Earlier today, Air Berlin had done what most of us were expecting for some time when they filed for Bankruptcy protection. The filing came primarily as a result of Etihad’s withdrawing of any more funding to help keep the airline viable. Etihad had been a major stakeholder in ‘AB’ since January 2012.
The bankruptcy leaves Air Berlin in shambles as it is now left to scramble to either reorganize, sell off units, or simply cease operations. As it stands now, the German government has stepped in with a €150 million bailout that will keep Air Berlin operational for 3 months. During this time, ‘AB’ will be able to run as normal a schedule as possible, and ensure the employment of its 7,300 workers. This is especially important since we are in the midst of holiday travel season in Europe.
During this period, Lufthansa will continue business as usual as it relates to the 38 aircraft that it sublet from Air Berlin earlier this year in an effort designed to help AB regroup their operation.
Over the next weeks and months, suitors will emerge hoping to take over important gate space at airports where Air Berlin operates. Of course, with Berlin and Dusseldorf being the main hubs for AB, I suspected a heated bidding war to arise between the likes of Easyjet and Ryanair as they hope to make further inroads against Lufthansa on LH’s home turf.
Ryanair is already whining about LH having an unfair advantage due to all this happening in Germany, but Ryanair whines because it is what it does best when it doesn’t get its way.
Lufthansa has stated that it expects to compete successfully for the Air Berlin business due to its ‘home field’ advantage and its existing relationship with Air Berlin. In fact, LH is already in talks with German and Air Berlin officials to craft a way forward that minimizes the impact of a complete shut down of Air Berlin.
Call it luck or brilliance, but Lufthansa appears to have played Air Berlin perfectly. LH did not spend much time, money, or manpower to take on Air Berlin directly with their Eurowings unit. Instead they saw the writing on the wall several months ago and waited patiently for their opportunity to arise. Along the way, they offered help to support their fellow ‘countryman’, knowing full well that AB did not have a chance at survival and that Etihad would pull it’s life line from Air Berlin. Now in the end, Eurowings is most likely to be the biggest benefactor and should see an exponential increase in size and presence in Europe’s Low Cost Carrier market. Much to the chagrin of RyanAir, Easyjet, and others.
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.