Gulliver | Low cost, high stakes

Lufthansa is attempting to bulk-up Eurowings

Lufthansa plots a low-cost revolution with Eurowings. Whether it will happen is another question

By M.R.

LUFTHANSA is already Europe's largest group of airlines, counting the flag-carriers of Germany, Switzerland and Austria among its portfolio of subsidiaries. It may be about to get even bigger. Impressed with the results of consolidation in North America—now the world’s most profitable aviation market—Lufthansa’s chief executive, Carsten Spohr, is shopping for more airlines. Efforts to lift the group’s shareholding in Brussels Airlines to 100% were disrupted by terrorist attacks in its home city in March, but remain on-track. Scandinavian Airlines (SAS), the shared flag-carrier of Norway, Sweden and Denmark, and Condor, the German leisure carrier, are also now rumoured to be in its sights.

As well as increasing the number of hubs operated by the sprawling organisation, the acquisitions would help Lufthansa scale up Eurowings, its newly relaunched low-cost carrier. Eurowings is Mr Spohr’s answer to Ryanair, EasyJet, Norwegian Air Shuttle and the other low-cost carriers that have come to dominate the short-haul market in Europe. Unlike Germanwings—its smaller and domestically focused predecessor—Lufthansa’s executives hope to ramp up Eurowings’s economies of scale to make it more competitive. The subsidiary is also dipping its toes into the risky low-cost, long-haul market. It currently operates out of three German cities (Cologne, Dusseldorf and Hamburg) plus Vienna, Austria’s capital. A “migration concept” being negotiated with Brussels Airlines would involve partially re-branding the Belgian flag-carrier as a Eurowings franchise. If SAS follows suit then Eurowings bases could spring up across Scandinavia, stemming the rise of Norwegian. If Eurowings subsumes Condor—itself a former subsidiary of Lufthansa—the fleet could balloon overnight.

Turning the plan into reality will not be easy. Lufthansa has lost an estimated €500m ($543m) because of industrial action since 2014. A court ruling that prohibits further strikes over the Eurowings strategy has slowed the walkouts, but disgruntled unions continue agitating over pay and pensions. Scandinavia’s heavily unionised workers are unlikely to be any more obliging. Politics is another concern. Whatever the commercial rationale for turning their capitals’ airports into low-cost battlegrounds, governments tend to favour more illustrious paths for their cherished flag-carriers. Austrian Airlines has already rejected proposals to re-brand its short-haul network into a Eurowings franchise.

Conflicts of interest may also arise within the group. Lufthansa’s business model hinges on feeding short-haul passengers into its Frankfurt and Munich hubs, whence they can be redistributed around the globe. The more non-stop options that Eurowings provides for point-to-point connectivity, the less necessary it becomes to connect with the mainline unit.

It is also worth noting that Lufthansa’s push into the low-cost sphere comes at the same time as Ryanair—the continent’s biggest low-cost carrier—lurches in the other direction towards semi-full-service provision. The once-puritanical no-frills carrier is now three years into a plan that has seen it improve customer service, cut ancillary charges, and even trial hub-and-spoke operations—all of which may push up its costs. In their respective ways, Ryanair and Lufthansa seem to be exploring new pastures during a period of historically high profits for the industry. But if the economy stumbles and demand falters, they may discover that the grass was greenest in their own back gardens.

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