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 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.