Bumpy flight

Dividend shocker puts Lufthansa aerobatics to test

Lufthansa's dividend shocker is putting the aerobatic skills of Europe's largest airline to the test. The German flagship carrier announced on Friday that it's scrapping payouts to shareholders. That's the second such move in three years and follows two profit warnings and an acrimonious, unresolved labour dispute. And new Chief Executive Carsten Spohr, in the job since last May, has a worrying appetite for growth in a challenged industry.

Lufthansa has a cost problem as well as a revenue problem. It also has an ageing fleet that requires heavy investment to modernise. Unit costs are higher even compared to other European legacy carriers like British Airways. And aggressive long-haul carriers like Dubai's Emirates, Abu Dhabi's Etihad and Turkish Airlines are wooing lucrative intercontinental passengers with cheaper tickets and better comfort. They operate a younger, more fuel-efficient fleet and pay lower wages, taxes and airport fees at home.

Meanwhile, no-frills carriers like Ryanair and easyJet are undercutting prices in the European short-haul market. Combating that requires cutting costs, which has sparked Lufthansa's disputes with staff. Its pilots are not willing to give up perks like retirement at age 55 without a fight. Eleven strikes since April 2014 have wiped out euro 232 million in profit and annoyed millions of passengers.

CEO Spohr's predecessor Christoph Franz scrapped the dividend for 2012 and launched a multi-year cost-cutting programme. Reinstating the dividend for 2013 was supposed to underpin the group's progress and its confidence in a better future. The new about-face provides fresh evidence that the turnaround story was stalling - Spohr had already been forced to reduce profit targets.

Even more worryingly, Spohr is prioritising growth over cost cutting. The fleet of Lufthansa's core high-cost unit is supposed to grow by a total of 9 per cent by 2020, requiring 500 additional pilots and 1,300 flight attendants. The no-frills unit Wings is expanding too. The risk is that too many seats compete for too few passengers, pushing ticket prices down and costs up - and thus crashing profit. Spohr needs to chalk up a few successes quickly if he wants to avoid his credibility being grounded.