Lufthansa to Order Airbus Planes in Fuel-Cost Cut Program

Deutsche Lufthansa AG agreed to renew its short-haul fleet with 100 mostly fuel-efficient jets from Airbus SAS, as the airline seeks to cut kerosene costs that constitute its single biggest expense.

Of the new aircraft, 70 will be A320neo and A321neo models, while 30 will be equipped with the current engine option, the company said in a statement today. The airline will also take six Boeing 777-300ER for the long-haul fleet of its Swiss unit and two additional A380 for its namesake brand, bringing the list price for the planes to 9 billion euros ($11.7 billion).

Europe’s second-largest airline is emerging from the first year of its most ambitious efficiency push ever, seeking 2.3 billion euros in operating profit by 2015. Lufthansa, which suspended its dividend payout for 2012 to help finance the planes, predicted today that net income will drop this year, and that it’s unclear if the company can achieve free cash flow.

“2013 and 2014 will be tough years of implementation and the continuation of the restructuring process,” Chief Executive Officer Christoph Franz said, according to a speech handed out to journalists ahead of the company’s annual press conference at Frankfurt airport today.

Lufthansa rose as much as 57 cents, or 3.7 percent, to 16.06 euros, and traded at 16.02 euros as of 9:31 a.m., valuing the Cologne-based company at 7.4 billion euros.

Biggest Operator

The order makes Lufthansa the biggest airline operator worldwide of Airbus aircraft. Franz said the fleet will not grow significantly in coming years, and Lufthansa will remain “restrictive” in its offering, adding just 1 percent capacity this year. That’s down from an earlier goal of 1.5 percent capacity growth. While the short-haul offering will be reduced by 2.6 percent, long-haul capacity will rise 2.9 percent.

Lufthansa today said fuel costs rose 18 percent in 2012 to 7.39 billion euros, which it sees declining to about 7.2 billion euros this year. Staff costs rose 5.6 percent to 7.05 billion euros, while fees and charges increased by 3.3 percent.

While fuel expenses will remain on a high level, the projected decline for this year is “a sigh of relief,” Chief Financial Officer Simone Menne said.

Operating profit declined 36 percent last year to 524 million euros and is set to rise again this year, Lufthansa said, without being more specific. That means profit will have to rise more than four-fold in 3 years to reach Lufthansa’s target. Analysts surveyed by Bloomberg expect the number to rise to 987.5 million euros this year.

Profit Swing

Air France KLM Group and British Airways parent IAG both suffered operating losses in 2012. Lufthansa’s passenger airline had an operating loss of 45 million euros, while Swiss earned 191 million euros and Austrian contributed 65 million euros. The company’s maintenance and repair unit, No. 1 in the industry, made the biggest contribution to operating profit,

“The passenger airlines’ profits are set to be the profit swing this year,” Damian Brewer, an analyst at RBC Capital Markets, said in a note to clients.

Score, as Lufthansa’s efficiency push is dubbed, made a gross contribution of 618 million euros to operating profit last year, compared with a target for 280 million euros. Operating profit still declined this year, as fuel costs rose by 1.1 billion euros. Score is expected to contribute 740 million euros this year.

The program includes cutting 3,500 jobs, and Lufthansa has already booked provisions for severance packages for 2,014 employees, the company said today.

The savings measures coincide with the company’s largest ever fleet renewal program that includes 236 new planes to be taken into operation through 2025 for a list price of 22 billion euros. Customers typically get discounts on orders.

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