While Air Berlin navigates bankruptcy through the German legal system, it has announced that cuts to under-performing long haul routes will take place almost immediately. The decision comes as a result of a dramatic fall-off in bookings that has taken place since the bankruptcy announcement.
As far as I can tell, here are the canceled routes:
Berlin – Abu Dhabi will be canceled beginning September 17.
Berlin – Chicago will be canceled beginning September 30.
Berlin – Los Angeles will be canceled October 1.
Berlin – San Francisco will be canceled October 1.
Dusseldorf – Boston will be canceled October 1.
For now flights from Berlin to Miami and New York (JFK) remain unaffected as do flights from Dusseldorf to Boston, Fort Myers, Orlando, New York, and Miami. Also unaffected at this point are flights from Dusseldorf to Cancun, Los Angeles, San Francisco, Punta Cana, Puerto Plata, Varadero, Curacao, and Havana. I suspect these aforementioned routes won’t stay on the timetable for long but at this point AB plans to operated them as scheduled.
It is widely expected that Lufthansa will come away with a significant stake in Air Berlin after negotiations are completed between the German government, Air Berlin, and Lufthansa. It also appears that Easyjet will stand to benefit from certain Air Berlin assets as well. At this point it appears that Ryanair is the odd man out and will not be a benefactor of AB’s bankruptcy.
Over the last few days, German media has been reporting a new concept being considered by Lufthansa to further enhance cost savings when it comes to flight operations out of the hubs in Europe.
Lufthansa’s Harry Hohmeister has unveiled plans that will create a potentially new ‘Flexible Routing’ fare that will allow Lufthansa to change already issued tickets for passengers willing to be more flexible in their trip routing.
The reasoning behind this concept will allow Lufthansa to self-direct passenger flow through hubs based on demand and pricing. For example, Frankfurt Airport charges Lufthansa up to 20% more for handling long haul LH flights and passengers than Munich, Zurich, or Vienna charge. Having passengers reroute through lower cost hubs obviously would net a positive impact on LH’s bottom line. In their planning, LH would be able to determine in advance if other hubs and flights have capacity to handle last minute changes. If not, the flex fare passenger would fly their original ticket.
An example could look like:
A passenger books a flight from Chicago to Berlin. The original booking would have the passenger transit through Frankfurt enroute to Berlin. Under a flex routing fare, Lufthansa could re-ticket the passenger a few days before the flight to have them fly Chicago – Munich – Berlin, Chicago – Vienna – Berlin, or Chicago – Zurich – Berlin and thus avoid the extra costs associated with routing a passenger through the more pricey Frankfurt.
Passengers flying under a flex routing fare would be informed days or weeks ahead of their trip, letting them know if their original routing has changed.
Please understand that only a ‘flex routing’ fare class would subject a passenger to a last minute rerouting. Passengers flying on traditional fare classes would not be subject to these kind of changes.
Lufthansa has already sent a ‘shot across the bow’ to Frankfurt by announcing a transfer of 5 A380 aircraft to Munich, thus already reducing capacity at Frankfurt and potentially preparing for the roll out of the new flex-routing fares and increasing capacity in Munich.
In his comments, Hohmeister indicated that passengers agreeing to a flex routing fare would be well rewarded for their willingness to be flexible.
Plans are in place to unveil the new program for Lufthansa and Austrian operated flights at the beginning of 2018.
Today was a busy news day for Lufthansa and not in a positive manner. Aside from an earnings report that was lackluster with future forecasts that were not overly optimistic, Ryanair announced something that will force a shift in how Lufthansa does business on its home turf.
It was perhaps not a coincidence, but on the same day that Lufthansa announced their 3rd quarter financial results, Ryanair announced that they would begin offering flights from Frankfurt. A place where Lufthansa controls over 60% of air traffic movements and also an airport in which LH owns an 8% share.
Ryanair in its announcement stated that 2 737 aircraft would be deployed beginning in March 2017 and will focus primarily on warm-weather holiday markets in and around the Mediterranean region. Ryanair expects to invest over $200 million dollars into this expansion that is specifically targeted at Lufthansa’s low cost carrier unit, Eurowings. Ryanair will now operate out of 9 German airports.
Plans for Eurowings never included operating in Lufthansa’s hubs in Munich and Frankfurt, but due to the ‘attack’ of LCC carriers upon Eurowings, Lufthansa had to relent and recently announced that in fact it would operate Eurowings out of Munich, and today they were forced to announce that Eurowings may also be coming to Frankfurt. This decision had to be made as a direct response to Ryanair’s action. LH didn’t provide specifics, simply because they were caught off guard by the Ryanair gambit. However, expect a Eurowings / Frankfurt announcement sooner than later.
WHY NOW FOR RYANAIR?
Previously, Ryanair avoided Frankfurt-Main (FRAPORT) like the plague choosing instead to operate out of Frankfurt-Hahn which is about 70 miles outside the city. Their CEO, Mike O’Leary, even went on record last year saying that Ryanair would never fly out of FRA. What prompted the change in strategy was the inducements that the Frankfurt Operating Authority offered Ryanair, including substantially reduced landing fees, gate expenses, and similar overhead. In all, Ryanair will pay 40% less than other airlines for the same services. FRAPORT said this was done as part of a new strategy of offering huge discounts in order to attract more airlines and routes. My question is where are you going to fit them when the airport is already at capacity and your dainty neighbors don’t want flights departing or arriving when the sun is below the horizon? But I digress……
Of course this irritated LH’s senior management who now are challenging their own business partner in FRAPORT to extend similar discounts to those already using the airport. This soap opera will get more interesting over the coming weeks as Lufthansa responds to the Ryanair announcement. But give credit where credit is due, Ryanair simply is taking advantage of an opportunity that was placed nicely onto its lap. FRAPORT has initially suggested that no deals will be made with existing carriers at Frankfurt, but I can’t see that remaining the case.
USED INSTEAD OF NEW…..
Also part of todays earnings commentary was an announcement that going forward, Lufthansa may opt to purchase used aircraft instead of new aircraft as it looks to replace aging aircraft in the short haul fleet (regional jets, etc). The rationale behind this decision is to reduce some of the capital expenditure as a result of softer earnings expectations. This does not affect any orders that Lufthansa has placed for new aircraft, it may just result in fewer orders for new aircraft. LH still plans to spend 2.2 – 2.7 billion dollars a year over the next 3-5 years as it takes delivery of new aircraft.
NO TO ITALY AND ALITALIA…….
As part of the same session today, LH Group CEO Carsten Spohr put to rest the rumors surrounding Lufthansa taking a stake in Alitalia as part of a larger deal to acquire Air Berlin. There had been conversations between Etihad (stakeholder in both Air Berlin and Alitalia), Alitalia, and Lufthansa about a potential 3-way deal that would have LH take a substantial stake in Alitalia, and in return Etihad would proffer Air Berlin. This plan was in addition to the existing plan that will have Lufthansa wet-lease 40 aircraft from Air Berlin and fly the planes the routes that those birds normally served. In his comments, and perhaps they were unscripted, but Spohr simply stated that the personal home that he owns in Italy is about as much as Lufthansa is going to invest in Italy. Hopefully a speechwriter doesn’t get a bonus for that wit.
‘IMHO’ (Brewing for a while!) ………
For this LH fan it’s become increasingly frustrating to see an Airline struggle in a business where by all reasonable measures, it should be the dominant player. It has allowed itself to be nickle-and-dimed into positions that it shouldn’t be in. It should have stepped up and fixed its labor woes years ago instead of suffering hundreds of millions in losses due to strikes as a result of unhappy labor. It would have been ridiculously more cost effective to settle with labor instead of being stubborn to bend to a compromise.
I think another mis-calculation was the decision to create some kind of super-LCC within the group. Thus far Eurowings has not proven itself as a successful model and the jury is still out as far as its viability is concerned. I’m hoping it works out because in theory EW would be a fantastic complement to the group but on the other hand I think Lufthansa has taken their eye off of what used to matter.
The successful Lufthansa paid attention to their best customers, took their advice to heart, and developed product and services based on what these passengers were asking and willing to pay for. With that commitment came a fierce loyalty from their best passengers. That has changed. No longer is Lufthansa actively soliciting the advice of ‘HON’ and ‘Senator’ level passengers. Instead they have turned their focus on the low-margin passenger who travels once or twice a year and wants to buy the cheapest seat possible. They’ve transformed marketing and social media campaigns to focus on the guy or gal who will pay €79 euro for a once in a lifetime trip from Stuttgart to Ibiza.
I’m no marketing expert, but I am well versed in reading corporate financials. When I see the priority being shifted to filling up an economy cabin with $400 fares instead of focusing on the far more loyal, and far more profitable, premium cabin passenger, it comes as no surprise to see Lufthansa struggling on the balance sheet. They keep referring to a challenging operating environment but other carriers seem to do well in the same environment. A few years ago, fuel expense was the scapegoat. Now the scapegoat-du-jour appears to be the fierce competition coming from LCCs. Eventually the list of rationalizations is going to run out. The challenges to Lufthansa’s success are within the airline, not outside of it.
Focus on your best passengers. They’re the ones that will determine success or failure for any carrier.