Lufthansa Focuses on Low Cost, Takes a Page Out Of United’s 2003 Playbook

You might think Germans would just be spending this week basking in the glow of their World Cup victory, but that’s not the case at Lufthansa. In a stilted press release, Lufthansa laid out its vision for the future this week. What’s the plan? Turn the focus to building and growing low cost carriers. Hmm, I feel like we’ve seen this plan before…

Lufthansa Group on the Run

Lufthansa isn’t new to the low cost carrier game. It previously bought Germanwings and decided that the airline would fly all European Lufthansa flights that didn’t touch the Frankfurt or Munich hubs. But seeing British Airways/Iberia-parent IAG purchase the big-and-growing Vueling must have made Lufthansa feel puny. It has decided to build its own big low cost operation under the master brand WINGS. That’s Germanwings minus the German and plus some serious overuse of capital letters.

Now this isn’t exactly like United’s ill-fated Ted adventure – this one will focus on point-to-point flying. But, the impact on the main airline could be the same.

From what I can tell, the Germanwings name isn’t actually going away. Lufthansa is just going to throw Germanwings, a transformed-Eurowings, and possibly a new long haul carrier under single management. The new amalgamation will be called WINGS.

Germanwings will grow to 60 airplanes and will be responsible for all short haul flying touching Germany as long as it doesn’t touch Frankfurt and Munich. In addition, Eurowings, a regional operator currently flying regional jets for Lufthansa, will trade those in for up to 23 A320s. I think those will be flown in the Munich and Frankfurt hubs otherwise I don’t know the difference between Germanwings and Eurowings, but I’m a little fuzzy on that. Eurowings will then grow into Switzerland, Austria, and Belgium as well, but that should be outside the main hubs. The first Eurowings base will be in Basel with 2 to 4 airplanes.

But wait, there’s more.

Lufthansa is also going to bring the WINGS brand into the long haul game. Oh boy. This one will have 7 767s or A330s for now, and it’s possible that it’ll be a joint venture with Turkish, maybe. That seems like a very small operation. This will be entirely focused on the leisure market, or the, uh “private” market as the press release notes. There’s also another 9 A340s in the Lufthansa fleet that they say can only be operated if they can get lower costs.

In the end, all these changes mean that the company will see its “new businesses, our new platforms and our service companies” grow from 30 to 40 percent of total group revenue. You can read the very dry press release yourself if you’d like. But the real question here is… why is this all happening?

The rationale is pretty clear. Within Europe, Lufthansa is getting smoked by all the low cost carriers. On long haul, especially heading east and south, the Gulf carriers are eating Lufthansa’s lunch. So how does Lufthansa fight it? The same way legacy airlines always fight these things… try to cut costs to find a way to be competitive. And of course, the biggest cost to cut is labor.

Or, as Carsten Spohr, Chairman and CEO of Lufthansa, puts it:

But in the dynamic and highly price-sensitive market segments, our current platforms only enable us to exploit the growth potential to a limited extent, in view of their sometimes over-rigid cost structures.

There is a big problem with this, of course. Ideally what an airline would like to do is find a way to reduce labor costs throughout the entire system. But labor groups won’t stand for that. So airlines think they’re getting smart by creating new airline subsidiaries that check off all the buzzwords. They’ll be more efficient, have more productive labor, and open up new markets. It’s all about growth right?

What really happens is that these low cost carriers become distractions. Legacy airlines don’t do a very good job of starting up low cost carriers. The best they can hope for is to acquire one that’s successful and then try hard not to screw it up. (That has to be IAG’s plan with Vueling.) But is this effort really likely to beat the low cost carriers within Europe? No.

WINGS is not going to get its costs below Ryanair, or one of the other big players in Europe. And on long haul, will Lufthansa really beat the Gulf carriers with 7 airplanes flying to leisure destinations? No. It could be part of the long term plan to just reduce costs throughout the entire company. That’s what Jetstar seems to be for Qantas. But if that’s the case, then it’s just a sneaky end run that tries to avoid problems instead of addressing them. And in the meantime, the core airlines suffer from lack of attention.

Maybe I’ll be proven wrong. Maybe some legacy carrier will start a successful low cost carrier. (Jetstar may be the closest though its success is debatable at best.) Is Lufthansa going to be that airline? I wouldn’t bet on it.

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21 Comments on "Lufthansa Focuses on Low Cost, Takes a Page Out Of United’s 2003 Playbook"

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Hermann
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I don´t fully agree but think that there is some potential to this, however this also came from a limited number of options. First of all, Ryanair, Wizzair and, to some extent, Easyjet are Ultra-LCCs that won´t be able to capture all of the market. See Spirit in the US, that has its own profitable niche. Then, LH did learn from recent experiences and the Germanwings product is very customisable. With a basic offering resembling intra-European business class (put into quotation when comparing to real business class), network carrier coach and LCC they can serve a wide range of markets… Read more »
Durcy D
Guest
Great post I mostly agree with! However, I have to respectfully disagree with you regarding EasyJet. EasyJet has in the past couple of years stepped away from ultra-LCC model and turned more towards “legacy-light” concept. For example, they allow seat pre-selection and their flexi fares offer many add-ons bundled together (1 checked bag (20kg) + priority boarding + rebooking within a month for free) at the price that is very competitive with “normal” fares from legacies (where you get a checked bag). With their fares being available through GDS and multiple daily flights between big cities in Europe, they are… Read more »
Darkwater
Guest

Whatever happened to Condor? For awhile back in the ’90’s, they were flying a number of LH’s low-yield markets.

Hermann
Guest

Sold off to Thomas Cook 2009 IIRC.

Jeremy
Guest

Is Air Canada Rouge the Same as this Ted/wings program?

Carl
Member
The only way(s) I see this really helping them is that if they develop a set of work conditions and labor costs that are lower, and are then able to persuade their unions to come close to matching those in order to preserve jobs and/or prevent more flying shifting to the lower cost model. It is a lot of complexity which is why UA (Shuttle and Ted) and DL (Song) ended up reintegrating it into the core. They need to lower costs across the board, not just in a low cost operation. And the leisure long haul business case makes… Read more »
David SF eastbay
Member

Interesting how everyone watched U.S. carriers start low cost units and fail, but in Europe the big guys think they can do it in an area that has so many more low cost carriers already and in an area where any E.U. carrier can fly anywhere in the E.U.

Seems a small company can think big, but a big company can never think small.

Hermann
Guest

IIRC Ted had UA crews at UA pay rates – that´s a big difference and an advantage that Vueling, Germanwings, Transavia and a few others seem to have succeeded on getting. In Asia/Australia Scoot, Nok and Jetstar seem to be doing well with the separate company within a company concept. SilkAir and Dragon Air, while not classical LCCs also fare not too bad. ThaiSmile is too new to really judge here.

dc.contarino
Member

LCCs within a legacy carrier don’t work. Period. Not only does it distract management from running the core business, it confuses customers who think they’re booking on the legacy but end up on something they’ve never heard of. At United, Ted’s goal was to win back market share. But as we all know now, it’s not about market share. It’s about making money. As Cranky said, I hope they prove us wrong, but this is a train wreck waiting to happen.

Leslie in Oregon
Member

How do you think Lufthansa’s plan will impact Air Berlin?

EndlosLuft
Guest
I think LH is crazy to ignore Berlin with their hub strategy. It’s perfectly understandable that LH is trying to build up competitive pressure to the rigid Unions with their core product so that they can negotiate more favorable rates or at least not these crazy 6% pay increases every year. It’s also pretty remarkable that the German government is blind to LH’s problems with Gulf carriers and how they really can’t compete fairly with their lack of pension obligations or labor laws. But as a buyer of many tickets a year I refuse to fly Germanwings on routes where… Read more »
Carl
Member
On the one hand, LH cannot afford to have more hubs. They are already splitting their own traffic between MUC and FRA, and via the subsidiaries they have hubs at VIE ZRH BRU and even GVA. TXL isn’t well suited to a hub anyway. And it’s unclear when the new airport will open, and whether it will already be at capacity when it opens. On the other hand, I find it very customer unfriendly that the Wings operation won’t belong the Star Alliance and you won’t get your Star Gold privileges. And I agree with you, it makes me not… Read more »
David M
Guest

I wonder if doing this helps them make a credible thread to LH’s unions: Get in line with lower costs, or we’ll do at LH what we did at Austrian: Shut the mainline operation down and turn the planes over to a wholly-owned regional subsidiary (Tyrolean) to operate the flights under the mainline brand at a lower pay scale.

Rory
Guest
The long haul proposition is lunacy. They’re going to create something that has higher costs than Qatar with lower brand equity than Ryanair and, I’ll wager, poorer service than Condor. Since the first tentative steps Ryanair made into Frankfurt Hahn, Lufthansa has consistently underestimated the willingness of their customers to endure inconvenience in order to save money. Assuming they can cover costs in this area by matching the economy fares offered by Emirates and Qatar, I still think most Germans will tolerate a stop in the Middle East in preference to a product positioned as “low cost” on a twelve… Read more »
RoboKopp
Member

A real screw up by Lufthansa in leaving Dusseldorf. The prices for flights on GermanWing, a supposedly low cost airline, are as high when Lufthansa was the name on the planes. Only now there are no Star Alliance privledges. Crap check in somewhere in the terminal, no lounge access, nasty reservations agents all lead to finding another carrier. To summarize, same prices but way less service.

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