Lufthansa Expands Germanwings in Aim for 2015 Short-Haul Profit

Deutsche Lufthansa AG (LHA) aims to make short-haul operations outside its main hubs profitable by 2015 as it folds all such routes into the Germanwings low-cost arm and scraps business class offerings at the unit.

The expanded division, which will operate almost three times as many aircraft as the current 32 when it starts in January, will be headed by Germanwings Chief Executive Officer Thomas Winkelmann, Lufthansa said today. It will operate all the airline’s short-haul flights outside Frankfurt and Munich.

“For several years we have been loss-making outside our hubs,” Chief Executive Officer Christoph Franz said at a Frankfurt press conference. “We are separating the two business models: that of the hub carrier from the point-to-point operations.”

Europe’s second-biggest airline is seeking to save 1.5 billion euros ($1.9 billion) through 2014 via its Score reorganization plan, which will see the elimination of 3,500 administration jobs and as many as 1,000 catering posts. Franz said on Sept. 28 the program won’t deliver an improvement in earnings this year.

Air France-KLM Group (AF), Europe’s biggest airline, cut its second-quarter operating loss by more than 50 percent to 66 million euros, aided by a 2 billion-euro savings plan. British Airways (IAG) parent IAG is planning job cuts at Spanish arm Iberia after the brand prompted a second-quarter loss.

The Lufthansa brand will eventually exclusively apply to hub and long-haul operations, while Germanwings will be used for all short-haul flights between airports away from Frankfurt and Munich. The aircraft run by Germanwings will in the long-run all have the discount carrier’s branding.

Low-Cost Carrier

The expanded Germanwings will remain a low-cost carrier, with no business class seating, Franz said. Lufthansa’s current direct services chief Oliver Wagner will join the board of Germanwings, which is based at the airport in Cologne, where it stations 16 planes.

Lufthansa is currently losing a “significant three-digit million euro sum” on the routes to be covered by the merged entity, Franz said today. Germanwings posted an operating loss of 52 million euros in 2011, according to the annual report.

Pilot costs at Germanwings are about 20 percent lower than at Lufthansa, although a cross-subsidy deal means that Lufthansa pilots flying short-haul routes outside the hubs are not more expensive. The carrier plans to negotiate with unions to move these pilots to Germanwings.

Efforts to cut unit costs for decentralized traffic by 40 percent began in 2009, Thomas Kluehr, head of Lufthansa passenger services outside its main hub, said at today’s press conference. So far, a 20 percent reduction has been achieved, and this next phase should help realize the rest of the savings, Kluehr said.

Lufthansa is predicting a full-year operating profit in the “mid-three-digit million-euro range,” excluding restructuring costs of at least 100 million euros.

To contact the reporter on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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