Deutsche Lufthansa AG, Europe’s second-biggest airline, will combine short-haul operations outside its main Frankfurt and Munich hubs with the Germanwings low-cost unit as part of a cost-reduction effort.

The new unit will begin operations in January and fly 18 million passengers annually, Cologne, Germany-based Lufthansa said yesterday. Former Chief Executive Officer Wolfgang Mayrhuber and former Chief Financial Officer Karl-Ludwig Kley have been nominated to join Lufthansa’s supervisory board in 2013, with Mayrhuber becoming chairman, the airline also said.

Lufthansa has a companywide goal of saving 1.5 billion euros ($1.96 billion) through 2014 under a reorganization program dubbed Score. The company is cutting 3,500 jobs in administration and as many as 1,000 catering posts may be eliminated. The program has already helped improve earnings, with second-quarter operating profit increasing 28 percent to 361 million euros and exceeding analyst estimates.

“Combining our domestic German and European point-to-point services has enormous potential to improve efficiency,” CEO Christoph Franz said in a statement. “Our aim is to once again fly these services profitably under the umbrella of a single company.”

The carrier is predicting full-year operating profit in the “mid-three-digit million-euro range,” excluding restructuring costs of 100 million euros to 200 million euros.

Shares Gain

Lufthansa rose as much as 1.7 percent to 10.96 euros and was trading up 1.4 percent at 10:05 a.m. in Frankfurt, the best performance on Germany’s benchmark DAX Index (DAX), which declined 0.6 percent. The stock has gained 19 percent this year, valuing the company at 5.01 billion euros.

The European short-haul strategy is “absolutely crucial,” said Peter Oppitzhauser, a Zurich-based analyst at Credit Agricole with an outperform recommendation on Lufthansa. Unlike discount airlines, “they’re still a network carrier, so they still have to feed the hubs. So what they can do is slash the labor costs, which is what they’re trying to do.”

Mayrhuber, 65, stepped down as CEO at the end of 2010. He is supervisory board chairman at German semiconductor maker Infineon Technologies AG (IFX) and serves on the board of Swiss bank UBS AG. (UBSN) He will succeed Juergen Weber, who is retiring, Lufthansa said. Kley, the 61-year-old CEO of drugmaker Merck KGaA, will replace Klaus Schlede on the Lufthansa board.

Mayrhuber’s Acquisitions

Weber, 71, was also Mayrhuber’s direct predecessor as Lufthansa CEO, while Schlede is another former executive. During Mayrhuber’s term as chief from June 2003 through December 2010, Lufthansa bought BMI, Austrian Airlines and Swiss International Airlines, as well as stakes in JetBlue Airways Corp. (JBLU) and Brussels Airlines NV. Weber, Mayrhuber and Franz, 52, all started at Lufthansa before their 31st birthdays.

Franz’s administration is “concentrating on making units such as Austrian profitable,” rather than acquiring other carriers, spokeswoman Claudia Lange said Sept. 17. Franz concluded the sale of unprofitable BMI to British Airways’ parent International Consolidated Airlines Group in April.

“Their strategies as CEO certainly differ,” said Jochen Rothenbacher, a Frankfurt-based analyst at Equinet Bank AG who has a reduce recommendation on Lufthansa. “But that doesn’t mean Mayrhuber doesn’t support Franz’s current policies. That they had different approaches is true, but the times are also now different.”

Iberia Reorganization

Lufthansa’s operational reorganization echoes moves at competitors. Air France-KLM Group (AF), Europe’s biggest airline, cut its second-quarter operating loss by more than half to 66 million euros, aided by the introduction of a 2 billion-euro savings plan, the Paris-based carrier said July 30. British Airways owner IAG is planning job cuts at Spanish arm Iberia after the Madrid-based brand caused a second-quarter group loss.

IAG CEO Willie Walsh has been working on a turnaround at the Spanish business through the transfer of domestic and short- haul flights to a new unit, Iberia Express, which aims to reduce the break-even point with less-generous labor contracts. The unit was profitable in June, its third full month of operations, IAG said Aug. 3, adding that the wider Iberia restructuring plan may lead to extra costs this year.

Lufthansa is implementing “the same process as IAG with Iberia Express,” Credit Agricole’s Oppitzhauser said. “That’s also related to why the cabin crew is going on strike. They want to outsource 2,000 people to this new unit.”

Labor Dispute

Cabin crews at the German carrier walked out for three days in August and September. A sticking point in wage negotiations was the failure of Lufthansa to guarantee beyond next year that flight attendants wouldn’t be transferred to cheaper contracts at the low-cost division, the Unabhaengige Flugbegleiter Organisation union said at the time.

The strikes, which culminated in half of Lufthansa’s flights being canceled on Sept. 7, ended after the two parties agreed to mediation. Hans-Adalbert Ruerup, a former adviser to German Chancellor Angela Merkel, was appointed as the mediator on Sept. 13.

Lufthansa plans to build a logistics center at Frankfurt airport to replace a warehouse complex that’s more than 30 years old, the airline said yesterday. Construction of the new main building will begin in 2014, following work to prepare the site. The facility will open in 2018.

The project reverses an investment-plan freeze that Lufthansa’s cargo unit imposed following the imposition of a ban at Frankfurt last October on flights between 11 p.m. and 5 a.m., which largely affected air-freight services.

“It is astonishing that Lufthansa complains vociferously to the outside world about the night-flight ban, about how many millions it is costing, how it might leave, but then says it will invest half a billion euros in Frankfurt,” Equinet’s Rothenbacher said. “The whole argument against the night-flight ban now seems not to carry as much weight.”

(Source: Bloomberg)