By Laurence Frost and Riham Alkousaa

BERLIN (Reuters) – Lufthansa lowered its capacity forecast for flights this year as hopes dwindle for an early summer travel rebound, but the German airline’s cost-cutting drive narrowed quarterly losses.

The group, which includes Austrian Airlines, Swiss and Eurowings, also stepped up warnings to German unions that it is ready to use forced dismissals to cut more jobs.

The travel industry has suffered many false starts to a hoped-for recovery, beset by new restrictions, virus variant outbreaks and a sluggish European vaccine rollout.

Lufthansa said it expects to fly at about only 40% of its pre-pandemic capacity in 2021, trimming the 40%-50% guidance issued less than two months earlier.

Shares in Lufthansa were trading 1.15 percent lower in Frankfurt at 10.81 euros at 1005 GMT.

The group predicted a gradual demand pick-up in April-June and a “significant market recovery” in the second half, citing moves by the European Union towards opening up transatlantic travel to vaccinated U.S. visitors.

“We know that bookings shoot up wherever restrictions are loosened and travel becomes possible again,” Chief Executive Carsten Spohr said.

In a further sign of aviation industry turmoil on Thursday, Britain’s Heathrow Airport said its total losses during the crisis had increased to 2.4 billion pounds ($3.4 billion) after a 329 million first-quarter deficit.

JOBS IN JEOPARDY

Lufthansa’s quarterly sales came to 2.6 billion euros, down 60% on a year-earlier period that was only partially impacted by the onset of the pandemic.

The adjusted loss before interest and taxes (EBIT) narrowed by 30% to 1.14 billion euros in the first quarter, helped by a 19% workforce reduction and 51% decline in operating expenses, while the net loss halved to 1.05 billion.

Both earnings numbers beat expectations, based on the median analyst estimates in company polling. Free cash flow came in at a negative 235 million euros per month, also better than the monthly 300 million euro cash burn previously flagged.

Lufthansa has 10,000 excess full time-equivalent German staff after 8,000 departures and will “address this personnel surplus” in 2021-2, finance chief Remco Steenbergen said.

The company is seeking new union deals on voluntary cuts and part-time work while preparing for compulsory layoffs if needed when current deals expire in 11 months, Steenbergen said.

“We are preparing for forced dismissals,” he said. “We expect the necessary legal process to be completed by the end of this year.”

The cargo business – a bright spot for crisis-hit airlines as grounded passenger jets squeeze capacity and boost prices – set a 314 million-euro operating profit record in the quarter.

Lufthansa has pledged swift progress in paying down debt from a 9 billion-euro government-backed bailout last year and will seek authorisation from its May 4 shareholder meeting to raise up to 5.5 billion euros in new capital.

Any new share issue is likely to be significantly smaller, Steenbergen said.

Net debt rose by 1 billion euros over the first quarter to 10.9 billion euros at March 31, the airline said. ($1 = 0.8243 euros)

($1 = 0.7173 pounds)

(Reporting by Laurence Frost in Paris and Riham Alkousaa in Berlin; Additional reporting by Ilona Wissenbach; Editing by Maria Sheahan)