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Lufthansa revamps budget airline Germanwings to take on rivals

07/01/2013 | Reuters

FRANKFURT (Reuters) - Lufthansa (LHAG.DE), Europe's biggest airline, launched its re-branded budget carrier Germanwings on Monday in an attempt to cut costs and win back passengers from no-frills rivals.

Germanwings, which is taking over most of Lufthansa's short-haul flights in Europe, is seeking to re-position itself as a budget airline for business travelers offering extras such as champagne and more leg-room.

Lufthansa shut its short-haul business in January because it had been losing money, mainly due to competition from budget airlines EasyJet (EZJ.L), Air Berlin (AB1.DE) and Ryanair (RYA.I).

The Germanwings revamp is a major part of Lufthansa's three-year overhaul to boost group operating profit by 1.5 billion euros ($1.95 billion)to 2.3 billion by 2015. Like other European airlines, Lufthansa has been hit by competition from low-cost rivals and Middle Eastern carriers.

Lufthansa, Europe's biggest airline by sales, is in the process of transferring 800 of its cabin crew and 30 planes to Germanwings, where costs are 20-30 percent lower.

Carsten Spohr, a Lufthansa board member, said Germanwings' costs had to be on a par with other budget carriers and raised the possibility of dropping uncompetitive routes.

"If at some point that is no longer the case, and even if that were only true for some routes, then we have to withdraw possibly from such routes or even from operational bases. We don't want that of course and we have to prevent that," he said in an interview published on Monday by newspaper Stuttgarter Zeitung.

The result of pay talks with cabin crew could increase costs, which analysts estimate are still higher than those at EasyJet and Ryanair, but likely similar to Air Berlin's.

Germanwings aims to make a profit by 2015. In 2011, the last time it published results, its operating loss widened to 52 million euros from 39 million in 2010.

"I consider Lufthansa's move sensible and borne out of a need to cut its cost of production on short haul," Credit Suisse transport analyst Neil Glynn said.

"However as with any project of this importance, it is not without challenges including building out Germanwings scale to ensure its own unit costs fall into line with LCC (low cost carriers) peers," he said.

Germanwings is relatively unknown outside Germany, where it sells up to three-quarters of its tickets, and unlike EasyJet and Ryanair, which have bases in the country and elsewhere in Europe, it operates only out of six German cities.

A Germanwings spokesman said the airline was well-known in England. "About 50 percent of tickets from and to England are generated in England. We are also known in Russia," he said.


The revamped Germanwings wants to attract customers whose companies ban them from traveling business class, the spokesman said. Its most expensive economy seat, Best, is the equivalent of a Lufthansa-branded business-class ticket but is cheaper, he said.

A Germanwings Best one-way Stuttgart to London ticket on August 14 costs 299 euros compared with 1,249 euros for Lufthansa business-class, according to the companies' websites.

Germanwings passengers can also pay for extras such as a 200 ml glass of Piper Heidsieck champagne at 12.00 euros, the ability to re-book flights and online booking of extra luggage, unlike the old service which had few add-ons.

It sold about 42 percent of total tickets to business travelers last year, the spokesman said.

A website search on June 27 for a one-way flight from Berlin to London on August 2 with 20 kilograms of checked-in luggage showed Germanwings was more expensive than two of its three main rivals.

Its 89.99 euro ticket compared with 67.31 euros at Ryanair and 73.79 euros at EasyJet, but was cheaper than Air Berlin's 194.47 euros.

The airline also has an image problem among its largely German clients. The German word for low-cost - "billig" - also means poor quality.

"Germanwings is seen as an inferior brand. And it is not a known brand outside of Germany," a Lufthansa pilot who did not want to be identified said.

Lufthansa is lending its image of reliability and quality by adding the words "Lufthansa Group" below 'germanwings' on the fuselage of planes re-painted with a new livery in the run-up to Monday's launch.

A Lufthansa spokesman said there is a high rate of acceptance among its corporate clients for Germanwings despite its low-cost image and bookings have been "extremely good", without providing details.

Germanwings has so far taken over the Stuttgart, Cologne and Hamburg routes, while Duesseldorf and Berlin will follow, so that by end of 2014, Lufthansa-branded short-haul planes will only fly to or from Frankfurt and Munich, where the company operates its profitable long-haul flights.

($1 = 0.7693 euros)

(Editing by Erica Billingham)

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