ANALYSIS: Europe's network carriers attempt to learn from low-cost rivals

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European network carriers Lufthansa and Air France have in the last week added more flesh to the bones of their plans to tackle their short-haul challenges.

While more details are still to be clarified, it is now clear that Lufthansa will hang its hopes for turning round its non-hub operations on the Germanwings low-cost brand as it pulls these services together under a single banner from January.

Meanwhile, Air France has taken a different, more fragmented approach, creating a number of different units to drive its recovery push. It will, from the start of next year, decentralise into eight separate units, including splitting its long-haul and medium-haul operations from Paris Charles de Gaulle. There will also be separate units covering Paris Orly, regional and Transavia leisure operations.

The moves are driven by both airline groups' attempts to tackle problems in their short-haul operations as part efforts to improve overall profitability. Air France-KLM posted group operating losses of €809 million ($1.05 billion) in 2011, largely driven by losses at the French carrier. It has since launched its wide-ranging Transform 2015 programme.

Lufthansa posted a small net loss in 2011, in part reflecting losses at BMI, and has launched its major Score cost-saving programme. The airline, which is targeting a medium three-digit group operating profit for this year, is not giving a precise figure of the losses incurred on its non-hub operations. It is hoping to cut 30% from its cost base by moving non-hub operations to the new single unit. In total, non-hub services contribute around 8% of Lufthansa's total revenue.

It continues a trend that has seen European network carriers isolate and address under-performing parts of their business. These moves illustrate the extent to which European legacy carriers have identified short-haul operations in particular - eaten away by highly competitive and increasingly business-friendly low-cost carriers - as an area to be tackled. In the process it concentrates the mind of staff and unions on the job in hand.

Specifically, Lufthansa expects to move around 30 aircraft to its Cologne-based Germanwings operation as result of the decision to concentrate all non-hub operations - excluding long-haul flights from Düsseldorf - under one banner.

Innovata data shows this covers a host of routes operated by Lufthansa out of Berlin Tegel, Dusseldorf and Hamburg. That includes a mix of routes operated with Boeing and Airbus narrowbodies, and serving a range of destinations including major hubs like London Heathrow and Paris Charles de Gaulle.

Lufthansa route map from Dusseldorf (Oct 2012) 

 lh dusseldorf route map
 Key: red=intercontinental, blue=regional, yellow=domestic; Source: Innovata Flightmaps Analytics

Lufthansa route map from Berlin Tegel (Oct 2012) 

 lh berlin route map
 Key: red=intercontinental, blue=regional, yellow=domestic; Source: Innovata Flightmaps Analytics

Lufthansa route map from Hamburg (Oct 2012) 

 lh hamburg route map
 Key: red=intercontinental, blue=regional, yellow=domestic; Source: Innovata Flightmaps Analytics

Germanwings operates a fleet of Airbus A319s from six bases in the country; Berlin Schonefeld - which will be merged with the Tegel operation at the delayed Brandenburg airport when it opens next year - Cologne-Bonn, Dortmund, Hamburg, Hannover and Stuttgart.

"I admire that Lufthansa is taking a decisive step," says John Strickland, director of JLS Consulting. "There appears to be a clear strategy with Lufthansa carrying out hub services and a distinct separate operation for everything else."

He notes this is different approach from Air France where several brands remain within the group - which come with associated complexity of fleet and conditions.

While Lufthansa has opted to retain the Germanwings budget brand for the merged operation, it has already pointed to some "fine tuning" of the division and highlights its attractiveness to business traffic in describing it as a "quality provider in the low-cost segment". Germanwings has always pitched itself within the hybrid area of budget carriers. It, for example, has offered allocated seating from the outset, sells tickets through the GDSs and its wide-ranging network already includes both Heathrow and Stansted in London.

The move, together with actions like International Airlines Group's efforts to tackle Iberia's short-haul difficulties at Madrid with the new Iberia Express operation, sees a new round of efforts by legacy operators to use low-cost carrier learnings to tackle their short-haul challenges. The efforts of a decade ago, which saw several in-house budget arms set up, uniformly failed to solve the problems of the parent company, even if the low-cost strands were in some cases quite successful.

Strickland - a former executive at KLM's own London Stansted-based low-cost venture Buzz - sees some advantage for Lufthansa by virtue of Germanwings having been established for more then a decade and with its own management team in place.

"That is often the failing point, there is not enough distance from the main carrier or autonomy," say Strickland. He notes without this level of independence, time is spent worrying about competition between the two divisions "rather than looking at the outside world".

Much has changed since those formative attempts to embrace the concepts - and cost bases - of the budget carriers. But wanting and achieving a lower cost base are two entirely different things. Network carriers may see this as a chance to get their short-haul labour costs closer to their budget partners, but it remains to be seen how the unions will react.

"It should be easier now because economic conditions are so much tougher, but I am not convinced it always is," says Strickland. He points to the labour unrest around short-haul reform already seen this year at Lufthansa and Iberia.

"There is often an apparent disbelief among some staff that there have been such significant changes in the outside world," says Strickland, pointing out that staff at some carriers - which have avoided drastic restructuring - have seen relatively little change to the terms and conditions compared to that driven by the low-cost carriers over the last decade.

And even if they can embrace these cost savings, there is the added challenge that low-cost rivals are a moving target as they themselves continue to aggressively tackle their own costs.

But it is not just on the cost-side that Strickland believes network carriers have to embrace the budget model. "You just have to look at the load factors on short-haul for legacy carriers. These load factors are so much lower than effective low-cost carriers like Ryanair and EasyJet," he says, noting that aside from the objective of providing feeder traffic, the airlines need to fill the aircraft. "You have to have appropriate pricing," he adds.

Meanwhile, another low-cost brand affiliated to a European major continues to thrive. Vueling, in which Iberia owns a 46% stake, has just unveiled plans to take its route network up to 100 out of Barcelona El Prat next summer through a major expansion. It is also stepping up its offering to business passengers with flights into destinations including Frankfurt and with development of a new business traveller product.