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Pressure on Lufthansa's Eurowings as budget rivals eye Germany

02/01/2016 | 11:00am

BERLIN (Reuters) - Budget airline Ryanair (>> Ryanair Holdings plc) is set to fly more passengers than Lufthansa (>> Deutsche Lufthansa AG) for the first time this year, heaping pressure on the German carrier to make a success of Eurowings, its latest attempt to crack the low-cost market.

BERLIN (Reuters) - Budget airline Ryanair (>> Ryanair Holdings plc) is set to fly more passengers than Lufthansa (>> Deutsche Lufthansa AG) for the first time this year, heaping pressure on the German carrier to make a success of Eurowings, its latest attempt to crack the low-cost market.

Lufthansa has already tried its hand at budget flying with the short-haul Germanwings service, which is now being merged into the new Eurowings business.

While Germanwings, whose brand was set to be phased out even before the crash of one of its jets last year, is set to turn a profit for the first time, its costs are still seen as too high to compete with easyJet (>> easyJet plc) or Ryanair, which carried 101 million passengers last year, against Lufthansa's 108 million.

Through a combination of employing staff on more flexible contracts that reflect seasonal demand, replacing regional jets with larger A320 planes that can seat more passengers, and keeping onboard frills to a minimum, Lufthansa hopes to bring costs at Eurowings down to around those of easyJet.

"Eurowings is crucial for Lufthansa. The Germanwings experiment didn't work because it wasn't sufficiently low-cost, but Eurowings should have greater labour flexibility and lower unit costs," Jonathan Wober, chief financial analyst at CAPA-Centre for Aviation, said.

The stakes are high. Budget air travel in Germany, which has long lagged other markets, looks set to take off.

And a successful Eurowings could help Lufthansa push through the cost cutting and labour reforms that have been crucial in helping other traditional carriers, such as British Airways' owner IAG (>> International Consolidated Airlns Grp SA), to thrive in a highly competitive market.

But the initial signs have not been encouraging. Eurowings has had to fork out hundreds of euros apiece to passengers in compensation after a spate of delayed long-haul flights, including one from Cuba delayed for 68 hours.

"It's not gone too well to be honest, but now we are doing everything we can to stabilise the operation," a spokesman said, adding the future of Eurowings was not in question.

TAKING OFF

Currently, low-cost carriers have only a 25 percent share of Germany's short-haul market, against around 50 percent in countries such as Britain, Spain and Italy.

High costs at German airports and the dominance of Lufthansa and Air Berlin (>> Air Berlin Plc), which control about 60 percent of the short-haul market to and from Germany, have held back the likes of Ryanair and easyJet.

But with Air Berlin cutting routes as it struggles to return to profit and Lufthansa moving some routes to Eurowings, German airports keen to keep passengers coming through their shops and restaurants have become more willing to do deals with low-cost carriers.

Alongside Europe's two largest low-cost carriers, IAG's Vueling, Air France-KLM's (>> Air France-KLM) Transavia, Wizz Air (>> Wizz Air Holdings PLC) and Iceland's Wow Air are among those expanding.

"German airports ... are actively working with us and others, saying please can you come in here," Ryanair boss Michael O'Leary said on the sidelines of an event in Amsterdam last month.

Ryanair aims to grow its market share in Germany to 15-20 percent over the next five years, from around 5 percent now.

The robust German economy, low unemployment and low oil prices are also driving expansion and serving as a magnet for low-cost players, Euromonitor senior travel analyst Nadejda Popova said.

LOW-COST THINKING

CAPA analyst Wober said making Eurowings work could help Lufthansa apply some low-cost concepts to its mainline brand as it battles to bring down the cost base there too.

That is a strategy Willie Walsh has used to great effect at IAG, which groups former state-run flag carriers British Airways and Iberia with budget carrier Vueling, acquired in 2013.

"Vueling gives us a new dimension, an aggressive and established low-cost base, a low-cost culture. That brings great value to IAG," group CEO Walsh said in Dublin last month.

Lufthansa, which has faced a serious of strikes by pilots and cabin crew at its main brand over the last two years, is looking for 4,000 new employees this year. That includes 240 new pilots, of which 140 are for Eurowings.

"It's a way of saying to existing staff that management will get on with it, find other people and on more flexible contracts," Wober said.

Not everyone is convinced its strategy of offering cut-price long-haul flights in addition to routes to nearby destinations will work.

"Today's planes are still too expensive for this business model," Philipp Goedeking, managing partner at consultant Avinomics, said.

Rival Norwegian Air (>> Norwegian Air Shuttle ASA) runs low-cost long-haul flights but uses new Boeing (>> Boeing Co) 787 Dreamliners with free wireless internet to entice customers, while Eurowings uses older Airbus A330 jets.

"I couldn't run a profitable long-haul operation with old aircraft," Norwegian Air CEO Bjoern Kjos told Reuters.

(Additional reporting by Peter Maushagen; Editing by Mark Potter)

By Victoria Bryan

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