Deutsche Lufthansa AG (ETR:LHA)

German airline Lufthansa (DLAKY) announced on Wednesday the mass cancellation of flights as its pilots’ union went on strike. The group is complaining about proposed cuts to its union and early retirement, while demanding pay increases in parallel.

The move will ground hundreds of flights on Wednesday and roughly as many on Thursday as the strike continues. Pilots have been locked in a war with management over pay and benefits for years, striking multiple times over the period.

Lufthansa can ill afford the impact on its bottom line. The company is facing stiff headwinds as smaller competitors catch up and demand stagnates amidst a glut of seats. Despite record earnings last year, the company has been aggressively cutting costs.

LHA has been pushing for a conclusion to the strike. Efforts to have it declared illegal by a court failed, and mediation attempts have been rebuffed by the union.

LHA Grounded

A strike by Vereinigung Cockpit—Lufthansa’s pilots’ union—forced LHA to cancel 876 flights on Wednesday, including several long-haul connections. The union has been fighting management for nearly two years as it negotiates a pay increase for the membership.

VC has asked for a 20.00% pay raise for the period from 2012 through 2017—roughly 3.70% a year. LHA has countered with 2.50% through 2018, or 0.38% annually. The union has refused mediation efforts, claiming that Lufthansa must improve its offer before VC goes to the negotiating table.

The strike has grounded the majority of the company’s outbound flights from Germany, including long-distance flights. LHA’s other brands, including SWISS, Brussels Air, and Austria Airlines, are not scheduled to see any cancellations.

The cancellations will cost Lufthansa between €7 million and €9 million for each day, adding to headwinds facing the company.

Technically Speaking

Looking at the price-action of the Lufthansa shares, it appears that the company has been largely unaffected by the strike. The stock appears slightly overbought with the Stochastic Oscillator about to cross below the 80.0 level. However, any retreat in shares may be short-lived. For one, supporting the shares are bout the 200-day and 50-day moving averages. Should the 50-DMA cross the 200-DMA to the upside, it could be viewed as a bullish signal for shares.

Adding to the more bullish outlook is shares trending near the lower channel line of a multi-week equidistant channel formation. Should bullish momentum pickup, it is not unreasonable for shares to climb back towards €14.00 over the coming sessions. Nevertheless, a candlestick close below the lower channel line could be viewed a downside breakout. Any move would be confirmed by higher momentum and trading volumes, targeting €12.00 per share which coincides with the 200-DMA.

Challenges Mounting

Lufthansa is caught in a precarious financial position. Despite posting record earnings for 2015, the company is facing stiff challenges. For one, competition for short-distance European flights has been steadily heating up. Smaller airlines such as Ryanair have quickly gained ground, forcing larger companies to slim down.

LHA has already negotiated pay cuts and new retirement plans with ground staff and cabin crew unions. However, its cost-cutting efforts could be derailed if it cannot reach a quick compromise with the pilots’ union. The company has been constantly side-tracked by costly strikes the past two years, grounding over 16,000 flights and costing €463 million.

Additionally, Lufthansa’s bottom line has been dented by weaker ticket prices which are resulting from a glut in available tickets. Recent demand has also been hampered by a string of terrorist attacks in Europe over the past two years. However, despite the negativity, a positive outcome with pilots could clear the way for shares to climb to €14.00 near-term.

[Image Courtesy of Wikimedia]