2nd UPDATE: Lufthansa Rating Downgraded After Austrian Deal

(Rewrites and add details on Moody's downgrade.)

Moody's Thursday downgraded Deutsche Lufthansa AG's (LHA.XE) credit rating to junk status as the German carrier finalized its acquisition of struggling Austrian Airlines AG (AUA.VI) and said it would pursue further cost cuts.

Following the closure of the Austrian Airlines deal, Moody's cut Lufthansa's credit rating to Ba1, saying that the company's metrics are under pressure from the deal and "very weak market conditions."

A week ago, Standard & Poor's Ratings Services cut Lufthansa's rating to the brink of junk.

Moody's, however, said it expected Lufthansa to improve the Austrian carrier's performance in the long term and noted the German airline's strong liquidity continued to support its rating.

The ratings agency said that stronger metrics were likely in 2010 if industry conditions improved, but in the near-term this wouldn't be enough to bring Lufthansa up to an investment-grade rating.

Chief Executive Wolfgang Mayrhuber told reporters in Vienna Lufthansa would pursue further cost cuts in its own operations and within its new acquisition as it anticipated continued tough times for the aviation industry.

Mayrhuber raised the possibility of further job cuts, saying "only profitable jobs are safe jobs."

He didn't expect a marked improvement in revenue or demand for flights in the near future, adding: "In the near and mid term, we will have to make do with the level we have now."

Mayrhuber expected the highly indebted and loss-making Austrian carrier to have positive cash flow in 2010, but actual profitability could take longer as it would also depend on unpredictable factors such as fuel-price swings and flight demand.

Lufthansa won the tender for the Austrian state's 41.6% stake in Lufthansa last year and declared it would offer EUR4.49 for each outstanding share in a public offer for the free float. The European Commission approved the deal on the condition Austrian Airlines shed some flight capacity.

Lufthansa said earlier Thursday it now has more than 90% of the share capital.

Without detailing the intended squeeze-out offer, Mayrhuber said the remaining shareholders will be offered less than the EUR4.49 a share paid to shareholders who took the initial offer.

Mayrhuber said Austrian Airlines, with its strong focus on Eastern European destinations, offers a good product in terms of service and route network, but it "has a cost problem" which needs dealing with.

Austrian Air is its Eastern European medium- and short-haul routes were a major attraction for Lufthansa.

Lufthansa also intends to keep Austrian Air's long-haul route network largely intact, Mayrhuber said.

He said Lufthansa's buying spree of the past year, according to the current plans, ended with the purchase of Austrian Airlines.

At 1500 GMT, Lufthansa's shares traded up 1.3% at EUR10.77, while the Frankfurt DAX index traded down 0.4%.

Company Web sites: www.lufthansa-financials.com; www.austrian.com

-By Flemming E. Hansen and Erin Fines, Dow Jones Newswires; [phone]; [e-mail]