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?