At Lufthansa Capital Markets Day, the airline informed its investors and analysts of the upcoming changes at one of its subsidiaries, Eurowings. The low-cost carrier will undergo a reorganization of it’s fleet and route network and is expected to turn its tide around.
Just a few days prior, on June 16, 2019, the German airline group slashed its profit projections for 2019. According to Lufthansa’s (LHAB) (LHA) own press release, the airline group is striving in the long-haul market, successfully increasing revenues in routes between Europe and North America or Asia.
And according to IATA’s state of European air travel report, Q1 profitability margins in 2019 have fallen by 3.4% to -5.2% compared to the same period in 2018 in Europe.
Specifically, Eurowings is getting an overhaul – route, fleet and business model changes are coming. Lufthansa (LHAB) (LHA) expects the airline to be profitable once again in 2021, something Eurowings has not seen since 2016.
But a snap decision to overhaul Eurowings follows a similar snap decision to change the way the airline operated in 2015.
First overhaul of Eurowings
Lufthansa (LHAB) (LHA) announced the new business model of Eurowings on March 4, 2015. The CEO of Lufthansa (LHAB) (LHA) , Karl Ulrich said that “we see strong demand for low-cost, long-haul travel in the coming years”.
Already then Lufthansa (LHAB) (LHA) felt the pressure of Europe’s emerging low-cost carriers, as the group lost a lot of money prior to 2015. The airline group posted a net profit of €1.228 billion in 2012, 2013 the net profit was €313 million. In 2014 the number was even lower, as Lufthansa (LHAB) (LHA) ended the year with a net profit of only €55 million.
The airline group knew it had to make significant changes in order to restore profitability, and in 2014 the Supervisory board approved a concept called Wings.
The plan was to expand low-cost services in Europe and offer more short-haul and long-haul destinations to passengers and as a result, enter the fight against low-cost carriers.
At first, the plan seemed like it delivered the results that Lufthansa (LHAB) (LHA) wanted. In 2015, Lufthansa’s (LHAB) (LHA) net profit equaled to €1.698 billion and both Germanwings and Eurowings reached a break-even point. Lufthansa (LHAB) (LHA) prepared for a future where the profitability of Eurowings would grow further.
The group established one more airline in 2015 – Eurowings Europe, which operated under an Austrian AOC to further sustain the growth. Lufthansa (LHAB) (LHA) expected Eurowings and other airlines flying under the brand to “grow faster than average.”
Yet something went wrong.
Signs of trouble
While Lufthansa Group increased its profit furthermore, the first signs of trouble were showing up at Eurowings.
The low-cost carrier posted a negative EBIT of €90 million in 2016.
But you could excuse 2016 as a growth and investment year. Eurowings started to lease 33 Airbus A320 family group aircraft from Air Berlin (AB1) , further homogenizing its fleet to the Airbus A320/A330 family. Eurowings added 4 more Airbus A330 aircraft in 2016, which increased the total wide-body aircraft number to 6.
Nevertheless, Lufthansa (LHAB) (LHA) planned to integrate Brussels Airlines to the Wings project. As a result, Eurowings operated flights under 5 (!) different AOC’s: Germanwings, Eurowings Europe, Eurowings Germany, Sun Express Germany and Brussels Airlines.
This only added complexity to the project, as it strayed away from the usual low-cost airline model. According to the Eurowings website, they currently operate 6 different aircraft models, 2 of which are from the same A320 family.
It is common knowledge that low-cost carriers try to limit their costs as much as possible. One of the ways to do so is to use one or in some cases two aircraft models. Yet, Eurowings serves customers with Airbus A340 and De Havilland Dash-8 Q400 aircraft in addition to the A320 and A330 family aircraft. The airline even has 6 737s, which further adds to the difficulty of running a low-cost carrier and trying to keep the costs down.
However, a Management presentation from 2016 already notes that Eurowing’s RASK has declined in 2015. But to quote the presentation, “CASK improvement overcompensates RASK decline.”
The Long-Haul Dream
The complexity of the operations certainly did not help Eurowings. Furthermore, the airline uses an interesting cabin layout for its long-haul operations – it has 4 or 3 different classes, depending on the route.
With 4 different classes, the low-cost carrier offers a business class option of a lie-flat seat, on-board catering and extra entertainment options. The 4 class-option is only available to passengers departing towards the United States from Düsseldorf.
As a result, even more complexity is added to the operations of Eurowings – only specific aircraft equipped with a business class option could serve routes to the United States.
On a low-cost airline.
Norwegian, another struggling low-cost long-haul airline only has 2 classes – Premium and Standard. You also have the option to upgrade to an extra legroom option.
If Norwegian, the airline that has standardized their options and doesn’t offer lie-flat seats in their Premium cabin is struggling, how will Eurowings be able to maintain profit operating under such complex structure?
And the figures showcase that. If the RASK was 9.5 euro cents in 2015, the same number kept falling in the coming years:
In 2016 it was 8.3; In 2017 RASK dropped further to 7.9 euro cents.
The fact that the Eurowings group was not in a healthy state was quite obvious. Even with growing passenger numbers, the airline struggled to keep their costs down.
In fact, one more factor led to the financial difficulties of the airline. 2018 was a very harsh year for flight cancelations and delays. According to a 2018 article by DW, airlines canceled 15,571 flights in Germany during the first 6 months of the year. The compensation claims also put a strain on Eurowings’ finances.
Lufthansa’s (LHAB) (LHA) financial report for 2018 also noted the effect of flight disruptions: “Earnings were also burdened by higher expenses due to compensation payments for irregularities in flight operations.”
Future of Eurowings
Heading towards the future, as announced on June 26, Eurowings will undergo a complete overhaul.
Firstly, Eurowings will transfer its long-haul service to Lufthansa Network Airlines – Lufthansa (LHAB) (LHA) , Austrian and Swiss. European short-haul operations will be the main focus of the airline.
Secondly, the complexity of Eurowings operations will be thrown out the window: the airline will start operating under one AOC and will be homogenized with a fleet of Airbus A320 aircraft. As a result, Lufthansa (LHAB) (LHA) expects significantly reduced (15%) unit costs by 2022, with the first profitable year in 2021.
Thirdly, Brussels Airlines will be separated from the Eurowings brand. Instead, the Lufthansa (LHAB) (LHA) group has indicated that the Belgian airline will operate closely with other Network Airlines, with further details coming later in 2019.
While it’s hard to judge how the reformed Eurowings will do in the coming years as the European market is extremely competitive. However, the changes Lufthansa (LHAB) (LHA) is making are definitely the steps towards the right direction – reducing the complexity of the operations and reducing operating costs by flying only the A320 will lay the foundations for a successful future of Eurowings.