Lufthansa struggles to rein in costs as fare pressures loom

[FRANKFURT] Deutsche Lufthansa AG struggled to reduce operating costs, setting up the German airline for a difficult second half with pressure on fares set to intensify.

The shares fell as much as 4.3 per cent, the biggest intraday drop in three months, despite Lufthansa raising its 2017 operating profit forecast to gradually catch up with analyst estimates.

While first-half earnings almost doubled on stronger traffic, investors focused on the company's lack of progress in responding to lower cost rivals.

"We remain concerned that Lufthansa is not making sufficient progress in improving competitiveness in its core businesses," Gerald Khoo, a London-based analyst at Liberum, said in a report to clients.

Bankhaus Metzler analyst Guido Hoymann downgraded his recommendation on Lufthansa to sell from hold.

Lufthansa shares had been trading at a nine-year high as the company said in its last two monthly traffic reports that ticket pricing was "positive".

The company said in a statement late Monday that the trend for unit revenue, a measure of pricing per seat, will be "negative" in the second half.

The carrier, which has its main bases in Frankfurt and Munich, has capitalised on the added demand by leasing extra aircraft from ailing rival Air Berlin Plc and acquiring full control of Brussels Airlines, which is combining with the Eurowings low-cost arm that Lufthansa is seeking to expand.

Amid the expansion push, Lufthansa still has to agree on wage and retirement terms with its pilots union. Even if the carrier succeeds in reducing unit costs at Eurowings as planned, the arm's costs will still be far higher than those at budgets rivals such as Ryanair Holdings Plc.

Lufthansa shares fell 3.1 per cent to 20.46 euros at 9.47am in Frankfurt.

Still, the stock is the best performer this year on Germany's benchmark DAX Index with a 67 per cent gain.

BLOOMBERG