Lufthansa’s board of directors has approved the establishment of a low-cost subsidiary to provide services across Europe.

The unit will be based at Cologne/Bonn Airport and will start operations Jan. 1.

The German operator for years has been losing million of euros on its European operations, despite attempts to reverse this trend with the 2002 launch of low-fare affiliate Germanwings. Following initial successes, the carrier was prohibited by contractual obligations from growing further and taking a larger share of Lufthansa’s European business. Germanwings now operates at a loss.

This low-fare operation now will be merged with Lufthansa’s own point-to-point network and regional carrier Eurowings to create a new entity that will operate about 90 aircraft and expects to carry about 18 million passengers in its first year. The fleet eventually will comprise Airbus A320-family aircraft and Eurowings’ Bombardier CRJ900 fleet, although initially it also could include Boeing 737-300s that are in the process of being phased out of Lufthansa’s fleet.

The board has not decided on the new unit’s brand, although insiders say candidates include Lufthansa Express and Germanwings, although it may simply be branded Lufthansa. It is also unclear who will lead the new entity; Oliver Wagner, current head of direct services, is widely expected to take the role.

Wagner in the past two years has led a project to sharply reduce unit costs on European services. Lufthansa claims that network restructuring has led to more efficient flying and that other measures have reduced expenses by 20%.

But industry sources close to Lufthansa say a 50% reduction is needed to approach acceptable profit margins. Lufthansa has said internally its target is about 40%, which would at least prevent further losses.

Separately, Lufthansa’s board recommended Wolfgang Mayrhuber and Karl-Ludwig Kley for election to the body in 2013. Mayrhuber, Lufthansa’s former CEO, would follow Juergen Weber as chairman, while Kley would become a regular member. Kley formerly was the airline’s CFO.

Also, the group decided to build a new cargo-handling terminal at the site of the current 30-year old facility in Frankfurt, with construction starting in 2014. The new building is expected to become operational in 2018. Lufthansa Cargo has said its competitiveness has been hurt by the recent ban on night flights in Frankfurt and it was questionable if such an investment would be made.