Lufthansa Group Thinks It Has an Answer to Ryanair's New German Incursion

For years, as low cost airlines have grown in Europe, the Lufthansa Group mostly has stuck to what it knows best — carrying business travelers and higher-end leisure customers from its four key hubs, Zurich, Vienna, Frankfurt, and Munich, to key world capitals in Europe and elsewhere.

But like every other legacy airline group in Europe, Lufthansa, which owns Lufthansa Airlines, Austrian Airlines and Swiss International Air Lines, is feeling more squeeze than ever before from discounters like Ryanair and EasyJet. So after making some half-hearted attempts in recent years to try to compete with lower cost airlines, Lufthansa Group is telling investors it finally has an aggressive plan to thwart the competition.

Lufthansa will grow its low cost subsidiary, Eurowings, in the coming years, hoping passengers will choose it over better-known competition. The airline is not new — it started flying in 1994, and Lufthansa Group assumed control about a decade ago — but until recently it has been a bit player, with a fleet and customer base far smaller than Ryanair's or EasyJet's.

Now, through proposed deals with Brussels Airlines and Air Berlin, Lufthansa Group is poised to turn Eurowings into the third-largest point-to-point airline in Europe by next summer, according to Group CEO Carsten Spohr. Eurowings, which historically has not flown traditional hubs, has a much different model than the hub-and-spoke full-service airlines of the Lufthansa Group.

Soon, Spohr said, Eurowings could have more than 160 aircraft, possibly giving it enough scale to compete with Ryanair, which is a little more than twice that size. That's a major jump from the 30 or so aircraft Eurowings had a few years ago, before it merged operations with Germanwings, another Lufthansa-owned discounter. It's also a big increase from the roughly 90 aircraft Eurowings operates today.

The decision to grow Eurowings comes as Ryanair, Europe's most powerful discounter, expands into Frankfurt, Lufthansa's top hub, for the first time. Ryanair made its announcement on Wednesday as Lufthansa Group reported its third quarter earnings and shared plans for Eurowings' expansion. Lufthansa Group CEO Carsten Spohr told analysts he was watching the development "with great interest," promising his company would "react as appropriate."

Eurowings still does not operate from Frankfurt, though that could change at some point. Lufthansa Group has been increasingly willing to permit Eurowings to operate from its hubs, with the carrier expanding in Vienna this year and Munich next year. Eurowings is also beginning to expand its long-haul operation with widebody aircraft.

"Lufthansa has built an unrivaled operation here in Frankfurt that operates probably the strongest network of all European airlines in Europe," Spohr said. "We are certainly not nervous to take on more competition. As a matter of fact we are competing already in many airports in Europe."

Air Berlin Deal

Having expanded Eurowings by merging its brand with Germanwings, Spohr is now turning his attention to inorganic growth. New aircraft will help Germanwings add point-to-point routes outside of Germany.

"Eurowings is already the market leader in direct traffic in our home markets," Spohr said. "But we also want to grow in other markets, and for that, we need partners."

Perhaps most interesting is Lufthansa Group's recent decision to wet-lease about 35 aircraft from Air Berlin for six years, beginning in March. Under the agreement, Air Berlin pilots and flight attendants will work the flights, but Eurowings will sell tickets and market the operation. It's a relatively unusual arrangement, with wet-leases more commonly used by smaller airlines and charter carriers, but Spohr notes it's cheaper than buying new planes.

"We plan to increase our presence in attractive European markets where we may already be active today," Spohr said about plans for the Air Berlin fleet.

The cash will be vital for Air Berlin, which has been struggling to make money, disappointing Etihad Airways, one of its larger shareholders. And for Lufthansa Group, the deal helps sideline a competitor. That's important, Spohr said Wednesday, because the European market has seen fewer airline mergers than its U.S. counterpart.

"Another reason why this step is so important is that it [helps] drive consolidation, and thereby the capacity discipline [that's] so urgently needed in the European airline industry," Spohr said.

Brussels Airlines Acquisition

Lufthansa Group also plans to transfer some Brussels Airlines aircraft to Eurowings, assuming the company is able to acquire the 55 percent of the Belgium-based carrier it does not already own. Lufthansa Group's board approved the acquisition in September, and the transaction is supposed to close early next year.

But on Wednesday's call, Spohr said it is too early to know how Eurowings would use the aircraft. He said the company will first focus on absorbing the Air Berlin aircraft.

"We’ll take the year of ‘17 to jointly analyze the integration to Eurowings when it comes to brand, when it comes to overhead, [and] which synergies [will] be realized," Spohr said.