There is no secret that the competition amongst European airlines for passengers is very intense. Add in the pressure airlines are facing to reduce their carbon footprint and you are facing a very fierce battle in the European skies.
And it seems like the intensity has got the best out of the CEO of Lufthansa (LHAB) (LHA) , Carsten Spohr. He publicly criticized low-cost carriers, namely Ryanair and easyJet, for trying to undermine Lufthansa’s (LHAB) (LHA) positions in their own home market in Germany.
Speaking to the Swiss newspaper NZZ am Sonntag, Spohr slammed the low-cost airline business model and called their pricing policy “economically, ecologically and politically irresponsible”.
But with a price war for airfares in Germany and exceptional growth showcased by the two low-cost carriers, Lufthansa (LHAB) (LHA) might have a long-term battle on their hands.
Price attrition
It seems like Ryanair, easyJet and Lufthansa (LHAB) (LHA) are trying to lower their prices to push each other out of Germany. The country is the second busiest aviation market in Europe, according to statistics provided by the European Commission.
Lufthansa (LHAB) (LHA) is not happy with the strategy that the low-cost carriers have chosen, especially when ticket prices are as low as €10 for certain flights departing Germany. Ryanair also undercuts Eurowings’ prices by half on the same routes within the country. For example, flying from Berlin-Schonefeld (SXF) to Cologne (CGN) for as low as €12,99. Eurowings’ cheapest offerings from Berlin-Tegel (TXL) to Cologne (CGN) stand at €25,99.
Meanwhile, easyJet offers pretty much the same price as Eurowings – a one-way ticket between TXL and CGN will cost around €25.
“Flights for less than 10 euros shouldn’t exist,” Spohr told NZZ am Sonntag. His words have some truth to them because Ryanair managed to become the number ten polluter within the European Union in 2018.
Yet the German airline group is also facing a lot of pressure from the two no-frills carriers. Ryanair and easyJet forced Lufthansa’s (LHAB) (LHA) hand and as a result, Eurowings will now try to compete with the two airlines for a spot under the European low-cost sun.
The price war problem for Eurowings
Eurowings earned much more per passenger compared to its two main rivals. But the German airline is operating under a much more complex model, which Lufthansa (LHAB) (LHA) is trying to change to reduce operational costs.
The transformation includes reducing the number of AOCs, homogenizing the fleet and introducing a much more aggressive strategy in pushing ancillary revenue, including a new catering concept. Lufthansa (LHAB) (LHA) expects that Eurowings’ costs will go down 15% by 2022 and the airline will be profitable by 2021.
While the presentation by Lufthansa (LHAB) (LHA) at Capital Markets Day 2019 showcased that Eurowings is the leading airline in “core home bases,” the situation at other airports is quite grim. To illustrate, according to the Berlin Airports Facts and figures, Eurowings is only the third airline in Berlin-Tegel by market share.
In addition, the Capital Markets Day presentation has highlighted another huge issue of Eurowings – its pricing structure.
In 2018, Eurowings managed an average yield of €89 per passenger, which is split into two: €80 from fare, €9 from ancillary revenue.
In contrast, Ryanair received €37 from fare and €17 from ancillary revenue. easyJet yielded €61 from fare and €16 from ancillary revenue.
Consequently, both low-cost carriers can keep slashing ticket prices, as their operating costs are much lower. On the other hand, Eurowings still suffers from the complexity of its business model, the only thing that Lufthansa (LHAB) (LHA) can do for now is call the cheap prices “irresponsible.”
Ryanair used the opportunity to mock the CEO’s comments on its German website with a banner stating that “You will find cheap flights at prices that Lufthansa (LHAB) (LHA) cannot offer.”
Source: Ryanair.de