UnknownOn June 8 Air France/KLM warned about profits and over capacity.  Then came Lufthansa on June 11 with its own warning.  Such statements from mega-carriers should be taken seriously.  Meanwhile, another mega carrier, American seems quite satisfied with its status quo.   Mixed messages for sure. What to make of it?

The big EU carriers are facing disruptive threats.  Take a look at this presentation by Lufthansa’s CEO – pay attention to slide five.  Two comments jump out here – low cost carriers and consolidation.  In the US, we now have the big airlines; of the biggest three are network airlines with global footprints and alliances.  In the US, consolidation has played out and the financial results speak for themselves.  Other than at United, profits are growing rapidly.  We expect United to become profitable soon.  So in terms of consolidation, the US leads the and Lufthansa identifies this issue as probably not yet played out in the EU.

The LCC item bears consideration.  The LCC model of avoiding hubs and serving to point is disturbing for network carriers that are hub oriented.  An early example of just disruptive is to see reaction to the Norwegian 787s flying long hauls to the US. The US carriers see this for what it is – a threat.  Ryanair is waiting to pounce, of this one can be sure.  Air Asia X is working its own plans in Asia.  The long haul low cost airline is a threat to every network airline.  Boeing’s Randy Tinseth briefed reporters yesterday and made a great remark –  “This is all about demand. It’s no surprise that market has struggled to take hold.”  He was talking about VLAs.  The only airlines that can afford the 747-8i or A380 are network carriers.  A key argument for the VLA is hub dependent.  Ergo, if the hub model decays into to point, the need for a VLA wears thin fast. This is what Boeing sees happening and therefore forecasts only another ~180 VLAs to be ordered.

Lufthansa notes the to point model is here to stay.  The airline is adding a premium economy section to its cabins and reducing its fleet.  And on slide 14 of the presentation linked above, you see the  very interesting item “wings long haul”.  Lufthansa is developing its own response to Norwegian and Air Asia X.  We are certain that Air France/KLM and British Airways are watching this very closely.  Do not be surprised to see the strategy copied with refinements.

In another presentation by Lufthansa, CEO Carsten Spohr states “We don’t want to be driven by change in the aviation sector: we want to be among the drivers of it”.  Therefore we see this strategy emerging – “The new WINGS family, which will build on the success of the Germanwings concept, will be specifically aligned to the high-growth market for private air travel. The Group will use the new WINGS master brand to bundle the various platforms for its -to-point air travel business; and it is considering extending the concept to intercontinental services, too“.  Lufthansa is taking the fight to LCCs on its own terms.

The company has powerful assets it can deploy – not least of which is its MRO.  What does this mean?  If a Wings family flight experiences a technical hitch – as Norwegian has seen a few times – Lufthansa Group has a fleet which allows a substitute plane right away.  None of the Norwegian type responses like chartering an A340 to replace a stranded 787. And with its world leading MRO, it should be rare that Lufthansa has a fleet that is unreliable.  Private travelers (as opposed to business travelers) are going to be sent the message that a Wings flight will operate according to schedule – you have the Lufthansa guarantee.  It could be a compelling message.

This is a bold move – not driven out of fear, but out of recognition the market is changing.  How long before the other EU mega carriers respond?

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