When to considerable fanfare in around 2014, Lufthansa Group announced the development of Eurowings as a core network airline for the company operating intra-European flights from Germany (with the exception of Frankfurt and Munich), much attention focused on how this move was designed to help Lufthansa respond to the threat of LCCs in the German market that tended to avoid the Lufthansa hubs of Frankfurt and Munich. This decision was much in line with copycat practices of airline executives given IAG’s development of Vueling and Air France-KLM’s investment in Transavia. This decision required re-structuring of Lufthansa Group’s employee relations with Eurowings employees being on different, less generous contracts compared with Lufthansa staff. The key goal here was to nudge down costs as close as they could to LCC levels to compete. It would aslo allow Lufthansa Group to unbundle the value proposition and generate additional revenue through paying for seat assignments, checked baggage etc.
Later in 2015, Lufthansa announced it would launch long-haul services under the Eurowings brand to North America, the Caribbean and Dubai with mixed results. A quarter of all Eurowings’ long-haul flights was delayed by an average of almost 6 hours, with some delays lasting more than 20 hours. Lufthansa’s predictable excuse was a combination of ‘unexpected technical difficulties’ (really? You’ve never flown a plane before?) and a small fleet (so why did you launch an airline with too few planes?) As hard as this is to believe, Eurowings started its first seven long-haul routes with only one own aircraft. Eurowings long-haul reached rock bottom when one of their flights from Varadero to Cologne arrived 2 1/2 days late. Passengers with visas whose validity had run out were stuck in their hotels!
Ryanair has now intensified its efforts in the German market by launching flights from Frankfurt, Lufthansa’s main hub. Again predictably, Lufthansa Group blamed Frankfurt Airport operator, FraPort, for offering better conditions and prices for services to Ryanair than Lufthansa could get. It seems that Lufthansa executives don’t fully understand the concept of competition fully. Partially in response, it now appears that Lufthansa Group will be infecting their hub airports with the Eurowings affliction. Eurowings began to expand service in 2017 and will finally fly from Munich, launching 32 new routes. Eurowings will fly to Amsterdam, Paris, London, Rome, Edinburgh, Basel and Geneva. As part of the takeover of Air Berlin the latter will operate them for Eurowings under a wet-lease agreement.
Methinks the lady doth protest too much: the official reason for this move was to enter a segment that Lufthansa Group has previously avoided – namely the price-sensitive leisure segment. Of course, a cursory glance at both Lufthansa Group’s pricing for Lufthansa flights; their actions to slowly eliminate First Class on long-haul; as well as introducing new fare categories and finally their stuttering efforts at Eurowings long-haul all suggest that this is not a new initiative but part of a longer term strategy to ultimately make Eurowings the core brand for Lufthansa Group’s passenger aviation services.
This brings numerous advantages to Lufthansa executives (not necessarily customers). First, they can get rid of their highly paid pilots and senior flight crew by phasing out Lufthansa passener flights and bringing in Eurowings which will significantly reduce costs and bring an end to the power of the pilots unions. Second, they can reduce their ground service obligations by reducing the ‘frills’ and VIP treatment that elite customers get by closing First Class lounges. Third, while Miles and More, Lufthansa’s FFP is used on Eurowings, they have a new program currently used by Eurowings – Boomerang Club – which could easily replace Miles and More as part of a radical devaluation of FFPs at Lufthansa Group. Existing Miles and More customers could be moved into Boomerang Club as a transition deal and then be forced to collect miles on new terms. Fourth, they can devalue business class by adding ‘premium economy’ as a replacement for it. It is rather interesting that Lufthansa is going in the opposite direction to Qatar Airways who have signficantly upgraded Business Class with the new QSuite. By contrast, Lufthansa’s business class hard product is very much poorly reviewed by influential frequent flyer blogs.
The signs are there that Eurowings is the Trojan Horse – Lufthansa is planning a slow, but fundamental transformation away from full-service carrier status to being a hybrid network carrier and trying to become the first fully integrated short-haul and long-haul LCC. If we consider the strategic logic of this, it would be as follows:
- Passenger aviation is rapidly commoditizing as ever more price-sensitive passengers consider flying in the same way they travelled by train or bus in the past.
- The emergence of the LCC business model suggests that developing a cost-conscious operation through a combination of cuts in salaries, fleet simplification and outsourcing ‘non-core’ activities such as ground services can generate profits at volume by gaining these new price-sensitive clients.
- Embracing LCC/Hybrid models is only sustainable financially if you have a large market share (to generate volume and network effects) thus Lufthansa must embrace industry consolidation to earn a large enough volume of thinning operating margin through reduced competition.
- By taking the lead in hybridisation towards LCC standards, Lufthansa Group can stay on terms with IAG and Air France/KLM and keep Ryanair, EasyJet and Wizzair at bay.
- By taking this path, Lufthansa is explicitly ceding ground to the Gulf Carriers in the premium segments since they do not operate on the same economic conditions (through explicit and implicit government subsidy from their governments) as Lufthansa.
From the perspective of shareholders and industry executives, this might work. In my next blog post, I will examine the evolution of the US domestic airline industry where today only four airlines control 80 percent of the US market and who have operating profits per passenger 300% higher than their European counterparts currently by embracing hybrid network carrier business models.