Low-cost Competition Lufthansa's Long-haul Fight for Survival

Lufthansa’s plan to expand its budget platform to include long-haul flights is necessary, but it won't be enough to keep the airline aloft.
Lufthansa in it for the long haul.

Lufthansa, Europe’s largest airline, wants to reinvent itself. How radically it wants to do so was evident in a rather casually thrown-in sentence uttered by chief executive Carsten Spohr last Wednesday.

The airline, he said, is considering moving the holding company for the new low-cost family brand Eurowings outside of Germany. Clearly, Mr. Spohr does not belief the project can be realized with die-hard Lufthansa employees.

The expansion of the low-cost offering is a risky step. But there is also no alternative. Either the Lufthansa crane will perish because of its own stubbornness, with the shift immediately stifled internally, or it will be eaten alive by the changes happening on the outside. They have become so massive that even the recently announced radical measures will not be enough to secure a place for Lufthansa in the world’s leading group of airlines.

The idea of building up the low-cost platform for short haul flights, which it already operates under the name Germanwings, is the right one. Flying within Europe has changed dramatically with the advance of low-cost airlines such as Ryanair or Easyjet. Passengers want to get from A to B in a safe and reliable way. Comfort is not mandatory, and passengers are ready to buy it for a fee.

That has been true for a while for recreational passengers, but has been increasingly the case for business passengers. It may be that some travelers are not satisfied with what they get from Germanwings, but the majority is. And it is also no secret that even Lufthansa, when it comes to quality of personnel and machines, has already lost much of its previous sparkle.

Persian Gulf carriers such as Emirates or Etihad offer long-haul flights from Germany that no established airline in Germany can counter without incurring a loss

More challenging, however, is trying to achieve the same thing with long-haul flights. Firstly, comfort plays a very big role on flights longer than six hours. Secondly, this is a market in which Lufthansa has been profitable so far. The pilots’ union Cockpit suggested that the long-haul budget flights could lead to a cannibalization of the airline’s most important source of income, which is not altogether wrong.

But it is also true that there already are low-cost rivals operating flights to distant locations, and they are truly dangerous to the airline. Persian Gulf carriers such as Emirates or Etihad, through their hubs in Dubai or Abu Dhabi, offer prices on long-haul flights from Germany that no established airline in Germany can counter without incurring a loss. And if that weren’t enough: The tickets are not just inexpensive, but for relatively little money passengers are offered considerable comfort.

Therefore, Lufthansa’s Mr. Spohr probably wants to limit his new budget long-haul offerings to tourist destinations. That is quite clever. In doing so, he won’t wreck the prices that the “old” Lufthansa charges for business flights. And tourists are already used to basic flights. The snag is that real rivals from the Persian Gulf also have their eyes set on Lufthansa’s top customers.

In addition, Lufthansa is taking off with the handbrake on. Only three airplanes will be involved at the start. Later it could be up to seven. But the company plans to use 150 airplanes for short and medium-haul flights. That is also necessary because rivals have much larger fleets. Whether or not the strategy of “thinking big” on long-haul flights is enough, remains to be seen.

The setup is also questionable. The idea of operating long-haul flights through SunExpress Deutschland does have its appeal. Through its joint venture with Turkish Airlines, Lufthansa does have access to personnel at a favorable cost. And the risk is carried on more shoulders. The price for that, though, is limited access to this low-cost platform. Mr. Spohr should not forget that Turkish Airlines is not just a partner, but also a fierce rival, and has its own plans for Germany.

None of this solves the most important problem: The Lufthansa flagship must also become more competitive. That does not just involve cutting a privilege here or there. The productivity at Lufthansa must increase significantly.

The low-cost strategy can help with that. If Lufthansa personnel do not go along with the revamp, growth will shift even further to the budget platform. But it is also clear that over the long term it is not a strategy to shift all of the cost reductions to the external platforms.

 

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