Photographer: Ralph Orlowski/Bloomberg

Why Reaching Deal on Pilot Pensions Is Lufthansa’s Biggest Issue

  • Funding gap has widened despite billions of euros in top-ups
  • Flight attendants, ground crews agreed to revise pension terms

Deutsche Lufthansa AG is the airline stock that analysts around the world like least. Among the biggest issues is the pension deficit, second only to that of much more profitable Delta Air Lines Inc. Lufthansa wants to rein in retirement spending through a deal with its pilots union, the final labor group it needs to reach a settlement with.

The deficit has ballooned as falling interest rates reduced the money available for payouts, and the figure now far exceeds the German airline’s market value. Lufthansa is negotiating to switch the pilots’ retirement setup away from a guaranteed pension, similar to agreements hammered out with ground and cabin crews. The terms are part of contract talks set to resume this week. The pilots union said Saturday that the parties are edging closer to an accord.

The pension deficit has depressed the company’s equity ratio to well below its target of 25 percent. That reduces the financial resources available for Lufthansa to counter expansion by discount-airline competitors, such as Ryanair Holdings Plc.

Lufthansa’s retirement costs have doubled in the past five years. In addition, the company has been increasingly putting in funds to fight the deficit. Cumulative extra spending to finance the pension program in the period amounts to 3.6 billion euros ($4 billion). The company hopes that a deal with the pilots will provide instant relief. The airline has said that its contract in July with cabin crews will reduce pension provisions “in the upper three-digit million range.”

Even so, pessimism about the stock extends beyond equity analysts. Hedge funds are betting against a quick recovery of Lufthansa shares, which have fallen 26 percent this year.

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