Lufthansa and pilots reach pay deal, but clash over cost cuts

By Victoria Bryan and Peter Maushagen

BERLIN/FRANKFURT (Reuters) - Lufthansa and a pilots' union have accepted pay recommendations from a mediator, though the German airline said it planned to offset the cost by using more crew on cheaper contracts in a move that could jeopardise the deal.

Lufthansa, which has been dogged by a succession of strikes, said on Wednesday it had agreed to increase pay for 5,400 pilots by 8.7 percent in several steps, as well as one-time payments worth a total of 30 million euros - adding around 85 million euros ($90 million) to its annual costs.

The agreement boosted Lufthansa shares, which were up 1 percent by 1221 GMT and among the top DAX gainers.

To make up for the added expense, Lufthansa said 40 new aircraft due for delivery would be staffed not by crew on collective labour agreements at its core brand, but by crew from elsewhere within the group.

Board member Harry Hohmeister had last month raised the prospect of shifting new planes to other parts of the group or even setting up a new unit to keep costs down.

Pilots' union Vereinigung Cockpit (VC) said the proposals would be put to a vote of members, with a result expected by the end of March, but spokesman Markus Wahl said the plans to shift the planes could affect the outcome.

"It will be hard for some of our members to accept and it could impact talks over other issues," he told Reuters.

Lufthansa wants to cut costs to keep pace with leaner rivals such as Ryanair on short-haul flights and Emirates on long-haul routes, but pilots have walked out 15 times since early 2014 over topics including pay and early retirement, costing the carrier hundreds of millions of euros in lost profit.

The two sides had previously tried to negotiate a wide-ranging deal on subjects including pay, retirement schemes, working conditions and the expansion of budget services, but last year decided to tackle each topic individually.

Lufthansa said on Wednesday talks on the outstanding issues would continue.

Liberum analyst Gerald Khoo, who has a "sell" rating on Lufthansa stock, said the pay issue was arguably the least contentious one to resolve. "Then again, an agreement on one item is better than none, and the hope must be that the mediation process can be repeated," he said.

Before the mediation, the pilots had asked for an average annual pay increase of 3.7 percent over a five-year period back-dated to 2012, which is when their last collective bargaining contract with Lufthansa expired.

Lufthansa had proposed an increase of 4.4 percent in two instalments in 2016 and 2017, plus a one-off payment worth 1.8 months' pay.

($1 = 0.9479 euros)

(Reporting by Maria Sheahan and Victoria Bryan; Editing by Susan Thomas and Mark Potter)