ANALYSIS: Germanwings confident on low-cost competitiveness

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Germanwings expects to be able to compete effectively with low-cost rivals such as Ryanair and EasyJet as it takes over more of Lufthansa’s short-haul operations.

Chief operating officer Oliver Wagner says that while the Lufthansa Group has suffered losses of some €1 billion ($1.35 billion) in the German point-to-point market over the past decade, it has at least retained a dominant position at six airports including Stuttgart, Hamburg, Düsseldorf and Berlin Schönefeld, thereby preventing EasyJet and Ryanair from establishing significant bases there.

“When I said we lost €1 billion over the last decade, one good thing is that we kept up our market leadership in six markets, except at Berlin Schönefeld, where Air Berlin dominates,” he says.

Wagner believes that because Germanwings holds attractive slots at these airports, it can offer better schedules than low-cost rivals, offsetting any gap in fares.

“Because of our market share, we can get a slot in the morning at Düsseldorf or Hamburg, and right now we are holding those slots so we have a good basis for charging higher prices,” he says.

Wagner argues that EasyJet and Ryanair have struggled to make inroads in German secondary markets where Germanwings and Air Berlin dominate.

He says the next “battleground” in the German point-to-point market will be with Air Berlin at both Berlin and Düsseldorf where Germanwings plans to compete aggressively.

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Flight Maps Analytics

The operational split at Düsseldorf (above) and Berlin (below)

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FlightMaps Analytics

In Wagner's view, Germanwings' leading market position gives it a “good starting point” as it seeks to reverse losses and takes over all of Lufthansa’s short-haul operations outside of the carrier’s hub feeder flights into Frankfurt and Munich.

By 2015, Germanwings will have expanded to operating 87 aircraft, from 32 today. Staffing will increase to 2,500 from 1,350, and the airline will carry 20 million passengers, up from 7.7 million last year, predicts Wagner.

Germanwings will meanwhile seek to attain profitability by increasing yields and ancillary revenues. It intends to retain its low-cost “DNA” while introducing a higher level of service through its "smart" and "best" classes in a business model dubbed “Best of Both Worlds”.

So far, customer feedback regarding the transition from Lufthansa to Germanwings on many routes from Germany has been “good”, says Wagner.

Short-haul operations are being streamlined through the phasing out of Fokker and ATR aircraft to leave Bombardier CRJ900s and Airbus A319/320s. Franchise agreements with Contact Air and BMI have been terminated, and Eurowings operations are being merged with Germanwings.

Wagner says the strategy of shifting much of Lufthansa's short-haul operations to Germanwings will lead to savings as part of the Lufthansa Group’s overall Score programme.

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How Germanwings sees the change in point-to-point operations between 2009 (left) and 2012 (right)

Germanwings expects to achieve a 35% increase in passenger traffic, 1% increase in yield and 30% reduction in technical costs by taking over point-to-point operations.

At the same time, working conditions will contribute to savings. Germanwings will not offer pension schemes. Cabin crew will begin on short, but renewable, two-year contracts. Ground staff will work without fixed contracts.

While Germanwings pilots are on the same salaries as their Lufthansa counterparts, they work under different conditions, says Wagner. These, he adds, make them “15 to 20% more productive”.