develop the proposal, Nicoley Baublies, head of the UFO cabin crew union, said in a letter to employees at Lufthansa. “With these numbers, we can prevail against the Ryanairs and Emirates of this world, if Lufthansa will take us along instead of taking away our prospects.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE