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Lufthansa Uses Eurowings Expansion to Defend Against Budget Carrier Onslaught

Edward Russell
November 3rd, 2021 at 11:50 AM EDT

Photo credit: Discounter Eurowings was one of the bright spots for the Lufthansa Group in the third quarter. Flickr / Kevin Hackert

The Lufthansa Group is not going quietly as European discounters angle for more share in the Covid-19 recovery. Budget brand Eurowings has added bases outside of Germany to, as Group CEO Carsten Spohr put it, “send a signal” to back off to competitors.

“We see them as a not only useful tool to send a signal to our competitors that it’s no fun to fight with German Lufthansa in our home markets,” Spohr said referring to Eurowings’ new Prague and Stockholm Arlanda bases during the group’s third-quarter results presentation on Wednesday. The group also includes namesake Lufthansa, as well as Austrian Airlines, Brussels Airlines, and Swiss International Air Lines.

Ryanair also has opened a base in Stockholm, and expanded its operations in Austria, Poland, and Northern Italy — all traditional Lufthansa Group markets — in recent months. Wizz Air is expanding in Italy and the UK with an eye on challenging Ryanair’s discount dominance. And EasyJet recently raised capital to fund expansion, including targeting opportunities created by the downsizing of Europe’s legacy carriers to acquire sought-after access at the continent’s slot-controlled airports.

But Spohr’s defensive comments show Europe’s legacy carriers may be down but they are not out. In addition to expanding Eurowings, the Lufthansa Group launched a new leisure subsidiary, Eurowings Discovery, that will feed its Frankfurt and Munich hubs. Air France-KLM is expanding its Transavia budget arm, particularly in France. And IAG’s discounter Vueling is pushing into new markets, including a new base at Paris Orly. And each group’s legacy names — including British Airways, KLM and Lufthansa — are emerging from the crisis with lower cost bases and streamlined operations following pandemic changes.

And, on the plus side for these legacy groups, discount brands are proving needed boosts to their financials and helping narrow steep losses. Eurowings reported positive earnings before interest and taxes (EBIT) of €108 million ($125 million) in the third quarter; its first time in the black since the crisis began. That result came with capacity at just 62 percent of 2019 levels and yields down almost 14 percent year-over-two-years. Eurowings is forecast to turn a profit in 2022.

Transavia similarly helped slim Air France-KLM’s loss in the September quarter, and Vueling is expected to do the same for IAG. IAG reports its results on November 5.

Cargo and premium-leisure travel also buoyed the Lufthansa Group in the third quarter. Lufthansa Cargo reported record EBIT of €301 million, with Spohr forecasting that the segment’s strong performance will continue through 2022 given the global supply chain challenges.

Premium-leisure travel emerged as a bright spot for a lot of airlines in the third quarter. Air Canada, Delta Air Lines and United Airlines all cited the trend as helping narrow losses with at least Delta investing in more premium seats to capture more of these flyers going forward. Lufthansa saw much of the same, with Spohr citing transatlantic bookings as an example. While economy was down roughly 24 percent versus 2019, business class was down just 12 percent and first class down just 8 percent or up 8 percent depending on the market.

“We see more and more leisure travel, VFR [visiting friends and relatives] travel, not happening in economy class but in the forward part of the cabin,” he said. Spohr did not mention any immediate plans to invest in additional premium seats.

Overall, the recovery continues to improve. Lufthansa Group bookings are at 80 percent of pre-crisis levels — including across the North Atlantic — and it plans to fly roughly 60 percent of 2019 capacity in the fourth quarter. Capacity will step up to 65 percent of three-years-ago in the first quarter and hit 80 percent by mid-2022, Group Chief Financial Officer Remco Steenbergen said. The group forecasts flying 70 percent of 2019 capacity for the full year in 2022, compared with just 40 percent this year.

A big question mark for 2022 is when Asia, particularly China, reopens. Thailand is accepting visitors again, and Germany has established a travel bubble with Singapore, but beyond that flying to the region remains the lowest among the Lufthansa Group’s global segments. In the third quarter, it only flew 20 percent of pre-crisis Asia capacity compared to almost 70 percent for Africa and the Middle East, and almost 46 percent for the Americas.

And all-important corporate travelers are coming back, if slowly. The Lufthansa Group expects the segment to recover to 40 percent of two years ago in the fourth quarter, and to 60 percent of 2019 next year. Small- and medium-sized businesses are leading the segment’s return. Spohr has previously said he expects a full recovery over the medium- to long-term.

In the September quarter, the Lufthansa Group dramatically narrowed its net loss to €72 million from €756 million the quarter before. It posted a small EBIT loss of just €9 million, or positive EBIT of €17 million on an adjusted basis. Revenues were down 49 percent to €5.2 billion year-over-two-years.

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