Deutsche Lufthansa

Deutsche Lufthansa AG (ETR:LHA) (PINK:DLAKY) has had to cancel about 385 flights today, after its labor union Unabhaengige Flugbegleiter Organisation (UFO) took a hard line, and cabin crews went on strike in Frankfurt, Berlin, and Munich.

The walkout by flight attendants came as part of a wage dispute that has stretched over the last 13 months, and after talks broke down on August 28, according to Bloomberg. This was the second walkout, and came after a previous one on Friday. At issue in the dispute, are pay and working conditions.

Short and medium haul flights, such as within Europe, bore the brunt of cancellations, but long distance flights such as to and from Los Angeles, Houston, Chicago, Beijing, and Mexico City were also disrupted.

The dispute has also turned acrimonious: After Nicoley Baublies, chief of UFO threatened action by Lufthansa employees unless the airline gave in to their demands, the airline shot back by saying it might take legal measures against the union.

The airline is in the middle of a cost-saving program, which aims to reduce the expenditures by 1.5 billion euros. The union’s grievance is that there have been no pay hikes for three years, and hence a 5% raise in the salaries of cabin staff for 15 months effective January must be effected by the management. The union is also objecting to the use of temporary workers and outsourcing of jobs. Deutsche Lufthansa AG (ETR:LHA) (PINK:DLAKY) has offered a raise of 3.5%.

“We regret that it had to come to this escalation,” the union said in the statement. “However, the negotiations have reached a point where it left us no alternative but to strike.”

Financial implications of the strike vary. According to Equinet analyst, Jochen Rothenbacher, the current strikes could cost between 5-10 million euros a day and may escalate to 50 million euros, if all flights are cancelled. Credit Agricole analyst, Peter Oppitzhauser, estimates that the loss could be 12 million euros a day if it escalates further across Germany.

Research by Silvia Quandt says the strikes could be an additional burden on 2012e results, as the airline is caught between the losses, due to the strikes on the one hand, and the need to effect cost savings on the other. It therefore has limited room to maneuver. In the ultimate analysis, the strikes could be a long drawn out affair, and the stalemate would likely have to be broken by some concessions by the airline. That would mean the target of cutting costs by 1.5 billion euros could be unachievable.

Nevertheless, Silvia Quandt maintains a Buy outlook for Deutsche Lufthansa AG (ETR:LHA) (PINK:DLAKY), but reduced the price target from 14 euros to 12 euros. The current price of approximately 9.8 euros is also thought to be at a huge discount to  abook value of 17.4 euros, and not justified by Lufthansa’s leadership in the aviation sector.