LONDON - Lufthansa is the sorest loser in a brutal price war among Europe’s budget airlines. Costs per seat at the German group’s Eurowings outfit are almost double those of market leader Ryanair, whose chief executive, Michael O’Leary, seems willing to suffer a couple of years of pain to clear the region’s airways. That leaves his Lufthansa rival Carsten Spohr in a bind. Any change of course is likely to fly into German labour laws.

After profit warnings this year from easyJet and Ryanair, a gloomy outlook from Lufthansa late on Sunday was hardly a surprise. The big shock, however, was the intensity of its pessimism. The German flag-carrier lopped 20% off its 2019 forecast for adjusted operating profit. Most of the fault lay with Eurowings, which had been expected to break even this year but is now forecast to lose 5 cents on every euro of revenue. Lufthansa shares slid 12% on Monday to their lowest in two years. Europe’s other airline stocks also lost altitude.

Blaming rivals for accepting “significant losses” in return for market share looks like a case of sour German grapes. Nor is it strictly true. In the year to March, Ryanair made 1 billion euros after tax on revenue of 7.7 billion euros. Earnings this year could still come in at 950 million euros, despite the price war. By contrast, Eurowings last year suffered an operating loss of 231 million euros on revenue of 4.2 billion euros.

Rather than griping, Spohr would be better off trimming Eurowings down to size. Its 9,300 staff helped ferry 38.5 million passengers round Europe last year. Ryanair carried more than three times as many people with only half as many employees. Little wonder the Dublin-based operator’s unit costs of 3.2 cents per available seat, per kilometre flown, are less than two-thirds those at Eurowings.

Germany’s worker-friendly employment rules will admittedly complicate any restructuring. But with O’Leary seemingly prepared to keep the screws on for at least two years, Spohr has to wield the axe. Lufthansa says Eurowings will deliver a turnaround plan shortly. Investors will be looking out for signs of concrete action, rather than more scornful words.

CONTEXT NEWS

- Lufthansa on June 16 lowered its operating profit forecast for 2019, citing intense price competition from low-cost rivals in Europe.

- The German flag-carrier said operating profit for the year would be between 2 and 2.4 billion euros, from a previous target of 2.4-3 billion euros.

- Lufthansa shares fell 12% to a two-year low of 15.57 euros by 0848 GMT on June 17, dragging down European rivals. Shares in short-haul operators Ryanair and easyJet lost 5% and 4% respectively, while Air France-KLM and IAG, owner of British Airways, shed 4% and 3% each.

(Editing by Peter Thal Larsen and Bob Cervi)

© Reuters News 2019