Lufthansa sees better outlook after signing deal on pay and pensions

MUNICH (Reuters) – Lufthansa expects profits to fall only slightly this year despite lower fares and a rising fuel bill, the German airline said, fresh from clinching a long-sought deal on pay and pensions with its pilots this week.

Like its rivals, Lufthansa saw ticket prices come under pressure in Europe last year from overcapacity and fierce competition from airlines with a lower cost base.

While it expects the decline in ticket revenue to ease this year, the company said it would not be able to cut costs enough to make up for that and an increase in its fuel bill of about 350 million euros ($376 million) to 5.2 billion euros.

However, its forecast for adjusted earnings before interest and tax to be only slightly lower this year than the 1.75 billion euros reported for 2016 was better than expected by analysts, sending its share price more than 4 percent higher to 15 euros by 0929 GMT.

Before the results analysts had expected its underlying profit to fall more sharply to 1.38 billion euros for 2017.

"We feel well equipped to be successful in 2017 in a continuing challenging environment," Chief Executive Carsten Spohr told analysts.

Chief Financial Officer Ulrik Svensson said the year had started well for the company, with increasing traffic, the agreement with the pilots and unit revenues even improving in Asia compared with last year.

Wednesday's agreement on pay and pensions with pilots is expected to reduce pilot costs by about 15 percent, Spohr said. Under the deal pilots will effectively work more hours, thereby increasing productivity, and the average retirement age will also rise, cutting pension costs.

"It's a real success. The pilots made major concessions, which I did not think would happen," Union Investment fund manager Michael Gierse said.

But Svensson said revenues were still under pressure in Europe, after the group reported results for 2016 in line with expectations.

Many analysts have expressed concern that European airlines are engaging in a damaging battle for market share, putting more seats onto the market than there is demand for, which will lead to lower profits this year.