FLUG REVUE March 2005: Germanwings expanison continues

March 2005

GERMANWINGS: PROFITABLE GROWTH

By Sebastian Steinke

The contrast could not be greater: situated in front of the reflective designer glass walls of Cologne's new Terminal 2, next to the taxi rank, are some nondescript containers which formerly served as a site office. It is here that the Germanwings's head office is located. Economy is part of the concept of this low-cost oriented subsidiary of Eurowings, so its staff have to make do with scantily furnished offices, in which computers, printers and telephones make up the purely functional infrastructure.

“We follow the rule that no overhead costs should be incurred on things that do not benefit the customer, the business or the bottom-line,” explained Dr. Joachim Klein, managing director of Germanwings, during a visit by FLUG REVUE to his thrifty airline in mid-January. “We can't afford any higher costs. That is the aspiration and the criterion that differentiates good and bad low-cost airlines.” That is why Klein and his deputy managing director Dr. Andreas Bierwirth have their offices in the container.

The concept appears to be working: in the fiscal year 2004 Germanwings made an unspecified operating profit only two years after having commenced operations, on 27 October 2002. Klein explains the philosophy. “One cannot simply found a “low-cost company” and expect it to be successful right away. When we began to think about the concept, there were two camps: one side wanted to do something similar to Ryanair, while the other side preferred an approach closer to easyJet.”

It was the second variant that won the day. Andreas Bierwirth continues. “The Ryanair model only works if one is the first airline to get established at a secondary airport so that one can enjoy the start-up subsidies that go with this status, which are not available to the same extent for the next customer.” Instead, from the start Germanwings has targeted private travellers and business people to an equal degree and preferred airports close to the city centre that, although somewhat more pricey, were more convenient for customers to get to. They could have set up in Weeze (a former RAF air base some way away from Düsseldorf), Klein recalls, “But we deliberately decided against it as it was too far out.” Cologne became Germanwings's home base, with Stuttgart as its second base. The flight schedule is aimed at business travellers, with daily services in the morning and evening.

Today both directors regard the decision to make the low-cost Internet its primary sales channel as a critical success factor. As Klein explains, “The Internet is available seven days a week, 24 hours a day. We have two million visitors a month to our website, which makes ours the most visited German low-cost airline website, ahead even of Air Berlin.” In 2004, the proportion of Germanwings tickets purchased over the Internet was already around 93 percent. As an alternative, customers can also make telephone bookings via the call centre (at a charge of 12 cents per minute). No commissions were granted for reservations through the traditional travel agencies, although bookings can also be made from these over the Amadeus reservation system.

To attract as many customers as possible to its own website, www.germanwings.com, the company, which is known by the codes “GWI” and “4U” (= “for you”) maintains its own “fan club”. A steady stream of prize draws, private travel tips from members and even a travel partner introduction service keeps Internet-addicted regulars happy. Air tickets are offered at minimal prices through recurring “Crazy Nights”, while the “Crazy Surprise” campaign even promised cheap flights at a fixed low price, but to a completely unknown destination. A million customers are registered.

As in the case of virtually all the low-fare airlines, the business model used is to offer only a limited number of the cheapest fares advertised, which must be claimed a considerable time in advance of the travel date, with prices for bookings made at shorter notice significantly more expensive. Due to the greater demand for flights early and late in the day and at the start and end of weekends, these flights are usually more expensive than mid-day flights mid-week. For example, under this model the spectrum of prices for a one-way flight from Cologne to Paris ranges from Euro 19 to Euro 250, plus taxes and airport charges. It is this “yield management” approach that makes all the difference between profit and loss for the low-cost airlines. At Germanwings, the department in charge of pricing is therefore located directly next-door to the directors. The airline needs to achieve an average ticket price of Euro 60 to Euro 80 per route segment in order to make a profit at 80 percent seat utilisation. Whereas passengers do not receive any money back for their unused tickets, bookings can be changed up to two hours before departure for a fee of Euro 25.

As well as its regular clientele, Germanwings also makes a point of targeting new customers. As Joachim Klein explains, “We take care to ensure that the number of new customers each month does not decline. We don't rely on a limited customer base.” There has not been any cannibalisation of the previously existing market, he says.

In addition, business customers are enticed by cheap package prices for companies. Bookings have all the convenience features of a classic, flexible scheduled air ticket, but the terms offered are a lot more attractive. In Cologne alone, 400 companies have high-volume customer contracts with Germanwings. As Klein explains, “This year we plan to target the frequent flyers more strongly and tie them to us more closely. Flying cheaply does not mean flying third class. But one should create other benefits without becoming a classic airline.” For example, apparently one of the options currently under discussion is expedited checking in of customers with hand luggage at no extra cost for the airline.

Other service features are possible with assistance from external sponsors. As deputy managing director Andreas Bierwirth points out, “We make money out of comfort.” Thus, publishing houses pay a marketing premium to have their daily newspapers distributed free of charge on board, while the reservation website brings in additional revenue from the sale of advertising space. The onboard service is not free of charge, unlike dba, where the first drink and a small snack are free. But the prices of beverages and small snacks are kept down to Euro 3.50 or less at Germanwings. Travel articles are also offered for sale on board.

Despite the low fares, the high-quality image created by flight attendants dressed in suits and grey leather seats in the elegant Airbuses creates high expectations amongst the passengers. According to Klein, “It is almost like at Lufthansa.” This is no accident: the airline with the crane logo now owns 49 percent of Germanwings's parent company, Eurowings AG, and contributes numerous services. As well as maintenance services and seven to ten cockpit crews provided from Lufthansa resources, up to November Germanwings's arsenal was reinforced by three Lufthansa A320's, which have since returned to their home fleet.

The aircraft viewed as the ideal type for Germanwings is the A319. Five of these were made available to it by way of start-up capital by its parent company, chartered airline Eurowings Flug GmbH, itself founded in 1997, from its existing inventory. These hardworking jets are airborne for up to eight route segments during the day, and in some cases they fly a further two night-time mail flights. For the summer of 2005 the fleet is expected to comprise 17 aircraft, 14 A319's and three A320's. The latest addition to the fleet is A320 D-AKNZ, formerly in service with V-Bird as PH-VAC. One of the directors' primary aims is to achieve greater standardisation of the Airbus versions used, since at present there are aircraft both with and without freight containers, normal and extra wide Lufthansa seating arrangements and some minor differences in the technical configurations. If the Eurowings Supervisory Board agrees, up to nine leased A319's will join the fleet in 2005, in some cases replacing older jets and in others raising capacity. Unofficially there is already talk in the industry of a batch of A319's from the inventory of US Airways, which could be made available at short notice through GECAS.

Germanwings is also currently trying out a smaller model in the form of two leased, Spanish Boeing 717's, which could provide valuable services if new routes with lower demand were introduced. This experiment will run to the end of March. The provisional assessment of Accountable Manager Jürgen Stasch, a member of the Germanwings team responsible for flight operations and a trained 757 pilot, is that “the 717 is incredibly reliable. Apart from one minor problem, we have not had any failures.” According to Stasch, baggage handling of the very low 717 is even possible without baggage conveyor belts. The MD 95 is a tried and tested, robust aircraft. However, Stasch has also noted a few drawbacks in the twin-jet from Long Beach: its engines are relatively powerful, so that the fuel consumption of a small 717 is almost as high as the considerably larger A319. Moreover, due to its outdated aerodynamics, the 717 takes five to ten minutes longer to fly a given route segment. This means it cannot be deployed on cycles that involve Stuttgart-Echterdingen, which all have to finish punctually in time for the ban on night-time flying and are meant for the A319; instead, it can only be operated out of Cologne, which is always open.

Whereas Stasch's primary concern is with fleet deployment, the two directors are making growth the priority for 2005. As a result of an agreement concluded in the autumn with the pilots' union Vereinigung Cockpit, Germanwings is now integrated into the Lufthansa group collective pay agreement for pilots. As deputy managing director Bierwirth points out, “This will give us greater flexibility on the pay side. If we want to expand, we will no longer have Cockpit to contend with.” In practice, Germanwings's preference would be to cover its additional personnel requirements from the Lufthansa pool, amongst which it is currently seeking thirty two-man crews.

A new co-operation strategy (“Wings concept”) with the newly founded LOT subsidiary Centralwings, with its five 737's from Poland, should also help the airline to grow. Announced in January, this goes far beyond the present marketing partnership with bmi Baby. As Bierwirth points out, “One needs local expertise to work the markets optimally. We now have a foothold in Poland.” Apparently the Germany-Poland market is developing far more quickly than predicted. Germanwings registers 40,000 “clicks” on its website per month from Poland, more than from France. Now the two partners plan to draw customers' attention to each other's flights, albeit without a formal code sharing agreement, so that Centralwings, which operates flights from Warsaw, Katovice and Krakow to Hanover, Cologne, Nuremberg and Stuttgart, can add to the range of offerings from Germanwings. This is expected to enable passengers to make connecting flights from the partner airline. Joint purchasing and joint marketing should create synergy effects without additional costs being incurred. The Wings concept is already seen at Germanwings as the possible germ cell of a whole low-cost alliance, possibly with later cross-shareholdings amongst the partners, which regional airlines could also join. The directors are particularly interested in the Italian market, as the next step. As far as Bierwirth is concerned, 2005 is the “year of decisions... We have succeeded in showing that it is feasible and profitable. Now we have to hold our own against internal and external competition and increase our productivity. We have quite some way to go.”

From page 24 of FLUG REVUE 3/2005

Last updated 12 February 2005

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