Are traditional airlines commoditising themselves in their core markets?


They are all trying it. Air France/KLM, Lufthansa Group and IAG are all trying to copy Europe’s leading LCCs by launching their own ‘budget’ brand. From the outset, history is against them. Rarely in strategy analysis can the word ‘never’ be said with 100 percent certainty: full-service carriers (FSCs) have never been able to launch their own LCC. Some have acquired them – Vueling was acquired by Iberia and British Airways, but none of the FSCs have successfully developed an LCC from scratch.

Delta’s Song, United’s Ted, Continental Lite all fell by the wayside in the US despite their attempt to confront SouthWest Airlines. The FSC record on this is appalling.

So why is it so hard for an FSC to do LCC through internal development? I would argue that the most important factors are internally driven ones. In particular, the organizational mindset and climate of an FSC is poorly suited to adopting LCC practices:

  • Unionized staff resist the inevitable erosion in salaries and benefits that come from LCC business models
  • Shifting to a LCC model while maintaining an FSC core means that the LCC operation is often seen as marginal to the ‘core activities’ of the FSC
  • Old habits die hard: lavish advertising budgets; generous fringe benefits and prestige investments in new products (First class interiors, new long-haul aircraft) are hard to resist for industry executives.

So it comes with increasing disbelief that in their desperate bid for relevance and financial sustainability, the main European FSC groups continue to charge full speed towards the creation of European LCCs. AF/KLM have Transavia Europe that has been put on hold because of this year’s pilot strike; LH has forged ahead with Eurowings (despite the fact their was a pilot strike last week). IAG has been the most successful with its acquisition of Vueling.

This blog post will focus on Lufthansa group’s attempt to launch Eurowings in its core market: Germany. A recent study by the Centre for Aviation highlighted that Germany is the least successful one for Ryanair. Ryanair has a market share of in excess 10 percent of seats across the whole of Europe but only 4.7% in Germany. It ranks as the fourth largest airline in market share terms in Germany behind Lufthansa (1), Air Berlin (2) and Germanwings (3) – although the latter is a subsidiary of Lufthansa.

Ryanair is to launch nine new routes in Germany in winter 2015/2016, of which seven will be from Cologne/Bonn and two from Hamburg. These will be going straight into Lufthansa’s home market. While traditionally, airfares from Germany have been driven by Lufthansa’s FSC strategy, Lufthansa is attempting to change German attitudes towards the LCC business model. For the last two years, it has converted all of its European routes outside of Frankfurt and Munich to its Germanwings LCC subsidiary, forcing changes in the travel patterns of an important part of the German market.

This adoption of LCC practices (at least a hybrid LCC/FSC model) may appeal to the view that LH must inevitably shift to more price sensitive, more efficient LCC processes and products given the fierce competition in the European market. Yet this move may actually be self-destructive since it is highly unlikely that LH can match Ryanair’s lower costs. It is estimated that Ryanair’s costs are 60 percent lower than Lufthansa’s including Germanwings. Thus as Ryanair comes into the German market, if Lufthansa responds by intensifying its LCC footprint through Eurowings (the successor to Germanwings), it will be fighting Ryanair on Ryanair’s terms.

Arguably, one of the factors that has kept German customers loyal to Lufthansa has been its frequent flyer program, Miles and More (MAM). Yet alongside the erosion in inflight product quality, Lufthansa has significantly weakened the benefits of MAM by copy-pasting the miles-for-revenues formula being protoyped by US carriers further undermining the value proposition.

On top of that, Ryanair has introduced a Business Plus product featuring free ticket changes; fast track security, free seat selection and 20 kg baggage allowance included. At a considerably lower price than the best product offered by Eurowings, Lufthansa’s frequent flyers may defect to Ryanair for shorter flights (up to 2 hours) since the benefits offered by the higher priced offering of Eurowings will be less compelling.

In short, Lufthansa appears to be helping Ryanair convert the German market into a price-sensitive LCC one like Italy has become where Ryanair is the country’s biggest airline. When it comes to a cost battle, Ryanair for the moment will be the only winner. And given Ryanair’s healthy financial situation, it could if necessary raise its game to leapfrog Lufthansa. Last but not least, Lufthansa will have a difficult trick of balancing its attempt to be a ‘5-star’ FSC out of Frankfurt and Munich with its desire to face down Ryanair in the European LCC space. Oh, and don’t forget that Turkish Airlines is now flying from more German airports internationally (through Istanbul) than Lufthansa. Stuck between a rock and a hard place would be an understatement to describe Lufthansa’s predicament.


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