Beginning in Summer 2018, Lufthansa’s low cost carrier, Eurowings, will begin serving Frankfurt as the LH Group seeks to stem the competition coming from other European LCCs.
In an article published in Airliners.de, Eurowings boss Karl Ulrich Garnadt stated that due to the pressures seen coming from Ryanair and others, it made good business sense to counter the new competition. Ryanair plans to begin service to Frankfurt this spring.
Such a move is made easier due to the fact that Eurowings will inherit 33 aircraft in the coming months after Lufthansa agreed to lease the aircraft from Air Berlin. This is of course in addition to the aircraft that will join Eurowings after the acquisition of Brussels Airlines closes. In all, the Eurowings fleet will grow to nearly 120 aircraft making it easier to operate from large hubs and to take on their competitors directly.
Previously, Eurowings announced that it will begin flying from Lufthansa’s other Mega-Hub in Munich in March. The initial timetable calls for flights to 32 cities throughout Europe, mostly towards ‘Holiday’ type destinations.
A bomb threat called into Eurowings (LH’s Low Cost Carrier operator) was proven to be a hoax after the aircraft landed safely and was thoroughly searched by authorities.
The flight was enroute from Salalah, Oman to Cologne when the bomb threat forced the aircraft to divert to Kuwait City with 287 passengers and 10 crew aboard the Airbus A330. Passengers were then able to continue onward to Germany.
BTW, has there ever been a ‘bomb threat’ called in that actually resulted in a bomb being discovered? Didn’t think so.
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.
A few days ago, Lufthansa Group’s CEO, Carsten Spohr, outlined Lufthansa’s vision for Brussels Airlines and the role that they will play now that Lufthansa Group has decided to acquire all remaining shares of the airline that is does not already own.
The initial announcement stated that Brussels will be integrated in Eurowings, which serves as Lufthansa’s ‘Low Cost Carrier’ product. The recent comments by Spohr suggest that Brussels will continue to operate under its current branding and logo, except for a small footnote stating that it is ‘A member of the Eurowings Group’.
For now it appears that routes and equipment will remain largely unchanged since LH wants Brussels to maintain its dominant position in Belgium and in essence create another fortress hub for Eurowings. Another reason to keep things unchanged at SN for now is the extensive route network it has in Africa and how that can be leveraged for additional benefit to Eurowings. What has not been clarified is how any overlap may be handled as far as route network and staffing is concerned. Additionally, there has been no announcement as to how (if at all), Brussels role may change as a Miles & More / Star Alliance member.
What also has not been clarified as yet is the status of their outstanding Business Class product. I suspect for the near term things will remain unchanged, but it would not surprise me if the product is not ‘adjusted’ to be brought more into the Eurowings LCC model as far as equipment and pricing is concerned. In my opinion, it would be foolish to tamper with SN’s winning formula in Business Class, but my opinion doesn’t really matter in Frankfurt.
A long standing concern for Eurowings has been its viability in a very competitive LCC market in Europe. However, with recent developments such as wet leasing a substantial amount of Air Berlin aircraft along with their routes, and the recent developments with Brussels, it appears that EW has taken a quantum leap that should make it a serious contender in the LCC space.
What we knew would happen for weeks has become official. Lufthansa has entered a Letter of Intent with Air Berlin to assume a wet-lease for 40 Air Berlin aircraft, complete with Air Berlin crews to operate the flights. The aircraft will enter service on March 26, 2017, coinciding with the beginning of Lufthansa’s Summer timetable. 35 of the aircraft will be repainted to the Eurowings livery, while the remain 5 will fly under Austrian’s colors. Specifically, the lease involves 29 Airbus 320 and 11 Airbus A319 aircraft.
The decision was made after Lufthansa approached Air Berlin with an offer to help reduce some of the stress that Air Berlin is under due to mounting losses. Of course LH was not completely altruistic with the offer since there would be a substantial benefit to Eurowings, both in the growth of the fleet and the reduction of competition in the German LCC market.
Lufthansa will operate the aircraft on existing Air Berlin routes except those that serve Dusseldorf or Berlin. Air Berlin will continue to operate out these major hubs. However I do expect that a few tweaks will be made to the timetable to take into account existing routes already being flown by Eurowings.
Under wet lease agreements, the operating airline pays ‘rent’ for the aircraft and assumes all other responsibilities for the aircraft including maintenance etc. Any profits or losses remain with the airline leasing the aircraft, obviously in this case it is Lufthansa.
The ‘Letter of Intent’ announcement came from the Supervisory Board of the Lufthansa Group. The board held a regularly scheduled meeting on Wednesday (28 September) to discuss various proposals and strategy initiatives. Another major announcement that came from the Board was the approval for the Lufthansa Group to purchase the remaining 55 percent stake that it did not already own in Brussels Airlines.