FRANKFURT Lufthansa's (LHAG.DE) drive to cut costs on its European routes and invest billions in its fleet are paying off, with the German airline enjoying a better than expected summer, its chief executive told Reuters on Friday.
In recent years, Lufthansa has struggled to keep up with a fast-changing landscape that has seen rapid expansion by Gulf carriers and lower cost competitors with newer fleets.
Traditional rival IAG (ICAG.L) has responded more quickly, earning plaudits from investors for buying low-cost carrier Vueling and for its tough negotiations with unions to lower overheads, with the success reflected in rising profits.
In a bid to reverse market share losses, Lufthansa is now also cutting costs and expanding budget services despite union protests, as well as fitting new business and first class seats and introducing a premium economy class.
"We have seen the strongest summer ever, business has been substantially better in July and August than we expected," Carsten Spohr said in an interview at the group's main base in Frankfurt.
Spohr said Lufthansa would therefore "comfortably" reach a target to post adjusted earnings before interest and tax of more than 1.5 billion euros (1.1 billion pounds) this year.
Air France-KLM (AIRF.PA) also wants to cut costs and is threatening to shrink long-haul routes at its French arm unless pilots agree to cuts, sources said on Friday.
Spohr said the Germanwings unit, which has been taking over much of Lufthansa's short-haul routes in Europe, would make a double-digit million euro profit this year, its first profit in years on the routes.
Lufthansa shares, in danger of dropping out of the main German blue chip index this week after falling 14 percent this year, rose over 6 percent on Friday, extending earlier gains after Spohr's comments.
However, Lufthansa needs to do more to cut costs and to make the profits it requires to fund over 38 billion euros' worth of plane orders, according to analysts.
China's slowing economy is also posing problems for freight unit Lufthansa Cargo, though passenger demand, especially for premium seats, has been good thanks to a higher proportion of Chinese passengers, Spohr said.
The German market has long been dominated by Lufthansa and other German carriers such as Air Berlin and Condor, but with Air Berlin cutting routes and customers more price-sensitive than ever, low-cost rivals have spied an opening.
Ryanair CEO Michael O'Leary has promised to launch "the mother and father of price wars" this winter and the Irish carrier this week started its first German domestic flights since 2011, on the Cologne-Bonn route, offering tickets for a limited time from as little as 9.99 euros one way.
"There's this elephant, albeit a very lean one, thundering down the corridor, and that's Ryanair with its massive growth plans in Germany," independent aviation consultant John Strickland told Reuters.
Of the analysts covering Lufthansa, 23 have either a "hold" or "sell" recommendation, compared with six on "buy", according to Starmine data. IAG, meanwhile, has 17 "buy" recommendations and just six analysts on "hold" or "sell".
Lufthansa's response is Eurowings, formally a tiny regional carrier within the Lufthansa group and which Spohr hopes will be able to operate at costs nearer that of Ryanair rival easyJet.
"There's plenty more to be done. easyJet is not necessarily the one they have to worry about," said Liberum analyst Gerald Khoo, who has a "Sell" rating on Lufthansa.
Spohr, who took over as CEO in May last year, said Eurowings would attract customers because it would enjoy the same reputation for quality as Lufthansa, adding there was space for it in Lufthansa's core markets Germany, Austria and Switzerland, where low-cost carriers have not gained as much market share.
Like IAG CEO Willie Walsh, 48-year old Spohr has taken a tough line with unions, saying the group's main brand will not grow its fleet unless cost cuts can be achieved.
But both Khoo and Strickland highlighted Walsh was negotiating when the economic backdrop was much tougher and the oil price was higher, making it slightly easier to impress on the unions the necessity of cost cuts.
"Lufthansa needs to get the union into the mindset that radical reform is needed," Khoo said.
Pilots' union Vereinigung Cockpit has held 13 strikes over 18 months, costing the airline more than 300 million euros in lost profit, and this week threatened more walkouts.
Spokesman Markus Wahl said on Friday the union would only sit down for talks with Lufthansa if management presented a better offer and stopped moving jobs out of Germany.
(Additional reporting by Reuters TV; Editing by Maria Sheahan and Mark Potter)