December 21, 2016 / 4:19 PM / a year ago

Lufthansa's Eurowings adds air miles with new Munich routes

BERLIN (Reuters) - Eurowings outlined plans for new routes from Munich on Wednesday, maintaining its rapid expansion but raising concerns that the budget airline owned by Germany’s Lufthansa is not paying enough attention to cutting costs.

Lufthansa has made Eurowings its main focus in the battle with market leaders Ryanair and easyJet for leisure passengers in Europe and a vehicle for consolidation.

And it is set to become Europe’s third largest low-cost carrier after deals to rent 33 crewed planes from Air Berlin and to take over Brussels Airlines lifts its fleet to 180 planes from 93 by 2018.

Eurowings said it would fly to 32 destinations from Munich, traditionally a Lufthansa hub, from summer 2017, including tourist destinations in Italy, Greece, Portugal and Spain, as well as London and Paris.

CEO Karl Ulrich Garnadt also said Eurowings plans long-haul routes from Munich from 2018. The airline, which also spans Germanwings, already flies to destinations such as Cuba and Thailand, but only from Cologne.

Experts are concerned the Eurowings structure is too complex and that the integration of various different airlines could distract it from bringing down its unit costs.

“They’ve made a big commitment to the Air Berlin wet lease and the question is whether gaining that market share will be of tangible value,” independent consultant John Strickland said.

Eurowings aims to reduce unit costs to easyJet levels and wants to bring them down to 5.8 euro cents by 2020, a 28 percent reduction over 2015 levels. But analysts say this is not enough, with easyJet at 4.39 cents in 2015 and Ryanair at 2.08 cents.

Lufthansa is also weighing up taking over the rest of struggling Air Berlin, a source told Reuters, confirming earlier German media reports.

Air Berlin is part-owned by Etihad, which last week signed a code share deal with Lufthansa and said it was exploring further options for cooperation.

Lufthansa could use the additional Air Berlin planes and slots to prevent Ryanair and easyJet from expanding too quickly in Germany, Union Investment fund manager Michael Gierse said.

But he expressed concern that rapid expansion could make Eurowings fall behind on costs.

“They want to reach the level of easyJet, but it’s a tricky path. There’s airports in Europe, such as Brussels, where Ryanair has even ousted easyJet,” said Gierse.

Eurowings said it wanted to be profitable in 2017 after start-up losses in 2016, and confirmed its cost targets, adding it had ensured “competitive” rates for the Air Berlin lease.

“Our hands are full. We don’t have much capacity to handle anything else in 2017,” Garnadt said when asked whether Eurowings could take on more of Air Berlin.

Reporting by Victoria Bryan and Peter Maushagen; Additional reporting by Jens Hack in Munich; Editing by Alexander Smith

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