Lufthansa Plans Long-Haul Discount Carrier With Turkish Airlines

Deutsche Lufthansa AG (LHA) will establish a long-haul discount arm to fend off competition from Persian Gulf carriers, marking the first foray into intercontinental low-cost operations among Europe’s network airlines.

Lufthansa is in advanced talks with Turkish Airlines on a venture that would operate nine Boeing Co. (BA) 767s or Airbus Group NV (AIR) A330s, with flights commencing in winter 2015, though could still choose to go it alone, the Cologne-based company said.

The business will serve routes to Indian Ocean resorts and secondary cities in Asia, seeking to stem the flow of long-haul traffic to rivals led by Dubai-based Emirates. Short-haul unit Eurowings will meanwhile be transformed into a discount arm, swapping 80-seat jets for larger Airbus planes to cut unit costs and compete with Ryanair Holdings Plc (RYA) and EasyJet Plc (EZJ), with the revamped operations united via a new “Wings” branding.

“Our market is no place for half-measures,” Chief Executive Officer Carsten Spohr, who took over May 1, said at a briefing near Frankfurt. “Wings has the potential to become the third-biggest low-cost point-to-point airline in Europe.”

Spohr is restructuring operations to pare expenses after Europe’s second-largest carrier last month cut its profit goal, citing a decline in prices resulting from overcapacity on key routes caused mainly by incursions from Gulf rivals. June traffic rose 2 percent, lagging a 2.7 percent gain in seating.

SunExpress Model

Lufthansa already operates the SunExpress short-haul venture with Turkish Airlines, as Turk Hava Yollari AO is known, and that business could serve as a blueprint for a long-haul discount partnership, Spohr said.

Prior plans for close cooperation between the Star Alliance members failed in 2013 when Lufthansa sought to pare passenger rewards for Turkish Air customers on code-share flights.

Shares of the potential ally rose as much as 3.3 percent in Istanbul today, with Turkish Airlines (THYAO) spokesman Ali Genc saying talks are continuing, with no decisions reached as yet.

The new long-haul operation could serve destinations such as the Seychelles, Mauritius and Maldives and Chinese cities like Chengdu, Spohr said. It would operate from Munich, Dusseldorf or Cologne, as well as from outside Germany, avoiding the carrier’s main Frankfurt interchange.

Lufthansa is also exploring how as many as seven of its fuel-hungry four-engine Airbus A340s might be operated at lower unit costs on new routes or ones currently facing closure, with talks underway with internal and external stakeholders, it said.

Fleet Rethink

The Wings name will be used to bundle all of Lufthansa’s European point-to-point brands -- those that don’t serve its hubs -- including the Germanwings arm that will take over all of its routes not serving Frankfurt or Munich by next spring.

Following its redesignation as a low-cost unit, Eurowings, which has expenses a third lower than the main Lufthansa brand as it pays pilots less, will replace 23 Bombardier Inc. (BBD/B) CRJ900s with 168-seat Airbus A320s by next spring, requiring 10 to be procured. Germanwings’ fleet will swell to as many as 60 planes.

Eurowings, currently focused on flights from Germany, will add bases abroad, the first involving four A320s deployed in Basel, Switzerland, where Lufthansa’s Swiss unit will retreat. Similar roll-outs will follow in Austria and Belgium, where the group’s Austrian Airlines and SN Brussels divisions are located.

‘Over-Rigid’

Spohr said Lufthansa needs to reposition in order to best exploit continued global growth in demand for air transport.

“In the dynamic and highly price-sensitive market segments, our current platforms only enable us to exploit the growth potential to a limited extent, in view of their sometimes over-rigid cost structure,” he said at the briefing.

The new CEO dumped a goal of lifting annual operating profit to 2.65 billion euros ($3.6 billion) by next year on June 11, sending Lufthansa stock to its steepest drop since the 9/11 terror attacks. Air France-KLM Group (AF), Europe’s biggest airline, cut targets this week, citing overcapacity to the U.S. and Asia.

Analysts still reckon the company will miss the revised goal of about 2 billion euros by about 14 percent, according to estimates collected by Bloomberg.

Lufthansa will cut capacity growth to about 2 percent for the coming winter schedule by parking eight passenger aircraft plus two freighters as it seeks to cope with the pressure on yields. It also plans to expand profitable maintenance and catering activities in Asia and the Americas.

The German carrier said July 6 it plans to establish a joint venture with Air China Ltd. (753) from late October harmonizing schedules and sharing revenues on services between the second and fourth largest economies in the world.

Lufthansa already has similar arrangements -- the closest cooperation available to carriers from different regulatory jurisdictions given bars on mergers -- with United Continental Holdings Inc. (UAL) and Air Canada (AC/B) for transatlantic traffic, as well as with ANA Holdings Inc. (9202) for flights between Japan and Germany.

The relationship with United will be deepened too, the CEO said, with the venture expanded to include cargo flights.

Spohr plans to make principles of the Score savings plan a permanent mantra once it ends in 2015, though Barclays analyst Oliver Sleath in London said the program “fell victim to the old Lufthansa mentality of growing your way out of a cost problem.” The challenge is to cut absolute costs, he said.

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net Christopher Jasper

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