Lufthansa to make tough cost cuts

German flagship airline Deutsche Lufthansa vowed to make tough cost cuts and restructure its loss-making Austrian unit as it warned on Thursday that economic uncertainty and high fuel prices would cut into its operating profit this year. “It is going to be hard work, because in order to structurally and sustainably strengthen the group’s earnings power, we are going to have to rebuild the group itself and we have to be willing to make some unpopular decisions,” Chief Executive Christoph Franz said at the company’s annual results press conference. The company’s operating profit is expected to slide from  ¨820 million ($1.1 billion) in 2011 to a “mid three-figure million euro range” in 2012, it said. European airlines are being hit with a toxic mixture of soaring fuel prices - which accounted for a fifth of Lufthansa’s costs last year - weak demand due to the European debt crisis and burdens from new national taxes on air travel. In addition, fierce competition from Gulf rivals such as Emirates and Etihad, which recently bought a stake in Germany’s No.2 carrier Air Berlin, as well as low-cost carriers like Ryanair is putting pressure on legacy airlines. To improve profits, Lufthansa plans to cut costs by 1.5 billion euros by the end of 2014, is selling loss-making British unit BMI and now plans to inject as much as 140 million euros of fresh equity capital into Austrian Airlines. “Our market conditions have changed drastically, and they will continue to change further. In order to stay ahead in this hard-fought competition, we too must continue to change,” Franz said. Lufthansa has not said what specific measures it plans or how many jobs may be cut, but said it aims to pool purchasing volumes and slash administrative staff costs, among others. Lufthansa saw operating profit drop by almost 20 per cent to 820 million euros ($1.07 billion) in 2011 and said it saw profit shrinking to a mid-three-digit million euro figure this year, in line with a 580 million consensus in Thomson Reuters StarMine. Its adjusted operating margin narrowed by 1.3 per centage points to 3.4 per cent in 2011, which Chief Financial Officer Stephan Gemkow said Lufthansa was “not happy with.”