Deutsche Lufthansa AG will organize its airlines into two units, one focused on premium services and the other on no-frills flights, to tackle the double threat from low-cost carriers offering cheaper tickets in Europe and airliners from the Persian Gulf outclassing it on services to Asia.

Lufthansa will group its namesake airline brand along with its Swiss and Austrian units into a so-called hub group, the Cologne, Germany-based carrier said in a statement today. The Eurowings operations will be combined with Germanwings to form the budget group, and management levels will be cut to three from four, with the measures contributing 500 million euros ($564 million) to earnings once implemented.

Harry Hohmeister will head the hub airlines operation, while the low-cost unit will be led by Karl Ulrich Garnadt, who will also be responsible for aviation services including maintenance, cargo and catering, the carrier said.

“Our new group organization should make us more efficient and more responsive,” CEO Carsten Spohr said. “Cutting one management layer is something that won’t be met with cheers from within the company, but is necessary to make us faster,” he added on a conference call.

Lufthansa has suffered from a double squeeze. The rapid expansion of low-cost airlines including Ryanair Holdings and Easyjet in Europe has caused losses at its short-haul operations for years, and government-backed airlines from the Middle East and Turkey offering top-notch service for less, crowding it out of once-lucrative routes toward Asia. Spohr’s plans to cut costs to narrow the productivity gap have been met by ferocious resistance from unions, cumulating in 13 pilot strikes over 18 months.

Spohr last year vowed to make the carrier more agile by cutting a layer of management, to better manage innovative ideas and to focus on the faster-growing market of leisure travelers. For premium passengers, Lufthansa this month completed an upgrade of business-class cabins on its long-haul fleet, and started trolley-less restaurant-style food service, with a goal of gaining a five-star rating next year from Skytrax, which ranks airlines by quality.

That means Spohr must manage the balancing act of running a full-service carrier at eye level with the world’s best airlines while cutting costs and improving productivity so he can boost Lufthansa’s no-frills business to a size competitive against the segment leaders. Air France-KLM, Europe’s largest carrier, tried a similar strategy and was forced by striking pilots to back off from a plan to create a low-cost unit outside France. British Airways’ parent International Consolidated Airlines Group SA sidestepped such problems by buying an established low-cost airline in Vueling Airlines SA.

–With assistance from Andrea Rothman in Toulouse.

This article was written by Richard Weiss from Bloomberg and was legally licensed through the NewsCred publisher network.

Photo Credit: A Eurowings Airbus A320. Aleem Yousaf / Wikimedia Commons