UPDATE 2-Lufthansa CEO defends low-cost expansion plans

Thu Jul 10, 2014 9:42am EDT

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BERLIN, July 10 (Reuters) - Lufthansa's new chief executive on Thursday defended the airline's plans to expand its low-cost services under new brands, after some analysts questioned the wisdom of such a move.

Carsten Spohr, who took over as CEO in May, presented plans on Wednesday that include expanding low-cost services in Europe and possibly on intercontinental flights, as well as grounding eight planes this winter, to battle competition from Middle Eastern and low-cost carriers.

Some analysts said, however, that plans to extend Lufthansa's little-known Eurowings regional carrier could create additional complexity at the group and highlighted how saturated the low-cost market in Europe already was.

"The European low-cost market is starting to suffer from a proliferation of operators and this development will only worsen that situation," HSBC analysts wrote in a note.

Spohr said Lufthansa, Europe's largest airline by revenue, needed to do more to lure price-sensitive travellers but would risk losing higher-paying business customers if it did so under its premium namesake brand.

"If you're on a Lufthansa product, you expect certain elements. If I take them away I hurt my brand," he told a gathering of analysts in London on Thursday.

Using a carrier such as Eurowings or even starting from scratch, as Lufthansa would have to for low-cost long haul, also allows Lufthansa to avoid collective labour agreements at its Lufthansa and Germanwings units, he said. Eurowings operates at a cost base about 20 percent below that of Germanwings.

"In the end it creates opportunities for staff. They won't be as well paid as my Lufthansa A380 pilots but it's opportunities for jobs," Spohr said, dismissing possible concerns from labour unions.

Unions drew some comfort from Spohr's plans, while saying it was too early for a definitive response.

UFO, which represents around 18,000 Lufthansa cabin crew, said it was right to focus on growth and that the low-cost segment represented an attractive market, while Verdi, the German service union, said that the fact Lufthansa was talking about expansion and not cost cuts was positive.

Spohr also rejected the idea that Lufthansa could buy a low-cost airline such as Wizz rather than expanding a brand it already owns. Eastern European Wizz recently pulled plans for an initial public offering, and Air France earlier this week denied it was in talks to buy the carrier.

After rising 1.4 percent on Wednesday, Lufthansa shares were down more than 4 percent on Thursday, mirroring falls in other airline stocks.

Part of Spohr's plans is a new joint venture with Air China to give Lufthansa a bigger foothold in China, the world's second-largest travel market.

However, the partnership, in which the two airlines will share ticket revenues on certain routes, may not be fully up and running until 2016 as it will take some time to obtain anti-trust approval, Spohr said.

He added that Lufthansa could ground more planes, on top of the eight already planned, as a short-term measure to deal with overcapacity, but said no decision had been taken yet. (Reporting by Victoria Bryan; Additional reporting by Peter Maushagen; Editing by Arno Schuetze/Ruth Pitchford)

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