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Lufthansa’s cost-cutting gaining altitude too fast

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Lufthansa , Europe's largest airline by passengers, is in the middle of a radical restructuring program. Employees and customers are already feeling the pain. It's now the shareholders' turn. They won't get a dividend after operating profit nosedived by 36 per cent last year. This will save Lufthansa €160-million ($217-million) to €200-million. Investors are not amused and sent the carrier's share price down almost 5 per cent.

Lufthansa is in a strategic bind. In the lucrative long-haul segment, important non-European competitors leverage their domestic tax benefits to woo customers with better service. In the short-haul market, no-frills airlines such as Ryanair and Easyjet have been mauling ticket prices and profitability. Record fuel prices, which reduced profit by €1.1-billion in 2012, only made matters even worse.

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Compared with other legacy carriers like Air France-KLM, which has been piling up losses since 2009, Lufthansa is coping well. Its operational business remained profitable throughout the financial crisis.

The company last year nonetheless announced an ambitious €1.5-billon cost-cutting program by 2015. Twenty percent of administrative jobs are to be culled and the loss-making short-haul business will be restructured. Non-hub connections will be handed over to Germanwings, Lufthansa's no-frills subsidiary.

The cost cutting was necessary and is now well ahead of schedule. Instead of reducing costs by €280-million in 2012, the company already squeezed out about €380-million.

These achievements come to the chagrin of customers and employees, though. Frequent fliers got cross when the airline downgraded its loyalty program. Passengers moan about uncomfortable new seats, poor catering, overcrowded call centres and the lousy handling of complaints. Employees are falling out of love with their employer as well, as Lufthansa's own surveys show. Staff satisfaction and trust plunged in 2012.

To a certain degree, tensions are inevitable during organizational change. But Lufthansa should take the disgruntlement seriously before it accelerates its cost cutting. The airline risks falling out with customers, employees and shareholders at the same time. That is definitely not something it can afford.

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