European airlines eye more cost cuts

Markets Reuters

By Maria Sheahan

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FRANKFURT (Reuters) - European airlines are seeking ways to further cut their costs to offset soaring fuel prices and the impact of international crises that are squeezing margins this year.

Political unrest in North Africa, an earthquake and subsequent nuclear crisis in Japan and European debt problems are adding to a toxic mixture of high oil prices and fierce competition among airlines fighting to make a profit.

German flagship carrier Lufthansa said on Thursday cost cuts could still help it achieve higher operating profits than last year, as it reiterated its 2011 outlook.

The airline hedges its exposure to fuel prices, has installed lighter seats on some of its planes to reduce their weight and plans to replace older aircraft with newer, more fuel-efficient ones to cut down on its expenses.

"We are working on many topics. There are more than 60 projects that deal just with reducing fuel consumption at the passenger airlines," Lufthansa finance chief Stephan Gemkow told reporters during a conference call.

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Fuel costs account for about a third of its overall expenses, and it sees the bill continuing to rise.

International oil prices hit a 2-1/2 year high last month as unrest spread in North Africa and the Middle East and fanned concerns supply could be disrupted, with U.S. crude staying above $100 per barrel.

CONSIDERING MORE CUTS

Irish carrier Aer Lingus said it is considering ramping up its cost-cutting program to limit an expected drop in 2011 profit.

Aer Lingus -- under constant pressure from bigger and leaner rival Ryanair -- has already cut routes, staff and pay to survive, but its reliance on the Irish market, still struggling to emerge from one of the industrialized world's worst recessions, has prompted a second look at its outgoings.

The carrier did not say what additional measures it was considering, saying only it would update the market "in due course."

In addition to lowering costs through the use of lighter materials, hedging deals and better capacity utilization, airlines try to pass on rising costs to their customers.

Delta and US Airways have indicated they may raise air fares to deal with higher fuel costs, leaving some analysts questioning how much longer consumers paying more for gasoline and food would tolerate higher prices.

PASSING ON COSTS

British budget airline Flybe said it would follow peers in introducing a fuel surcharge on plane tickets to recoup some of the rising costs it is shouldering amid sliding leisure bookings by British consumers.

This week it said it expects air travel markets to remain depressed in the second quarter after growth in international air passenger traffic slowed in March due to disrupted traffic flows to and from Japan.

International Airlines Group, the company formed by the merger of British Airways and Iberia, is due to report first-quarter results on Friday. Rival Air France-KLM reports full fiscal-year earnings on May 19.

(Reporting by Maria Sheahan; Editing by Mike Nesbit)

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