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Lufthansa's Discount Revolution Struggling to Get Airborne

Published on Feb 12 2016 10:12 AM in General Industry tagged: Ryanair / Deutsche Lufthansa

Lufthansa's Discount Revolution Struggling to Get Airborne

Deutsche Lufthansa's new discount arm is struggling to deliver as employees resist efforts to cut expenses on European routes and long-haul flights are blighted by a series of unlikely setbacks.

While the Eurowings short-haul fleet will number 89 aircraft by the end of next year, crews on fewer than 20 planes will have been transferred to less costly contracts, according to Lufthansa, which has pledged to build the business into Europe’s third-biggest low-cost carrier.

The long-haul operation, which has just two leased aircraft, has been hit by incidents including a lost engine cover that grounded a plane for a week, a turbine malfunction that stranded passengers in Cuba for three days, and an outbreak of tropical disease that left two pilots bedridden.

“Setting up a large low-cost carrier is no piece of cake,” said Jochen Rothenbacher, an aviation analyst at Equinet in Frankfurt. “The customer must accept it in order to be a success. Ramping up Eurowings in not a given.”

Lufthansa is relying on Eurowings to cut costs 40 per cent on European flights that don’t feed lucrative inter-continental services as discounters led by Ryanair and EasyJet grab market share and erode prices. The parallel long-haul operation aims to carve out new markets away from big-city routes increasingly dominated by Gulf carriers including Dubai-based Emirates.

Spohr Upbeat

Lufthansa Chief Executive Officer Carsten Spohr said in an interview Wednesday that while Eurowings has experienced difficulties, the first traffic figures for the unit, showing it carried one million people in January with long-haul planes 96 per cent full, “impressed the industry” and showed “the market is there.”

On short-haul routes, strikes that wiped €500 million from earnings in two years have scuppered plans for a wholesale makeover of the network outside the lucrative Frankfurt and Munich hubs. Savings are instead being achieved by re-registering planes with Eurowings’s Austrian arm at the pace crews move up to the mainline brand when others retire.

By the end of 2017 just 19 Airbus Group SE A320s are due to have been transferred, according to the company, or less than one-quarter of the Eurowings narrow-body fleet. At that pace, it won’t be cost-competitive for at least five years, according to London-based Barclays analyst Oliver Sleath.

Spohr said a decision not to fire anybody to establish Eurowings means the transition will “take some time,” though crew-qualification rules dictate that the shift couldn’t have been much quicker. The Germanwings brand being absorbed by Eurowings was also making “some money,” he said.

The long-haul woes can be traced largely to a single Airbus A330 aircraft that suffered the cowling incident on a crew- training flight and the engine failure in Cuba, together with an outbreak of dengue fever among pilots over Christmas.

“What we probably underestimated is just the lack of critical mass in terms of reserves when you have a small fleet,” Spohr said. “Definitely we misjudged the ability of what you can squeeze out of two aircraft.”

The issues have caused Eurowings to postpone until June the start of services to Las Vegas and Boston, originally set for May, and to shelve flights to Tehran indefinitely, jeopardizing its chances of tapping what’s expected to become one of the world’s fastest-growing markets following the lifting of sanctions.

At the same time, Eurowings has had to lease aircraft from at least seven other carriers including UK-based Titan Airways and Spain’s Air Europa to maintain existing services to Cuba, the Dominican Republic and Thailand. Dubai flights have moved to Lufthansa and will be suspended this summer.

The disruption meant almost one in seven of Eurowings’s long-haul flights was delayed for at least three hours from the start of services in November through mid-January, making passengers eligible for compensation of up to €600 apiece and undermining its aim of breaking even from day one.

Eurowings says the situation should ease once it gets a third and fourth A330 from leasing companies in April and May. The long-haul fleet should number seven by next summer and may be expanded further if profitable.

While Lufthansa maintains that Eurowings bookings are better than expected, groupwide unit costs still rose last year, and Spohr says expenses remain those of a state-owned carrier.

“We are done examining our problems,” he said. “Now we need the therapy.”

News by Bloomberg, edited by Hospitality Ireland

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