Lufthansa Spreads Wings in US With United Partnership

LUFTHANSA got a bigger piece of America on Nov. 1.

Under a new bilateral agreement, the German airline can start flying to 25 cities in the United States instead of 12. It has a new arrangement with United Airlines that hooks it into 200 US destinations. And to give Lufthansa breathing room, US airlines cannot increase their flights to Germany for two years.

``We can finally compete against US airlines on the same basis,'' says Lufthansa spokesman Rolf-Dieter Grass.

All this is buoyant news for an airline that could use a lift. Deutsche Lufthansa AG lost 817 million deutsche marks ($488 million) in the last two years. In the first half of this year, it lost another $132 million and the flow of red ink is expected to continue through next year. ``Our aim is to break even in 1995,'' Mr. Grass says.

The alliance between Lufthansa and United is the latest in a swath of partnerships between US and European carriers. Delta and Swissair, Northwest and KLM, Continental and Air France all have linked forces so they can book each other's flights. This practice, known as code-sharing, allows Lufthansa to sell a ticket that routes a passenger from Hamburg to Salt Lake City, even if part of that journey will be on a United plane.

If code-sharing adds just one extra business passenger to each flight, Lufthansa will reap an extra $17 million a year, estimates UBS Philips & Drew analyst Taco Sieburghsjoerdsma in London.

He terms the linkup with United ``absolutely brilliant.... The planes of Lufthansa will be fuller so that will hurt everybody else,'' he says.

The code-sharing is the first of two phases. By the end of next April, the airlines expect to closely coordinate their flights to create an even stronger network. Grass of Lufthansa estimates the synergy will increase his airline's revenues by $30 million to $42 million a year.

While Lufthansa's biggest advantage is its strategic location in Europe's largest airline market, it is also its biggest weakness. German workers are the best-paid workers in the world and enjoy one of the shortest work weeks. This limits the airline's ability to cut costs.

Last year among the major European airlines, only Swissair and Air France had higher labor costs (as a percentage of revenue) than Lufthansa. Lufthansa workers agreed to a wage freeze in 1992. This year, they received an average 2.5 percent raise, which is below the rate of inflation.

Since Lufthansa is government-owned and Germany has strong unions, wholesale firings are out of the question. So the company is making personnel cuts through normal staff attrition and early-retirement schemes. The number of man-months worked in July, for example, was down 11.5 percent from the same month a year ago. The company aims to trim the total another 6 percent in the months ahead.

Lufthansa also has consolidated two cargo operations into one and - in a remarkable move given Germany's unions - created an airline within an airline. Wages at Lufthansa Express, which handles flights inside Germany, are 27 percent lower than at the rest of the airline, Mr. Sieburghsjoerdsma says.

``There should be positive earnings surprises coming from the company,'' he adds.

Other analysts are not so sanguine.

``Certainly Lufthansa is doing the right things,'' says Andrew Barker, an airline industry analyst at S.G. Warburg Securities Ltd. in London. But ``it has got a long way to go before it catches up with British Airways and KLM,'' he says.

US airlines are even further ahead in cost cutting, says David Pizzimenti, an airline analyst with Nomura Research Institute America in New York.

Furthermore, these lower-cost airlines represent a moving target. As Lufthansa brings its costs down, Air France is going through dramatic turmoil in an attempt to economize. Its president resigned recently because the French government did not accept his cost-cutting plan. United and American airlines are confronting their unions in bids to reduce operating costs.

The new US-German air traffic accord will last four years and then is to be renegotiated along the principle of ``open skies.''

``The European market gets tougher and tougher,'' Mr. Pizzimenti says. ``If they [the Germans] deregulate and have to compete ... they have a tough road to go through.''

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