Lufthansa Takes on Low-Cost Airlines

Only a few years ago, Lufthansa scaled back its European services from airports other than the two main hubs of Frankfurt and Munich to focus on long-haul routes.

But now it wants to take on budget rivals by boosting its own network of German and European flights from secondary hubs such as Düsseldorf and Hamburg.

A pilot project is already underway in Hamburg. If that proves successful, the venture could be expanded to airports such as Düsseldorf or Stuttgart, a Lufthansa spokesman said.

"Lufthansa has learned a lot from the business models of low-cost carriers and is seeking to combine that knowledge with its own strengths," said Ralph Beisel, an airline expert at Arthur D. Little, in a recent study.

Response to market conditions

In Hamburg, for example, the German airline aimed to boost the number of flights by 14 percent and the number of seats available by 30 percent, the spokesman said.

Beisel calculated that Lufthansa could boost earnings on its Hamburg services by 20 percent as long as it cut prices and costs and increased tickets sales.

Lufthansa insists the Hamburg offensive is not a strategic U-turn, simply a response to changing market conditions.

"By expanding our program in Hamburg and Düsseldorf, we're reacting to strong demand in both cities," the spokesman said.

Too complacent for too long?

The regional state transport ministry in Düsseldorf, for example, had recently given the go-ahead for the airport to boost capacity, including the launch of new routes to destinations such as Madrid and Nice.

"Given the economic strength of North Rhine-Westphalia, the demand for frequent services, particularly on the part of business customers, is high," the spokesman said.

Analysts said that Lufthansa had been complacent on the German market for too long.

"It's a matter of not losing additional market share to the low-cost airlines," said Merck Finck analyst Robert Heberger. "Alongside Britain, Germany is one of the most competitive markets in Europe."

The Irish cut-price carrier Ryanair and Britain's own easyJet had already established a strong presence in Germany.

Discounters cross-promote

But native German rivals such as Air Berlin and DBA also recently stepped up their campaign to dethrone Lufthansa.

DBA recently placed an order for 40 new Boeing 737 jets with the explicit aim of becoming the number one airline in the domestic German market.

And the smaller low-cost rivals are also forging alliances to increase the pressure on Lufthansa: Air Berlin is teaming up with aircraft leaser Germania and from Dec. 1, Air Berlin and DBA have agreed to market each other's tickets on their own Web sites.

While the loose arrangement did not extend to full code-sharing and the two airlines were not planning to acquire any cross-shareholdings, some analysts believe the move could eventually pave the way to a full merger.

"Not everyone is going to survive," Herberger said. "The pressure is huge."