Eurowings, Lufthansa’s lowish-cost group of airlines, is, to be polite, a mess. The cobbled-together jumble of airlines has resulted in losses — expected to be 4 to 6 percent this year — despite promises that profitability was imminent. This is a surprise to nobody, as detailed in previous posts. The good news is that Lufthansa now admits it has a problem. In a capital markets day presentation, Lufthansa rolled out its plans to fix Eurowings and make it profitable by 2021. Will it work? Probably not without some serious luck. But at least it finally has a coherent strategy.
That image above was from when Lufthansa was thinking about trying to buy Condor. It now admits that it is unlikely to gain approval to do so, so that is probably off the table. After lopping off the left arm, Lufthansa still has too many pieces under the Eurowings banner, so it’s cutting some more.
First, it will mercifully kill off its long-haul operation. All the widebodies will be folded back in Lufthansa or other “network” airlines in the group. Remember, it has started doing long-haul from secondary German cities and had moved a couple planes into Munich, but earlier this year it said it would move all long-haul airplanes to Frankfurt and Munich. Now that plan is off. Good.
Second, it will cancel plans to integrate Brussels Airlines into the group. That leads us to the brand positioning:
A plan for Brussels will be rolled out in the third quarter of this year, but presumably it will be an attempt to mold the airline into something similar to the other network airlines. That’s just speculation, however. All we know is that it won’t be a part of Eurowings.
Third, Eurowings will cut back on wet-leased flying, trying to do it mostly only in the peak summer. The end of long-haul should be mean the end of SunExpress Deutschland flying for the airline. I assume the relationship with TUI fly Deutschland will end, ending 737 operations in the fleet. And the A319s that Czech operates should also go away. LGW, an airline which is bought out of the airberlin bankruptcy and then promptly sold, is likely to continue to fly for Eurowings, but it’s going to use Embraer 190s instead of Dash-8-400s. We’ll see how this all shakes out, but there’s no question wet leasing is shrinking.
What’s Left of Eurowings
With all that cut away, Eurowings is left as a short-haul, point-to-point carrier with eight bases in Germany, two in Austria, and one in Palma de Mallorca. That sounds manageable, but there’s still a bunch of complexity in that part of the operation. Case-in-point: There are four different airlines operating under the Eurowings name in Germany alone. That is going to get cleaned up.
We already talked about LGW. It will continue flying to some extent, but it’s not part of Lufthansa Group anymore. Additionally, for some unknown reason, Eurowings’s Munich base is operated by Austrian subsidiary Eurowings Europe. That will stop. That leaves both the Eurowings DE and Germanwings operating certificates. One will remain and eventually take over all the flying for the other. Eurowings Europe can then operate the Austrian and Palma bases.
That’s just the tip of the iceberg when it comes to cost-cutting. Eurowings will move to solidify around the A320 fleet, retiring the earliest models, and eventually go to an all-neo operation. It will also work on cutting down outsourcing, and it will try to reduce overhead costs. It will move its most expensive pilots back to the main Lufthansa network airlines, and make sure it can keep labor costs lower. These efforts should result in costs being reduced by 15 percent. That’s great, but does Eurowings really have a cost problem? Oh yeah. It really does.
When a Fare Premium Isn’t a Good Thing
To explain the cost problem, let’s look at revenue. Here’s a slide showing the fare premium that Eurowings gets over other low cost carriers.
Lufthansa talks about this as if it’s proud, but it shouldn’t be. First of all, this isn’t comparing like routes, so it’s not completely clear this is an apples to apples comparison. But even if it is, all it shows is that Eurowings charges more and still loses a bunch of money — remember, 4 to 6 percent this year — while airlines like Ryanair charge less and mint money. So yeah, costs are a big problem.
If Eurowings fixes its costs, that will solve the problem, right? Of course not. Do you think Eurowings is getting higher yields solely because people prefer it? No way. Sure, some business travelers may choose it when convenient so they can earn their Miles & More points, but there’s more to it than that. Time to turn to another slide…
Eurowings is a market leader in secondary German markets. But what do you notice about these markets? Ryanair and easyJet just aren’t that big (except in Cologne). That doesn’t mean they can’t get big, though in some places in Germany (*cough* Frankfurt *cough*) it has been exceedingly difficult for low cost carriers to get a foothold. But these airlines are only going to expand and put further pressure on Eurowings’s yields.
In the meantime, Eurowings is only going to grow about 1 percent until it gets its house in order, so at least through 2021. All the true low cost carriers will be looking to eat the airline’s lunch as they continue to grow and grow.
While I do like the Eurowings turnaround plan much better than what was happening before, it’s still ultimately a money-losing operation that isn’t going to be fixed easily. This is maybe the best chance Lufthansa has, but that doesn’t mean it’s going to work. What Eurowings really needs is for the other low cost carriers to ignore Germany. That will require a whole lot of luck.