SEEHEIM Germany (Reuters) - Lufthansa (LHAG.DE) may launch low-cost long-haul flights under a new brand as part of plans by the company’s new boss to battle competition from Middle East carriers and no-frills airlines.
The long-haul plan would mark a big shift for the company which prides itself on still being a full-service airline and also represents a high-risk route that few others have taken.
The challenges facing Lufthansa, which warned on profit last month, are numerous - Middle East carriers are expanding aggressively on long-haul travel, low-cost carriers are gaining customers in short-haul and cargo markets are in the doldrums.
The options for CEO Carsten Spohr, who took the reins of Europe’s largest airline by revenue in May, were expected to include a bigger push into the low-cost arena or a possible alliance with a rival.
Under his plans, unveiled on Wednesday, Lufthansa will join a low-cost rush to attract leisure travellers with cheaper tickets and no-frills services, while still keeping its premium namesake brand.
“There are markets where we believe that the Lufthansa brand is important. In other markets we believe that cost sensitivities are so high, we don’t need a full-service brand,” he said, explaining that the market for leisure travel was growing faster than business travel via hubs.
Spohr’s plan is for Lufthansa to expand its European low-cost service and possibly add a new one for long-haul flights. It could consider offering long-haul flights from Munich or the western German cities of Cologne and Duesseldorf, with a premium section for higher paying passengers, using used Boeing (BA.N) 767s or Airbus (AIR.PA) A330s readily available on the market.
It is in advanced talks to set up a joint operation with Turkish Airlines (THYAO.IS), Spohr said, though Lufthansa could end up going it alone as well. If Lufthansa’s board approves the plans, such flights could start by the end of 2015.
RBC analyst Damian Brewer said that flying Boeing 767s that have relatively high operating costs to compete with carriers such as holiday airline Condor (TCG.L) and fast growing rivals would be very challenging.
“We think the distraction of an ever widening group of airlines and strategies and the increasingly conglomerate like nature of the group (ranging from airlines to IT, catering, maintenance and cargo) will open the way for more focussed carriers like IAG (ICAG.L), Air France-KLM (AIRF.PA) and others outside the EU to take share away,” he wrote in a note.
Setting up low-cost long-haul business is not easy and few have tried it.
Low-cost pioneer Ryanair (RYA.I) has said it would not attempt it because it would need some form of premium or business class seat to make money. Norwegian Air (NWC.OL) has met criticism from rivals and unions for trying to cut staff costs for long-haul flights from Scandinavia.
Spohr brushed off these concerns, saying: “We have experience in long-haul, we know what will work or won’t work.”
Lufthansa will expand its existing European low-cost services under a “Wings” holding group. It is already growing its Germanwings brand to take on short-haul traffic within Europe and now plans to expand its Eurowings regional airline.
Germanwings operates on a cost basis that is 20 percent lower than that of the Lufthansa brand, while Eurowings is 20 percent lower than Germanwings, Spohr said.
“I think Wings has the potential to become the third biggest low-cost point to point airline in Europe.”
He said three quarters of all intercontinental air travel and 79 percent of European air travel was for private reasons, rather than business trips.
Lufthansa’s short-term measures to make up for the lower than expected profit in 2014 and 2015 include increasing the number of seats it offers by only 2 percent in the winter, rather than 4 percent as originally planned.
Spohr said that cost efficiency must become a way of life, even when a programme begun by his predecessor Christoph Franz ends next year. Unions, which were vocal critics of Franz and repeatedly called strikes during his time as CEO, have so far seemed more accommodating to Spohr.
“At least this time we were involved in the decision-making process, rather than just being presented with measures and told to fall in,” Ilja Schulz, head of pilots’ union Vereinigung Cockpit, told Reuters ahead of Spohr’s presentation.
Shares in Lufthansa closed up 1.4 percent at 15.225 euros. The rise was not enough to make up for Tuesday’s 3.8 percent slide that followed a shock profit warning by fellow legacy carrier Air France-KLM on Tuesday.
Metzler analyst Juergen Pieper said the long-haul low-cost plan was worth a go.
“And an attempt is all it is,” he told Reuters. “I have the impression Lufthansa finally wants to be seen as an innovator again, and not just as trying to catch up with the competition all the time.”
Additional reporting by Joanna Partridge and Reuters TV; Editing by Maria Sheahan and Jane Merriman