Lufthansa expands Germanwings to counter no-frills rivals

FRANKFURT, Oct 11 (Reuters) - Lufthansa istransferring short-haul flights to its no-frills Germanwingsbrand as it battles to return to profit in Europe in the face ofcut-throat competition from budget rivals Ryanair andeasyJet .

The German airline has been hit hard by low-cost rivals inEurope and by competition from Middle East airlines on its morelucrative long-haul flights.

Among cost-cutting measures designed to boost annualearnings by 1.5 billion euros ($1.9 billion) from 2011 levels bythe end of 2014, its flights within Germany and Europe - calledpoint-to-point services - will be operated by Germanwings fromJan. 1.

Flights to and from its hubs in Frankfurt and Munich, whichconnect with long-haul services, will remain Lufthansa-branded,while Germanwings will offer a lower-priced alternative on otherroutes, Lufthansa Chief Executive Christoph Franz toldjournalists on Thursday.

The new service will not offer any business class seats, butthere could be various price levels, Franz said.

Germanwings currently has three different fare levels,allowing customers to choose whether they want a sandwich,luggage or the option to rebook included in the ticket price.

Franz acknowledged that the new business model atGermanwings could be sustained in the longer term only if labourrepresentatives agreed to maintain its current cost structure,with labour costs that are about 20 percent lower than the restof the Lufthansa group.

The plans have already met with resistance from Lufthansacabin crew. The UFO union, which went on strike in the summerover pay and conditions, said that the new plan could hindercurrent mediation efforts.

Franz declined to detail how much Lufthansa would save bybundling its European direct services with Germanwings, but heforecast that the new, enlarged Germanwings would be in theblack by 2015.

He disclosed for the first time that the Europeanpoint-to-point services, which reside within the Lufthansa AGoperating arm of the aviation group, have been posting eurooperating losses in the high hundreds of millions.

Germanwings, meanwhile, widened its operating loss in 2011to 52 million euros from 39 million euros in 2010. The airlinecurrently has 32 Airbus A319 aircraft flying to 90 destinationsand transported 7.52 million passengers in 2011. From January,Germanwings will have 89 aircraft, fly to more than 110 Europeandestinations and is expected to serve 18 million passengers in2013.

Charts accompanying Franz's presentation showed thatLufthansa and Germanwings combined have about 30 percent of thelow-cost carrier capacity in Germany this year, with Air Berlin

at about 26 percent. The remainder is shared by otherlow-cost carriers, such as Ryanair and easyJet.

Ryanair carries a total of about 79 million passengers ayear, compared with 58 million for easyJet.($1 = 0.7751 euros)

(Reporting By Marilyn Gerlach; Editing by David Goodman)

((marilyn.gerlach@thomsonreuters.com)(+49 69 7565 1279)(ReutersMessaging: marilyn.gerlach.thomsonreuters.com@reuters.net))