The company launched a savings programme - dubbed SCORE - earlier this year to boost annual earnings by 1.5 billion euros by the end 2014, compared with 2011.

"Due to the headwinds we face, the progress we have made is not visibly reflected, as we had hoped, in our financial result," Christoph Franz said in an employee newsletter on Friday.

The airline - whose business is caught between low-cost rivals such as easyJet in Europe and Gulf carriers such as Emirates in the premium long-haul market - has said it has identified more than 1 billion euros in potential cutbacks in its passenger airline business alone.

It announced this month that it will merge its European and German domestic routes under a new low-cost brand.

While SCORE will reach its target this year, Franz said high jet fuel prices and the weak economy, as well as fees and costs for materials, were mitigating its effects.

"Therefore we have to work harder to achieve SCORE's planned earnings improvement of 1.5 billion euros in the end," he said.

Shares of Lufthansa turned negative on the news and were down 1.4 percent at 10.59 euros by 1113 GMT. The DAX index of leading German stocks was down 0.4 percent.

The airline is negotiating with labour representatives of cabin crew, who held a series of rolling strikes several weeks ago, resulting in the cancellation of more than 1,000 flights.

(Reporting By Marilyn Gerlach; Editing by Pravin Char)

• A Permanent Economic Emergency