Interesting comments coming from Lufthansa today during a briefing in New York.
Lufthansa’s CFO Simone Menne suggested that ‘LH’ is investigating alternatives to help it be more competitive against rival carriers from Asia and the Middle East. As part of this strategic review, it was mentioned that Lufthansa would consider created a dedicated Low Cost Carrier (LCC) that would specialize in long haul routes.
For those of you not familiar with the concept of an “LCC”, it is basically an airline that operates with a minimum of amenities in an attempt to deliver the lowest possible fares. Lufthansa’s ‘germanwings’ is an example of an LCC, and in the case of germanwings, it operates primarily within Europe. Most LCC’s that offer long haul services are usually single cabin aircraft offering only economy class fares. In addition, LCC’s tend to be ‘a-la-carte’ airlines that charge fees for additional passenger services and perks.
As part of her comments, Ms. Menne suggested that “The threat from Gulf carriers, for us, is Southeast Asia and it’s India” and “That is a concern for investors, and the answer is we look at all strategic options. That can be partnerships, it can be joint ventures, it can be our own platform or it can be a retreat from this market.”
Lufthansa has concerns about it’s Asia presence because it is a market place that is growing twice as fast as Europe as far as passenger traffic is concerned and creates more opportunities for airlines as a result. It’s a growth opportunity that LH needs to take advantage of AND its certainly not going to retreat from this lucrative market!
When I read these comments today, I was surprised that LH would consider such a risky proposition. To create another airline requires capital and ‘human’ intensive investments that normally do not yield positive results initially. With the airline business being an extremely cyclical and economically sensitive industry it seems that the risks would far outweigh the rewards especially in a low margin environment such as a low cost carrier.
In my opinion, Lufthansa’s concerns are valid. They should be concerned that their competitors (especially Emirates, Etihad and other non Star Alliance member airlines) have a bullseye on Lufthansa’s back and are looking to take market share away from what used to be ‘competitor free’ routes between Europe and the Middle East or Asia.
What I think should happen here (emphasis on THINK), and a decision that I hope that ‘LH’ reaches, is to partner up with an airline with an existing presence in the Middle East and Asia. At first glance, an ideal candidate could and should be Turkish Airlines. A combination such as this could provide immediate impact with minimal investments. Turkish already has an impressive route network throughout the Middle East and has substantial presence in major Asian destinations. With Turkish’s hub being in Istanbul and talk of a new and bigger airport for the city, this would let Lufthansa move into the Mid Eastern ‘neighborhood’ efficiently and quickly. The benefit to Turkish would be the access it would gain to Lufthansa’s route network to North and South American where Turkish currently has minimal exposure.
As a fan of the airline, I know and trust them enough to make the right decisions, the may not always be the perfect solutions, but perfection is usually unattainable regardless of the endeavor.
What would you do? If you could play Airline CEO/CFO for a day, how would you solve this?
First question is are they going after premium or leisure travel? My take was that the ME and Asian carriers are doing well in premium travel, as you mention in your comment the business traveler. So i don’t see how am LCC helps in this case. It is a starting point though if the growth and profit is from the leisure traveler.
Too often business leaders lean on the crutch that if i had a different toy i would be doing better. What stops LH from adjusting its current offerings to match the demand? Economy is already barebones on their fleet so an LCC would be what exactly? An unbundling of fares in a spartan product? How about focusing on simplifying economy fares and terms while providing a functionalproduct in the back, its what people like about LCCs, we know they aren’t necessarily cheaper.
As for the premium traffic, is the issue their premium cabins? Upgrading to flat beds in biz across all aircraft would rectify that along with investment in staff training to lift service standards. Being rigid in operations and process is why they seem so uncompetitive coupled with the fact the ME and Asian carriers are unburdened by legacy and infrastructure limitations.
LH has a strong base network and should be able to entice all its NA and euro traffic into MUC and FRA before depositing them all over the ME and Asia without creating a new airline, just a new mindset.
Overall, i just think the legacy American, European and Aussie airlines are crying foul because they have been caught with their pants down and they rely on the same canned cut costs and service response rather than adapt to offer value. I am not dismissing the fact that sometimes the issue is really costs.
I tend to agree, I don’t know if reinventing the wheel will solve anything, thats why I would be a fan of a tie-up. Those arrangements can always be “un-tied” if they do not work out.
Which long-haul LCCs are you thinking of which are single-cabin only?
Jetstar has a premium cabin. So does Icelandair. And Norwegian will have a premium cabin up front as well once they finally take delivery of their 787s.
It might not be a flat-bed suite, but there is definitely a premium offering available for customers who don’t want 30-31″ pitch.
As for a partnership with TK being useful, I’m not so sure either side really benefits. TK is growing their Americas service nicely, dumping inventory and generally pissing off Lufthansa and United something special. And passengers might take one connection to save a few bucks but a double connection where other, single connection options are available tends to see less traffic. Connecting in IST doesn’t really help Lufthansa with business travelers headed to the Middle East, and that’s where the revenue is.
I was thinking more of the tour operator/charter types and I did say “usually” and not “absolutely” but thanks for the examples. TK certainly has tried to increase US presence, but tie up with LH could only make it easier. Like I said, no perfect solution exists. It sometimes boils down to the least of all evils I guess! Options are sparse for LH other than TK if a tie up is considered. They would definitely make for strange bedfellows…..btw, nice sneaking in of link! 😉
I always cite my sources, particularly when the information is otherwise less obvious.
no worries. Glad you did!