Lufthansa’s struggles with Germanwings

GermanWings1

Two recent declarations from European passenger aviation’s biggest companies paint an interesting contrast. First Lufthansa CEO Carsten Spohr declared: “We don’t want to be driven by change in the aviation sector: we want to be among the drivers of it. But doing so demands bold steps forward: our market is no place for half-measures.” He emphasized that currently Lufthansa was struggling to achieve growth potential because of “over-rigid cost structures” in “highly price-sensitive market segments”. Lufthansa’s proposed solution is to expand Germanwing’s footprint across it’s non-hub European network. Second, and in typically candid fashion, Ryanair CEO Michael O’Leary claimed that Lufthansa “has some bizarre plan about establishing a new low-fare airline. Unfortunately they started with a high-fare airline called Germanwings and they’ll need to do a lot more than call it that and paint it yellow to make it a low-cost carrier.”

These two views highlight an emerging fight for Germany’s leisure and price sensitive customers. Lufthansa’s dominance of Frankfurt and Munich and its continued use of the ‘premium’ Lufthansa brand out of these airports has meant that in order to access growth (out of Germany’s secondary airports such as Dusseldorf or Hamburg), it has turned to Germanwings. The main reason for increasing use of Germanwings capacity is largely related to financial losses. According to Lufthansa Group financial reports, in 2012, its non-hub European network incurred losses of between 200 and 300 million Euros. This is attributed to Lufthansa’s higher cost base and ensured that the lower pricing model offered by Germanwings ate into its profit margin.

Moreover, the 2008 financial crisis made matters worse. From 2008 to 2010, the Lufthansa Group experienced a 17% decline in revenue per passenger in Europe, from EUR140 to EUR116. While it had by 2012 improved to EUR121, the following year did not see an uptick and a return to pre-2008 levels. Management at Lufthansa now recognize that the industry has restructured (beyond the general economic cycle) to lower long term RASK.

What is even more painful for Lufthansa management is a simple comparison with RASK for Europe’s most successful LCCs (easyJet, Ryanair, Vueling and Wizz Air) who in 2012 managed a 30 percent cost advantage over Germanwings (source: CAPA). One of Germanwings’ biggest cost issues is that its pilots are under union Vereinigung Cockpit who negotiates with both Germanwings and Lufthansa. Just to worsen matters for Lufthansa, while passenger numbers at German airports in August 2014 were up by over six percent, Lufthansa (including Germanwings) managed less than five percent.

Lufthansa’s ‘hybrid’ pricing structure at Germanwings (required to maintain service for its FFP and premium customers) means that it is stuck in the middle, not able to meet the LCCs heavily discounted prices but upsetting its FFP customers used to a Lufthansa ‘premium’ product on board.

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