Like several others before it, Eurowings has thrown in the towel on low-cost long-haul. That will allow it and parent Lufthansa to instead focus on getting the short-haul aspect of its operations right: a crucial task as it battles increasing competition in Germany from sleeker, nimbler rivals Ryanair and EasyJet.

Lufthansa chief executive Carsten Spohr admitted that Eurowings had bitten off more than it could chew, especially after acquiring parts of collapsed rival Air Berlin, describing it as "the elephant in the room" at a capital-markets day on 24 June.

"We knew we needed a second platform for long-range. We threw it over the fence to Eurowings," he told analysts. "Probably I have to take the blame that Eurowings was trying to solve too many of the open issues of the Lufthansa group within the Eurowings business model."

Lufthansa has since resolved some of those legacy issues within its mainline, improving productivity and removing scope clauses, meaning it has other options for long-haul, Spohr notes. Eurowings' long-haul business will therefore be handed over to the network airlines, and Brussels Airlines will no longer be integrated into the budget unit.

Still, much work remains to be done at Eurowings on the short-haul front – where the carrier faces increased competition in Germany and Austria, along with overcapacity in Europe, and is grappling with an untidy structure and fleet as a result of acquisitions.

Eurowings made a profit of €60 million in 2017 but slumped to a loss of €231 million ($256 million) last year following the Air Berlin deal and a chaotic summer for passengers with delays and cancellations. Lufthansa is now aiming for breakeven only in 2021, and an adjusted EBIT margin of 7% in the long term. That compares with an expected EBIT margin of between -4 and -6% this year. EasyJet, which Eurowings has oft cited as a comparable rival, recorded an operating profit margin of almost 8% for its 2018 financial year.

"We will create a new Eurowings, a complete new set-up compared with today's set-up – a much leaner, a much more focused company, simplified and right sized," said Eurowings head Thorsten Dirks at the capital-markets day.


Among the measures is focusing on its home markets, with bases at Dusseldorf, Cologne, Hamburg and Stuttgart set to take the lead, prompting unions to query what will happen with its other bases. Eurowings will also centre its fleet on A320s, discontinuing its wet-lease arrangements for seven Boeing 737s and crew with TUI and the 15 Bombardier Dash 8 turboprops it gained via the takeover of Air Berlin unit LGW (targeted mainly for its slots at German airports). That will increase its average seats per aircraft to 167 in 2022, from 149 today. The oldest Airbus narrowbodies will also be rolled over with A320neos: starting with four in 2021 and 16 in 2022. Overall, its current fleet of 139 aircraft will shrink by 10-20%.

In addition, Eurowings is simplifying its AOC structure in Germany, because aircraft and crew cannot be switched from one AOC to another easily. It has cut down to two and is looking to reduce it down to one – whether that will be the Germanwings or the Eurowings Germany AOC is not yet known. It will maintain its Eurowings Europe AOC in Vienna.

In addition, Eurowings wants to achieve higher productivity from its crews, increasing the block-hour rate per crew to 750h per year by 2022, from 539 now.

Ryanair pilots flew an average 822 hours per year, according to its 2018 annual report.

Overall, Eurowings has set itself a target for cost per average seat-kilometre flown (CASK) to fall 15% by 2022.

While Eurowings does have these "self-help" levers it can pull, Bernstein analysts predict tough times ahead for Lufthansa. Downgrading the German group and British Airways owner IAG earlier this month, the analysts warned the industry was in the late stage of the cycle and that an expected flood of aircraft deliveries next year as Max deliveries restart will not ease overcapacity issues. While Lufthansa has strong positions in its hubs in Frankfurt, Munich, Vienna and Zurich, which will serve it well longer term, it will likely have to accept lower yields in the short term as Ryanair expands in the secondary German hubs of Dusseldorf, Cologne, Hamburg and Stuttgart, the Bernstein analysts said.

Still, Lufthansa remains upbeat. "The attackers are losing more than the defenders," argues Spohr. He notes that while Eurowings lost €1 million per aircraft in Germany last year, the equivalent losses for Ryanair and EasyJet out of Germany were higher at €7-8 million.

Its hands full with Eurowings, Lufthansa may have a waning appetite for more M&A too. Lufthansa has bid for Condor, Thomas Cook's German airline. But highlighting Condor’s low margins, high capex needs and pension obligations and the seller's price expectations, finance chief Ulrik Svensson said at the capital-markets day that Lufthansa would be unlikely to win the bidding process. Thomas Cook has now put the sale process on hold, instead opting for a refinancing that will see shareholder Fosun take a majority stake in the tour-operating business and a minority stake in the airline.

Summing up at the 24 June event, Spohr was keen to highlight how being German, reliable and dependable is an advantage for his company as it works through its issues.

"In the end, we're boring, we're German, we're Lufthansa. We love to be boring. We all know we can do things better. I think we were quite open about correcting some things we did wrong in Eurowings. We'll fix them as fast as we can," says Spohr.

Source: Cirium Dashboard