Lufthansa Sees Eurowings Revival as Strike Shows Costs Challenge

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Deutsche Lufthansa AG (DE:) said an improved performance at its no-frills Eurowings arm helped stem profit declines as a two-day strike underscores the challenge facing the airline in cutting costs.

Third-quarter earnings fell 8% to 1.3 billion euros ($1.44 billion) as a slide in fares outstripped savings, according to a statement Thursday. The figure was ahead of analyst estimates and the revival at Eurowings suggests the group may be getting to grips with competition from specialist discount carriers.

Lufthansa said it expects capacity to shrink 1% on short-haul routes in its home markets this winter, comments that Bernstein analyst Daniel Roeska said may point to a better operating environment over the next six months. A glut of seats in the past few years has pushed down fares and undermined margins at European carriers despite efforts to boost efficiency.

The cabin-crew strike highlights the challenge facing Lufthansa as it seeks to secure deeper cost costs. The walkout, which began at midnight, has led to the cancellation of 1,300 flights and Germany’s UFO union has said it will escalate the action unless the company agrees to fresh talks on pay. Lufthansa declined to comment on the likely cost.

Shares of Europe’s biggest airline gained 3.4% to 16.70 euros as of 9:10 a.m. in Frankfurt. The stock has declined 14% this year, following a 36% slide in 2018.

Chief Executive Officer Carsten Spohr said the performance of Eurowings, which turned profitable after posting losses in the previous three quarters, indicates “turnaround measures are showing first results.” The unit has reduced winter capacity this winter, helping to buoy yields despite the fare war.

The Lufthansa statement made no reference to a possible investment in Alitalia SpA as part of a rescue of the bankrupt Italian carrier, though Spohr is tipped by analysts to tackle the subject on a call with investors later.

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