Lufthansa is pulling out of vast parts of its current European network and is transferring flight operations for non-hub traffic to its lower cost subsidiary Germanwings. The new airline will operate a fleet of almost 90 aircraft and will be covering all point-to-point markets outside the hubs in Frankfurt and Munich. The Lufthansa brand will also disappear in this market segment, as the legacy airline is now position exclusively as a long-haul and hub-and-spoke carrier. The strategic shift was announced by Lufthansa’s CEO Christoph Franz in Frankfurt.

“Our European operations have been making substantial losses for a number of years,” Franz said. While in the past significant profits in the long-haul field could be used to cross-subsidize the loss-making short-haul network, that is now no longer the case. “We are also seeing prices fall on long-haul routes,” Franz added. Therefore, the airline is now making serious efforts to return its short-haul operation to profit.

Franz pointed out that given the recently announced Qatar Airways/Oneworld, Etihad/Air France-KLM and Emirates/Qantas tie-ups, there is structural change in long-haul that Lufthansa cannot ignore. The airline therefore plans to carefully add closer relationships such as the existing joint ventures with United Airlines or All Nippon Airways. When asked whether Lufthansa could imagine a bilateral deal with Emirates, Franz said that even that could not be ruled out forever.

The new airline will use the Germanwings brand and will be based at Cologne/Bonn airport. It will be run by the current Germanwings management under Thomas Winkelmann, Oliver Wagner and Axel Schmidt. The airline is to be launched in January.

As part of the exercise around 30 Lufthansa Airbus A320s and A319s are to be transferred to Germanwings, which currently has a fleet of around 30 A319s. Additionally, 19 CRJ-900s operated by regional carrier Eurowings will be complementing the network, although Eurowings will not be merged into the new unit.

Carsten Spohr, CEO of Lufthansa’s passenger airline business, said that unit costs in the segment are around 20% lower than in the hub-and-spoke system today, but another 20% are targeted. Lufthansa will offer 800 flight attendants that are affected three options: they can either leave with a package, move over to Germanwings under new terms or stay within Lufthansa while having to operate out of Frankfurt or Munich. Lufthansa has over 18,000 flight attendants and annual fluctuation is at around 3-4% limiting the transfer issue.

According to Spohr, around two years will be needed to complete the transition. Initially, flight attendants and pilots are continuing under the current contract regimes. Negotiations with pilot union Vereinigung Cockpit are to begin shortly. However, Germanwings pilots are already at similar pay levels to their Lufthansa colleagues with somewhat higher productivity.

The new Germanwings will not have a business class, thus Lufthansa is the first major European legacy carrier to abandon the concept on short-haul services within the group. Business class will be kept only on the hub-feeder services.

The airline is striving for significantly higher aircraft utilization. Its short-haul fleet is currently flying around eight block hours per day, mainly because it is little used on weekends and because of the complexities of the hub-and-spoke operation. The target is to improve daily utilization to around 10 hours.

The pricing strategy is to follow the Germanwings model, but the new airline is to be positioned as a high-end low cost carrier with some more features that are intended to make it attractive to business travelers. Lufthansa plans to reveal more details in early December.

According to Spohr, Germanwings is to be profitable by 2015.