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Investors doubt Lufthansa's ability to meet new targets

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Airline faces labour challenges with possible pilot

strikes

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Streamlining efforts may aid Lufthansa turnaround

By Ilona Wissenbach and Joanna Plucinska

FRANKFURT/LONDON, Oct 29 (Reuters) - Lufthansa's

CEO last year described the German airline group's

flagship carrier as a "problem child".

Now, despite a turnaround plan, that label is proving hard

to remove.

Although Carsten Spohr is trying to change things with

cost-cutting, centralising operations and streamlining a complex

fleet, the group, which reports third quarter earnings on

Thursday, has slipped further behind Air France-KLM

and British Airways owner IAG.

Lufthansa stock has inched higher, but shares in IAG and Air

France-KLM have risen by 92% and 15.7% respectively. Meanwhile,

its group operating margin narrowed to 4.4% last year, down from

7.6% in 2023, with analysts predicting 4.8% for 2025.

"We definitely lagged behind some of our competitors when it

comes to financial performance, and also, until this summer, we

lagged behind operational performance," Spohr said last month.

The changes Lufthansa is making, such as a 20% cut to

administrative jobs and retiring old planes, should help it hit

an 8% to 10% operating margin between 2028 and 2030.

"Lufthansa is a 'show-me story'", said Ingo Speich, head of

corporate governance at Lufthansa investor Deka Investment,

adding: "It still has to show that it can achieve its targets".

'LUFTHANSA IS FOCUSED ON THE RIGHT THINGS'

Investors and analysts said Lufthansa was trying to move in

the right direction.

"Lufthansa, to its credit, is focused on the right things:

namely, driving productivity up, and cost out," said Bernstein

analyst Alex Irving.

Its new plusher Allegris cabin means it can maximize premium

seat and product sales, driving more revenue as Boeing ( BA )

deliveries with the format finally land after a long delay.

A decision to cut 4,000 administrative positions over the

next five years was also well-received by the market.

However, Lufthansa's plans could get sidetracked as it

battles more urgent and pressing fires, like supply chain snags

on its long-awaited Boeing ( BA ) jets and tough union negotiations.

Lufthansa announced two profit warnings last year as strikes

caused costs to spiral, hampering plans to widen its margin. It

has yet to reach a deal with its pilots' union and the threat of

possible strike talks still looms.

"We think (the) outlook will dominate results given the

potential for a pilots' strike," said UBS analyst Jarrod Castle.

GOOD LONG-TERM STRATEGY; WEAKNESS IN EXECUTION

Lufthansa also wants to streamline its complex structure,

which includes six hubs and nine passenger airline brands

ranging from ITA Airways to Eurowings.

"This multitude of brands is confusing for customers and

apparently hard for management to control," Hendrik Schmidt, a

corporate governance expert at German asset manager DWS, said.

Global headwinds are also rising, including an expensive U.S.

government shutdown that has hit the airline sector and softness

in transatlantic travel.

Deka's Speich is in two minds over the outlook.

"Lufthansa is (a) contradictory company. On the one hand, the

long-term strategy is right," Speich said, adding: "On the other

hand, there has been weakness in execution in the past".