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.
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.
Add more to the pile of woes at Eurowings……
Ver.di, the union that represents Eurowings’ ground crew and staff as well as airport personnel, is threatening to strike at short notice after recent labor negotiations fell apart. According to the union, 4 negotiation sessions with Lufthansa’s LCC management failed to yield any progress.
At the center of the labor issue is the union’s contention that employees have not seen a raise in 8 years. According to the union, the average Eurowings ground crew / staff employee earns only €131 more than Germany’s minimum wage requirement.
According to the union, it appears they are prepared to call a 4 hour strike with little to no notice between now and the next negotiation session which is slated for September 26. Nearly 500 employees can walk off the job at Eurowings bases in Hamburg and Dusseldorf should a strike be called.
The Union is seeking a 7 percent pay raise while Eurowings has countered with only a 1.3% raise for 2017 and 2018. So it doesn’t take a calculator to see that a major chasm exists between the 2 sides. The current contract expires on September 30 at which point things could really get ugly.
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.