Lufthansa Fails to Secure Pilots Deal, Adding to Pension Concern

  • Union says talks on pay and benefits for air crew have ended
  • S&P warns that German carrier needs to cuts its liabilities

Deutsche Lufthansa AG’s pilot union said negotiations over pay, pensions and promotion have failed, adding to concern about the carrier’s debt and liabilities after S&P Global Ratings cited pension costs as a prime reason for putting it on watch for possible credit downgrade.

Talks that began early this year on contracts and career paths for flight crew at the main Lufthansa passenger brand, Lufthansa Cargo and low-cost arm Germanwings ended without a deal, the Vereinigung Cockpit union said Friday.

S&P has meanwhile revised its outlook on Lufthansa’s credit rating to negative from stable, it said after markets closed Thursday, describing a jump in the pension deficit to 10.8-billion euros ($13 billion) as of June 30 from 6.6 billion euros on Dec. 31 as a “material credit weakness.” It urged the group to seek a pilot deal like one with cabin crew that cut liabilities by 800 million euros.

“We consider companies with underfunded defined-benefit plans, such as Lufthansa, as structurally more vulnerable to a prolonged period of low interest rates,” S&P said, adding that a 50-basis point change in the discount rate would equate to a net pension deficit movement of 1.63 billion euros.

Investment Grade

Vereinigung Cockpit said that Lufthansa’s management board “seems to have no interest in coming to a solution,” and that an outline agreement that formed the basis for negotiations is no longer valid.

Lufthansa, whose shares traded 2.6 percent lower at 10.04 euros as of 1:09 p.m. in Frankfurt, “still has every interest in solving all open issues with the pilots,” spokesman Helmut Tolksdorf said in an e-mail, adding that Europe’s third-biggest airline has invited the union to continue with talks.

S&P currently rates Lufthansa’s long-term debt at BBB-. While that’s the lowest investment grade, it’s a badge of pride for the airline as all but a handful of carriers globally have so-called junk status. The new outlook implies the rating may be cut within two years, S&P said.

While reforms to retirement schemes have also been agreed with ground staff, the pilots have so far refused to sign a deal. Relations with flight crew have deteriorated as Lufthansa ceases hiring on the most lucrative mainline contracts while beefing up the Eurowings discount division, into which Germanwings is being folded.

Chief Executive Officer Carsten Spohr is also establishing an Austrian arm of Eurowings, which unions say could begin to cannibalize existing services as Lufthansa seeks a backdoor route to cutting costs.

The breakdown in the pilot negotiations comes after the Ver.di union warned this week that its cabin-crew members at Eurowings could strike over pay. A series of walkouts wiped a total of 463 million euros from Lufthansa’s operating profit in 2014 and 2015.

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