New Partners

Lufthansa’s Dance with the Devil

View of a Lufthansa and an Air China plane at the newly-built A380 hangar, in Beijing, March 19, 2008. Asias largest aircraft maintenance hangar, the A380 hanger of the Aircraft Maintenance and Engineering Corporation (Ameco Beijing), was completed in Beijing on March 18. It will formally be put into use in May this year. Maintenance targets of A380 hanger include all Boeing series and Airbus series aircraft; and 11,500 aircraft can be maintained annually. The A380 hangar is located north of Beijing Capital Airports 3rd terminal, and consists of a maintenance hall and annexed building. The total construction covers an area of 70,437 square meters. Foto: Imaginechina +++(c) dpa - Report+++ [ Rechtehinweis: (c) dpa - Report ]
View of a Lufthansa and Air China plane at Asia's largest aircraft maintenance hangar in Beijing.
  • Why it matters

    Why it matters

    Lufthansa must do something as it continues to lose market share to low-cost competitors and Gulf airlines like Emirates.

  • Facts

    Facts

    • An expected collaboration with Air Berlin would see the airline disappear as a competitor in Cologne, Hamburg, Munich and Stuttgart.
    • By allying with Air China, Lufthansa will be the only foreign airline able to offer routes with transfers to many Chinese destinations.
    • Both Air Berlin and Air China have a less customer-friendly approach than Lufthansa.
  • Audio

    Audio

  • Pdf

 

Lately, it hasn’t taken much to rattle Lufthansa chief executive Carsten Spohr. You need only ask him when Eurowings, the airline’s low-cost carrier, will get the new partner he’s been promising, or why Lufthansa is letting powerful competitors, such as Gulf carrier Emirates, snatch away business.

Until now, Mr. Spohr has answered evasively. But this week Mr. Spohr intends to sign a joint venture contract with state-owned Air China after years of negotiating. And Lufthansa’s supervisory board is slated to approve another collaboration with Air Berlin the week after.

The German rival would see 40 of its aircraft get more space in Cologne, Hamburg, Munich and Stuttgart. In addition, their cabin crews would fly under the Eurowings logo. At the moment, neither company is commenting publicly.

Because a Lufthansa-Air Berlin deal leaves little room for competition, Lufthansa could be required to seek competitors for airports in Cologne, Munich, Stuttgart and Hamburg by law.

On the surface, the agreements seem to have little to do with each other. But a closer look reveals a common thread.

Both are designed to fight off pesky competition. Lufthansa has problems in two regions: Europe and Asia. Increasing competition is whittling away at the number of passengers, and worse yet, regulations are limiting the number of hours that Lufthansa aircraft can fly.

Lufthansa is hoping that collaborating with Air Berlin and Air China will buck a money-losing trend. In cities such as Munich and Hamburg, Air Berlin would disappear as a competitor. The deal would give Lufthansa routes in both locations before other airlines could take them away.

The Air China alliance would also guard against Gulf airlines like Emirates expanding further into the region. Lufthansa would also become the only foreign airline to offer routes with transfers to Chinese destinations other than Beijing or Shanghai.

In Germany, it’s just what many business customers have been waiting for.

However, Lufthansa is entering uncharted territory by seeking a closer relationship with two rivals that don’t necessarily meet its own service standards. In spite of progress, state-owned Air China still has a reputation for being bureaucratic and inflexible. Austerity and anxiety over job security have hit customer service and reliability at Air Berlin too.

These issues could rub off on Lufthansa.

By working with Air Berlin, Lufthansa can expect antitrust monitors to make high demands. Because such a deal leaves little room for competition in Germany, Lufthansa could be required to give commercial rivals greater access to airports such as Cologne, Munich, Stuttgart and Hamburg.

Ultimately, however, Mr. Spohr can’t allow himself to be frightened off by the risks, because he doesn’t have much choice in the fight against no-frill rivals and Gulf airlines.

Lastly, these new partners could be unpredictable. If Lufthansa pays the rent for 40 aircraft in advance – as is usual in the industry – Air Berlin would receive several hundred million euros at once.

For Lufthansa, that could be risky. Industry experts say Air Berlin spends a good €1,000 more per flight-hour than Eurowings typically offers its partners.

“Once the money has been used up, Lufthansa will either have to inject fresh capital or take over the rented aircraft completely,” an insider, who declined to be named, said.

The collaboration with Air China won’t be any easier. The Chinese carrier hopes to acquire more passengers, not only on routes to Germany but for flights to other European cities – potentially taking away valuable passengers from Lufthansa.

Ultimately, however, Mr. Spohr can’t allow himself to be frightened off by the risks, because he doesn’t have much choice in the fight against no-frill rivals and Gulf airlines.

“In both cases, it might be a sort of dance with the devil,” said a source familiar with the company. “But what should Mr. Spohr do, when he has no other partners?”

 

This article orignally appeared in WirtschaftsWoche. To contact the author: redaktion@wiwo.de

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!