Lufthansa is launching its new concept for European direct services on July 1, 2013, six months after the group’s direct services unit has been merged with low-fare affiliate Germanwings. The new airline, to be branded Germanwings, is a blend of premium and no-frills products and the group’s last effort to turn around its short-haul network to profitability.

Germanwings will operate 32 Airbus A319s and A320s that have formed the fleet of the current low-fare airline. Lufthansa is shifting over 29 A319/320s for a fleet of 61 narrowbodies. The unit also is wet-leasing 23 Bombardier CRJ-900s from Eurowings, one of the group’s regional subsidiaries. The new Germanwings is to reach €1.8 billion in annual sales and 16 million passengers with a combined fleet of 84 aircraft, slightly fewer than the 90 originally envisaged. Lufthansa has decided not to transfer all of the existing non-hub fleet to the new unit. Some aircraft are shifted to hub flying, and the company has decided to accelerate the retirement of its Boeing 737-300 and -500 fleet.

With the kickoff date in July, Germanwings plans to offer three fare categories. “Best” will provide flexible tickets, lounge access, priority security lanes, full frequent flyer recognition, free baggage and free drinks and meals on board. The middle seat will remain free in the first three rows, which are reserved for premium passengers. Germanwings is offering the business class-style service on all domestic routes and trips to Belgium, Austria, Switzerland, France, Russia and the U.K., but not on leisure services to the Mediterranean. Germanwings has decided on a 32-in. seat pitch in the first 10 rows.

Tickets in the “Smart” category are flexible, but can only be changed for a fee. Even frequent flyers can only use the lounge for a €25 charge, but drinks and snacks, as well as baggage, are free. The “Basic” plan is the cheapest, offering 29-in. seat pitch. Fares start at €33 one-way, and baggage, food and other services are extra.

Germanwings CEO Thomas Winkelmann says Smart fares will be offered from €53, and the Best category is offered in the €199-399 range.

Lufthansa claims Germanwings will be able to operate at 20% lower unit costs than the parent company. That cost difference used to be much larger, but with more integration and features, such as two frequent flyer programs, on the Germanwings side and cost cuts inside Lufthansa, the gap has narrowed recently. Germanwings is expected to make a profit in 2015.

Lufthansa Group CEO Christoph Franz says that “the market has changed more quickly than we would have imagined only a few months ago,” leading to “significant cost pressure we have to react to.” The airline conceded its losses have been in the triple-digit-million-euro range in its short-haul operation for many years.

Franz said that Lufthansa had two options: pulling out of non-hub flying or continuing it, albeit at much lower costs.

Separately, Lufthansa decided to introduce a premium economy class across its entire long-haul fleet. The new seats will be introduced when the transition to the new lie-flat business class is completed, most likely by the end of 2014. Premium economy has been a standard feature for many long-haul carriers for many years, including direct competitors, such as British Airways, but Lufthansa has been concerned that too many business travelers might opt to trade down. With the new lie-flat seats in business, management is confident that the product difference is big enough to take the risk.

The airline has charged a group of product experts internally to work on the details of premium economy over several months. It plans to invest less than €100 million in the upgrade. No details as to the capacity share and product features have been decided.