Lufthansa Hopes New Subsidiary Eurowings Discover Will Gain Long-Haul Traction

Photo credit: Lufthansa's latest long-haul leisure venture is Eurowings Discover. Lufthansa

The Lufthansa Group has long wanted to get into the long-haul leisure game. Efforts have ranged from flying high-density Airbus widebodies at Lufthansa Cityline and Eurowings, with neither generating hoped-for returns before both came to an end with the coronavirus pandemic. Enter Eurowings Discover.

Discover is the group’s latest operating subsidiary with an eye on the holidaygoers who are flocking back to the skies. Flights begin with three high-density Airbus A330s to five destinations in June and expand to more than 13 destinations — including new service Halifax, Canada, and Victoria Falls, Zimbabwe — by next summer. Discover, like the Airbus A340s at Cityline before it, will directly feed Lufthansa at its Frankfurt and Munich hubs.

But, with the group’s repeated emphasis on simplifying its operations through the crisis including the closure of its Germanwings and SunExpress Deutschland operations, analysts are understandably wary of the plan for a new subsidiary.

Speaking with analysts on Tuesday, group CEO Carsten Spohr described Discover as an operation closely integrated with Lufthansa to ensure “maximum connectivity” in Frankfurt and Munich.

“It’s a lot of innovation for the network in there,” he said. “If it turns out to be as positive as we think, we can indeed grow that business.”

Of course, that’s what executives said of the Cityline A340s when they were just an idea nicknamed “Jump” in 2014. The aim then — as now — was to expand into more leisure-oriented markets with high-density aircraft that would operate at lower costs under amended labor agreements. The crisis put an ended to this with Lufthansa planning to retire its last A340s — part of a larger push to streamline its widebody fleet — by 2023.

Discover will fly 11 A330s by next summer, plus another 10 Airbus A320s that will be used for medium-haul routes. For example, the narrowbodies will connect Frankfurt to the Canary Islands this winter, said Spohr.

Fleet, however, is not the raison d’être for Discover. That is to cost-effectively expand Lufthansa’s Frankfurt and Munich hubs by capturing a greater share of leisure travel flows. This differs from the group’s main budget arm Eurowings that is focused on point-to-point travel outside of the group’s hubs.

“Eurowings Discover is in the Amadeus world [and] fully integrated into our commercial model here in Frankfurt and in Munich, like Edelweiss is in Zurich, and complementing our network,” said Spohr. Amadeus is the reservations system for the group’s network carriers. Eurowings uses the separate Navitaire platform.

“It’s how they are commercially integrated,” he added when asked by analysts about the differences between Discover and Eurowings.

Transformation Mode

With the leisure travel recovery seemingly at hand in Europe, Lufthansa is looking ahead to its future. That includes further cost cuts across its businesses and a corporate restructuring that will create a distinct separation between Lufthansa the airline and the group.

Bookings have doubled since April, with the group anticipating a jump in passenger numbers to 55 percent of 2019 levels by August from 30 percent in June. Passenger numbers could even reach 70 percent of where they were before the crisis by year end. European travel is recovering first but, with talk of a reopening of travel between the EU and U.S., Lufthansa is preparing for an uptick in transatlantic travel from July. Full year group capacity plans remain at 40 percent of the level two years ago.

With the improving outlook, Lufthansa expects overall cash burn to be less than the forecast €200 million ($243 million) in the second quarter with operating cash flow turning positive.

The group has laid out a target of an at least 8 percent earnings before depreciation and taxes (EBIT) margin by 2024. Achieving this will require €3.5 billion in annual cost savings, with the majority coming from workforce reductions. The group shrank its workforce by roughly 26,000 staff in 2020 and targets another 10,000-person reduction by 2023. Most of those additional reductions will come in Germany with some 1,700 full-time staff equivalents leaving Swiss — including 550 layoffs — by the end of the year.

Swiss is one of the hardest hit in the group, which also includes Austrian Airlines and Brussels Airlines. Known as a business-focused airline, management in Zurich is forecasting a 20 percent reduction in demand over at least the medium term. This has prompted the staff reductions as well as pruning 15 aircraft from its 90-strong fleet. Five widebody A330s or A340s will go as well as 10 narrowbodies.

Fleet is a big focus of Lufthansa’s restructuring. It has already retired its Airbus A380s and older Boeing 747s along with four more types. These aircraft will slowly be replaced with new, more efficient models over the next decade. Boeing 787-9s begin arriving later this year and, barring further delays, Boeing 777-9s in 2023.

“It’s all about modernization and standardization,” said group chief financial officer Remco Steenbergen on Tuesday. The new jets will also help Lufthansa meet its climate goals.

Other cost saving initiatives that are in the works include planned sales of AirPlus and LSG Group, as well as a possible partial divestiture of Lufthansa Technik.

“We at Lufthansa are switching from the crisis mode to the transformation mode,” said Spohr of what’s ahead for the group.