Can long-haul LCCs succeed in Europe? Perhaps so, but the Lufthansa Group will no longer be part of that effort. Following an earnings warning based on “price deterioration in Europe caused by market-wide overcapacities and aggressively growing low cost competitors” last week the Lufthansa Group announced adjustments this morning that will revert long-haul operations to its network carriers by 2021 and significantly alter other plans previously indicated.
The group previously announced intentions to integrate its Brussels Airlines operations into Eurowings, with both long-haul and short-haul operations affected. None of that will happen under the new plans. Instead, the Eurowings operation will focus on its point-to-point, short-haul operations. They group claims a substantial revenue premium today over the LCC competition and intends to extend that position.
New ancillary revenue channels tied to both the air travel component and other bits of the trip are to be considered in building that revenue stream.
The revenue plans should not attract too much opposition, even from customers. The cost cutting efforts, however, may realize pushback. Some of the moves are relatively benign. Older aircraft will be retired and leases will be reduced. The DASH-8 turboprops will disappear by 2021 and A320neo family aircraft will join the fleet beginning then. The A320neos will come from the existing Lufthansa Group order book, implying slower short-haul growth on that side of the business.
More controversial will be the efforts to increase crew utilization within the organization. Over the next four years the company targets a 50% increase in annual block hours per crewmember. Consolidating the operations to a single operating certificate will reduce the number of standby pilots, for example. Establishing more strict home base scheduling will also help reduce commute time, increasing true operating time. And some crew seconded to Eurowings from Lufthansa will return to their original operations. But the company also intends to “Increase days of duty and daily flight hours” for its pilots. That is unlikely to make pilots particularly happy.
Is it really Low Cost??
The shift away from a long-haul LCC operation is not unique to the Lufthansa Group. Air France/KLM made a similar move with its Joon operations. The third European airline group, IAG, is not yet ready to make that same move, however. It is consolidating into the Level brand and expanding the routes served, though the expansion is much further away from its core hubs than either of the other two managed to deliver. Level is also much closer to a true low-cost operation than either Eurowings or Joon ever realized. Yes, they were slightly lower than their parent airlines. But the legacy contracts kept costs significantly higher than their true LCC competition. The yield premium for Eurowings helped overcome the operating cost pressures, but not enough. And especially not enough in the long-haul markets where costs scaled up far more quickly.
Perhaps long-haul LCC operations can still be financially viable for the European market at a larger scale. Certainly Norwegian will continue to try as well, though profitability there remains elusive as well. And the retreat by another major group does not project confidence in the segment.