After comments made last week by Lufthansa’s CEO Carsten Spohr, it appears that Lufthansa is putting together a strategy that would allow it to absorb Air Berlin into Eurowings. After years of struggling, and failed subsidies/investments by Etihad, it appears that Air Berlin is on life support and without intervention, could simply fade away.
Spohr, speaking before the Lufthansa Group Annual Shareholder’s Meeting, stated 3 criteria would need to be met before Lufthansa would feel comfortable writing a check for Air Berlin. Specifically he addressed:
- Air Berlin’s debt level of 1 BILLION Euro and a debt ratio of 4.5:1 makes it a VERY EXPENSIVE acquisition if LH were to acquire the liability. Spohr suggested that if Lufthansa were to be interested in acquiring ‘AB’, the debt would have to be assumed by Etihad (Air Berlin stakeholder), or be disbursed by some other means before AB would be welcomed to the LH Group. LH simply would refuse any deal that would involve assuming any of the debt
- Anti-Trust Concerns from the EU would overshadow any thought of the acquisition. Not only on a continental EU level, but also intra-Germany, since an AB acquisition by Lufthansa would leave Lufthansa as the only major airline within Germany. Knowing the EU’s political leanings, it would be foolish to think that they would award a monopoly to Lufthansa. This issue would create an opportunity for RyanAir or EasyJet to swoop in with proposals for Air Berlin which could be disastrous for Lufthansa. After all, who wants RyanAir or EasyJet operating in their neighborhood. Air Berlin joining Lufthansa would also lead to Air Berlin’s exit from OneWorld.
- Before any deal would take place, Air Berlin would also be required to reign in their costs. Progress is being made, but Air Berlin is not near being profitable, and again, Lufthansa has indicated that it does not want to inherit any liabilities should they decided to bid for Air Berlin.
- Assurances would also need to be made for Air Berlin staff. Any merger would almost certainly guarantee a significant amount of staff overlap and with worker protection laws in Germany being the way they are, Lufthansa will not be able to simply layoff unnecessary workers. AB employs approximately 8500 people and accommodations would need to me made for those at risk of losing their jobs as a result of a merger.
Should LH find a way to navigate the regulatory gauntlet, and get others to take the liability left behind by Air Berlin, it would be an obvious coup for Lufthansa. Considering that LH’s main focus over the last 3 years has been to build an LCC product that can take on, and beat the likes of RyanAir and EasyJet at their own game, plugging Air Berlin into Eurowings would catapult LH to the forefront of LCC operations in Europe. The only problem is that Europe’s politics and Lufthansa’s competitors will do everything possible to keep Lufthansa from realizing that success.
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.
Over the past few weeks it was quite obvious that Air Berlin was in ‘perilous peril’. News starting coming from Germany that Etihad was no longer happy with their stake in Air Berlin and was even looking at ways to divest of their ‘mistake’. At the top of most headlines was the fact that Lufthansa was prepared to take advantage of AB’s weakness and takeover aircraft and routes while Air Berlin restructured their operations.
With the latest news from Germany on Monday, we now gain clarity and confirmation of what has been discussed previously.
People in Europe were waking up to headlines that Air Berlin indeed will be restructuring operations in an attempt to return to profitability. Leading the list of changes is the elimination of over 1,000 jobs and reduction of its fleet of 127 aircraft to only 70 by the end of this year.
To dovetail this announcement, Lufthansa has been planning for this and had previously offered to assume control of 40 of Air Berlin’s aircraft and operate most of the Air Berlin routes that do not serve Dusseldorf or Berlin, both of which are major AB hubs. LH will ‘wet lease’ the aircraft and crews from AB and will operate them under ‘Eurowings’, LH’s Low Cost Carrier unit. What this means is Air Berlin is guaranteed to receive ‘rent’ for the aircraft, but Lufthansa gets to keep profits, or absorb losses.
In addition to the aircraft that Lufthansa will take over, it appears that Air Berlin will also sell 17 of their birds currently owned by ‘Niki’ to TUIFly. ‘Niki’ is an Austrian based subsidiary of Air Berlin.
The timing of the implosion of Air Berlin couldn’t have happened at a better time for Lufthansa. At the top of LH Group’s priority list for 2016 was to make sure that Eurowings would be set up for success and become accretive to Group’s balance sheet. So far success has been muted for a variety of reasons including the fact that the fleet is a bit undersized, uber aggressive competition from competitors, and a change in consumer sentiment in Europe that has fewer people thinking about travel.
With the injection of 40 aircraft, new routes, and broader coverage Lufthansa has the opportunity to make Eurowings what it is supposed to be, which is a low cost option for passengers to travel to destinations not usually served by mainline carriers. At this moment, Eurowings only has 33 aircraft in the fleet making it difficult to reach their goal. With the influx of 40 new aircraft, crew and hundreds of new flights, EW will have literally doubled in size over night without much effort or substantial risk.
Eurowings now has the opportunity to finally meet the expectations that everyone had for it. However the expectations may have doubled as well!
Lufthansa Group’s Supervisory Board is scheduled to meet Wednesday, September 27 to review and vote on the proposal for bailing out Air Berlin. It’s expected to be approved unanimously so expected another announcement in the coming days that confirms what we already know.
The strategy of operating a low cost carrier SPECIFICALLY NOT out of a major hub has apparently been scuttled.
According to Eurowings boss, Karl Ulrich Garnadt, Eurowings (Lufthansa’s low cost carrier division) will begin operating flights out of Lufthansa’s #2 hub in, Munich. No date has been announced, but it was indicated that Munich operations for EW would begin sometime in 2017.
The rationale behind the change in the Eurowings business model is to stave off LCC competition that is beginning to build in Munich thanks to other LCC operators such as Easyjet and Norwegian among others. However, there are inherent risks with the idea, one being labor and the other being the impact on Lufthansa’s mainline operations.
As the Eurowings concept was built out, Lufthansa had worked with Unions to ensure that there would be no conflict of interest when it came to Eurowings and Lufthansa crews. Bringing the 2 carriers in direct competition in Munich may not sit well with Unions who typically have an itchy trigger finger when it comes to calling strikes for trivial reasons.
Another almost certain unintended consequence with this move is the risk that Lufthansa mainline operations will lose passengers to Eurowings. EW and LH would be in direct competition for the same passengers. Fares wars within the same airline group?
Not only will this impact short haul Munich operations for Lufthansa, it will almost certainly impact long haul operations as well. Booking a combination of EW and LH flights on one ticket is not an easy task, nor is the ability to connect from an EW flight to one operated by Lufthansa, and vice versa. A lot of systems work will be needed to marry the 2, and thats on top of Eurowings’ existing systems challenges that they are working through.
I see this as a reactionary move and an attempt to reduce the impact of non-LH LCC airlines in Munich, but in reality I don’t see how this will be possible since Eurowings is suggesting that only 4 or 5 aircraft would be assigned to Munich, hardly enough to make a significant impact on the competition, but enough to hurt itself and the parent company. EW already has its set of challenges and I think that they are stretching themselves a bit too thin in opening this new ‘front’ on the war against other LCCs. This defines dabbling and experimenting, not a commitment. Bandaids do not heal wounds.
It would be wiser for EW to be proactive and perfect their product that currently has it challenges and not enter a new arena with a business model designed for anything but operating out of major hubs, especially Lufthansa’s. Perfect the EW model so that it allows Lufthansa to consolidate other European LCCs into Eurowings when the opportunities arise. Don’t dilute what at best is a marginally successful unit (most would even argue that it is not yet successful).
In my humble opinion it’s a case of ‘Ready, Fire, Aim’.
I’d like to be proven wrong, but I wouldn’t bet against me.