FLUG REVUE January 2003: Germanwings starts low-cost services

GERMANWINGS TAKES OFF FROM COLOGNE/BONN

By Sebastian Steinke

As is only fitting for a true premier, the carpentry work on the new check-in counters continued up to the last minute, while two days before the start of flying operations germanwings CEO Joachim Klein introduced his company to the press in Cologne. A subsidiary of Eurowings Flug GmbH, the Dortmund-based chartered airline, germanwings has taken off as a new no-frills airline, operating exclusively from Terminal area 1C at Cologne/Bonn airport (see FLUG REVUE 12/2002).

Germanwings A319

The idea of choosing Cologne/Bonn, an established airport with good access, as the home base for a low-cost carrier, seems to be working out well. At the press conference, Klein was able to report, with some pride, over 160,000 bookings, 80% of them sales over the internet, thus avoiding the expense of agents' commissions.

"It took Ryanair and Co. years to achieve this level of internet bookings. That is e-commerce, which we heard about years ago. We are right on target with our plans,” said Klein, just as the freshly painted latest germanwings Airbus A320 to be leased from Lufthansa, "D-AIQR”, approached past the windows of the conference room, back from Shannon.

According to Klein, the most popular destinations so far on the flight programme have been Rome, Barcelona, Madrid and Vienna, but the business travel destinations of Berlin, London and Zurich are catching up too. Unlike its rival, Ryanair, germanwings flies to the main airports of large cities, especially popular among business travellers, and does not land in secondary provincial airports in order to save landing fees, the only exception being London-Stansted, .

Klein's deputy, Andreas Bierwirth, added that the newly founded germanwings brand had already achieved 15% brand awareness among the population of its home market in North Rhine Westphalia in the space of only five weeks, and that 20% of customers had expressed a brand preference for the new airline, overtaking competitors dba, Ryanair and Hapag-Lloyd-Express. However, "4U”'s market launch had received a helping hand from an expensive advertising campaign to the tune of well over Euro 1 million. Its advertising spend is expected to rise to over Euro 10 million in 2003.

Again, the elegant image of the new airline, with Airbuses in metallic silver, light yellow and Bordeaux red paintwork and grey leather seats in its cabins, does not immediately conjure up associations of a low-cost airline. Although the name of Eurowings's minority shareholder Lufthansa does not appear anywhere, observers may well wonder how much of germanwings, with all its visible perfection and quality, has been borrowed from germanwings's dominant shareholder.

After all, the strategic market upheaval caused by the new demand for low-cost travel under Europe's increasingly liberalised skies naturally affects the classic network carriers as well. For Lufthansa it could well make sense to keep the rapidly growing no-frills sector in check on its doorstep with a particularly attractive low-price product of its own.

Joachim Klein mentioned an extensive market analysis which had preceded the foundation of germanwings. According to this study, in future there will only be three main types of airline in Europe: 1) the low-cost airlines for Continental point-to-point routes of up to three hours' duration, 2) the large flag carriers, such as Lufthansa and British Airways, with their global networks, of which, however, only three big alliances are sustainable in Europe, and 3) regional airlines which bring traffic from the regions to the hubs of the majors.

As for the low-cost airlines, Klein pointed out that Ryanair had begun systematically building up its own route network back in 1996/97 and, with hindsight, from the start it had created much more competition with the scheduled airlines than the latter had initially appreciated.

With cut-throat prices on a par with Ryanair's, germanwings is now attempting to win its own market share in the low-cost segment, for, according to Klein, the most important "criterion for product positioning” is "perceived price leadership”, i.e. the lowest air fare in each case.

However, shortly after germanwings published its fares, which start at Euro 29, a fare that applies to about 20% of its capacity, its competitor Hapag-Lloyd-Express dealt it a blow by offering some flights of its own at Euro 19, upon which "4U” reduced selected connections to that amount as well.

Klein is the first to admit that these fares do not cover costs. "No airline in this world can fly in the long term for Euro 19.99 or Euro 29.99. It is a question of allocation.” The break-even threshold, he says, entails an average of Euro 60 to Euro 80 per seat, with 80% utilisation. For this reason fares rise sharply for last-minute bookings, to up to Euro 200 per journey.

In view of the present price war among the low-cost airlines, it seems to be only a question of time and of the size of the available war chest as to which of the contenders will be the first to run out of funds in this destructive battle for market share. dba has meanwhile offered the lowest fares of all of Euro 5 (equivalent to around Euro 20 when one includes airport fees and taxes) on selected domestic German routes in selected directions and even distributed some free tickets in a surprise advertising campaign onboard the germanwings launch flight to Vienna. Lufthansa too is currently offering unusually low fares together with air miles credits on its scheduled services.

Meanwhile, passengers on board germanwings flights can expect an above-average level of comfort. Thus, for example, the latest A320 is configured with 150 leather seats plus audio programme. Meals and drinks are offered at relatively low prices. Sandwiches or baguettes cost Euro 3, coffee Euro 1.50, cola Euro 2 and wine or Prosecco Euro 4. On the other hand, the airline apparently draws the line at passengers bringing their own food on board.

Despite the high start-up costs, CEO Klein hopes to break even by 2004. In response to a question from FLUG REVUE, he explained the financial concept of his airline. Eurowings Flug GmbH itself, he said, had always achieved a highly favourable cost structure on the lines of "Ryanair and Co.”. Wage agreements "on a different level” were keeping down the employment costs of the 185-strong workforce, comprising 155 cabin and cockpit crew and only 30 administrators. The Spartan administrative headquarters, in direct view of dba's gates, is situated in the containers of the former site office of Cologne's Terminal 2. Operating its own reservation system saves between Euro 20 and Euro 25 costs per ticket. Concentration on direct connections without transfer passengers and the associated need to reload baggage simplifies the cost structure still further. Then on top of this, internet sales by credit card bring additional savings on the sales side.

This winter, he explained, germanwings's planes were scheduled to be in the air for between ten and twelve hours per day, compared with the more usual figure of between nine and ten hours among the competition. Turnaround times are to be pared to an extremely low 25 to 35 minutes. This is so short, that there may well not be time for the existing passenger bridges in Cologne to be manoeuvred to the aircraft, so instead passengers will sometimes have to embark and disembark via two sets of steps that are quick to move into position.

By next summer "4U” plans, in the words of its CEO, to establish its "market leadership” and then start expanding in Germany and Europe. If demand holds up, the fleet could grow within a year to ten aircraft capable of transporting three million passengers. germanwings already has its eye on "four to five” conurbations for the next expansion phrases. Berlin is the top priority, followed by Munich.

germanwings is working on the assumption that 150 seats is the optimum aircraft size, which rules out the A321. Since the second Lufthansa A320 was leased on top of the five Eurowings A319's, it seems that Lufthansa could continue to serve as "preferred supplier”. The technical aircraft configuration of this A320 is exactly the same as that of the Eurowings Airbuses.

From page 32 of FLUG REVUE 1/2003

Last updated 5 December 2002

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