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BERLIN (Reuters) - Lufthansa's (LHAG.DE) board approved plans on Wednesday to expand its budget flight operations against the backdrop of deteriorating relations with its pilots who are set for their tenth strike this year.
With the dust barely settled after this week's two-day walkout that forced Lufthansa to cancel half its flights, affecting 150,000 passengers, pilots' union Vereinigung Cockpit called another strike for Thursday.
However, this year's 160 million euro ($198 million) hit to operating profit as a direct result of the dispute over proposed changes to an early retirement scheme is only the tip of the iceberg and highlights the difficulty facing traditional airlines aiming to cut costs to counter the threat to their survival from leaner rivals.
Lufthansa is battling to remain competitive in the face of budget carriers such as Ryanair (RYA.I) and easyJet (EZJ.L) and Gulf operators including Emirates, Etihad and Qatar on lucrative long-haul routes.
Hence the company's decision to push ahead with expansion of regional airline Eurowings, where costs are 40 percent below that of Lufthansa-branded operations, into a no-frills platform alongside its existing budget carrier Germanwings.
Lufthansa, which traditionally targets mainly business customers, wants to chase faster market growth by boosting low-cost services to price-sensitive tourists, with Chief Executive Carsten Spohr vowing to remain strong despite pilot resistance.
The pilots, like peers at Air France, believe low-cost expansion could result in lower pay and worse conditions. Air France-KLM (AIRF.PA) was forced to backtrack on plans to expand its low-cost brand, Transavia, in Europe following a two-week pilot strike in September.
"We hope that we won't have any more strikes for the sake of our passengers, shareholders and employees," Spohr told journalists on Wednesday. "But we have set the path so that Lufthansa can have a future and strikes are the consequence that we have to live with."
Lufthansa on Wednesday offered mediation with the pilots in the hope of resolving the dispute in time for the Christmas holiday season.
Lufthansa shares closed up 1 percent on Wednesday, but are still down 8 percent this year, against a 14.5 percent gain by European travel and leisure stocks .SXTP
Alongside short-haul routes within Europe from outside of Germany, Eurowings will also offer long-haul flights in conjunction with SunExpress Germany, Lufthansa's joint venture on Mediterranean routes with Turkish Airlines (THYAO.IS).
Lufthansa will initially lease three used Airbus A330-200s and flights to tourist destinations in Florida, South Africa and the Indian Ocean will start at the end of 2015 from Cologne.
The board has approved the lease of up to seven A330-200s and Spohr said if the plan was successful the airline would have no problem in scaling up. Spohr said he did not foresee any difficulty in finding pilots for the Eurowings expansion.
Air France, which earlier on Wednesday announced that a majority of its pilots backed a deal reached in October to expand the company's low-cost operations in France, said more than 200 Air France pilots had volunteered to fill 72 positions at Transavia France.
Additional reporting by Peter Maushagen; Editing by David Goodman and Susan Thomas