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Lufthansa Considers Low-Cost Carrier Targeting Asia

March 26, 2013

Lufthansa Considers Low-Cost Carrier Catering to Asian Markets

An illuminated logo for Deutsche Lufthansa AG stands on display at Frankfurt airport in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

Deutsche Lufthansa AG (LHA) said it’s looking at establishing a long-haul, low-cost venture to help sustain its market share on routes to Asia as rival operators syphon more and more traffic through hubs in the Gulf.

Lufthansa may form an intercontinental subsidiary similar to its Germanwings short-haul unit, Chief Financial Officer Simone Menne said at a briefing in New York. Other options include an alliance with a Middle Eastern or Asian airline.

Europe’s second-largest carrier won’t be able to keep pace with rivals such as Dubai-based Emirates and Etihad Airways PJSC of Abu Dhabi without a change in strategy, Menne said, adding that the Cologne-based company ended services to Hyderabad and Calcutta in India last year because the routes were uneconomic.

“The threat from Gulf carriers, for us, is Southeast Asia and it’s India,” Menne said. “That is a concern for investors, and the answer is we look at all strategic options. That can be partnerships, it can be joint ventures, it can be our own platform or it can be a retreat from this market.”

Lufthansa is reviewing its strategy with Asia-Pacific passenger traffic poised to expand at a 6.7 percent annual rate through 2016, according to the International Air Transport Association -- half as fast again as forecast growth in Europe.

Gulf Challenge

The German company won’t be able to exploit that market unless it changes course, Menne said.

Gulf carriers are tapping Asia by utilizing the position of their home bases to build intercontinental transfer hubs where people can switch plane for flights to and from dozens of cities across India, China and countries such as Thailand and Malaysia.

Lufthansa’s European peers are already moving closer to Gulf carriers, with British Airways (IAG) recruiting Qatar Airways Ltd. for the Oneworld alliance and Etihad -- an investor in its chief domestic rival, Air Berlin Plc (AB1) -- in talks about an accord with Air France-KLM Group. (AF) Emirates, the biggest Middle Eastern airline, has said it isn’t interested in joining an alliance.

Lufthansa’s Germanwings division is already being used as a vehicle to reduce the group’s costs in Europe, with unprofitable short-haul flights that don’t serve the Frankfurt or Munich hubs being transferred to the discount operation.

Norwegian Plan

Establishing a low-cost long-haul business would mirror plans at no-frills operator Norwegian Air Shuttle AS (NAS), which is poised to add flights to cities including Bangkok -- tapping the lower operating costs of Boeing Co. (BA:US) 787 jets it has on order.

Air Berlin, Germany’s second-biggest carrier, is also buying the Dreamliner model, while AirAsia X Sdn., the long-haul arm of Asia’s top discount player, has ordered Airbus SAS (EAD) A330 planes with which it could resume European flights.

Menne said that Lufthansa will place a further order for aircraft to serve intercontinental routes in September. The carrier said last month it was considering 787s and the new Airbus A350 to replace the European manufacturer’s older A340s.

Shares of Lufthansa, which has been discussing closer ties with Turkish Airlines since at least November, traded 0.2 percent higher at 15.77 euros as of 12:15 p.m. in Frankfurt, extending gains this year to 11 percent and valuing the company at 7.25 billion euros ($9.3 billion).

“I don’t know if I buy into the idea of a low-cost, long- haul venture,” said Donal O’Neill, an analyst at Goodbody Stockbrokers with a “buy” rating on the stock. “The model hasn’t been proven. If they could do expanded code-sharing or a joint venture with Turkish that would be the most viable way to go.”

Lufthansa and Turkish Airlines, as Turk Hava Yollari (THYAO) AO is known, are both members of the Star Alliance and partners in the Antalya-based low-cost operation SunExpress.

“We are cooperating already because we have a joint venture together,” Menne said. “We are in regular talks and we are regularly considering what cooperation could bring us in other areas, but that’s it for the moment.”

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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