Lufthansa is targeting a 40% cut to unit costs in its European non-hub operations in order to bring the segment above the breakeven line.

Company sources tell The DAILY the carrier is working on sweeping changes to the way it operates its European mainline and regional network. Those executives rule out one option that has been discussed previously: Lufthansa will not transfer the segment to its low-cost affiliate Germanwings. The airlines officially had no comment.

Lufthansa’s European operations have been unprofitable for several years and are understood to be losing well in excess of €100 million annually – some say more than €300 million although that is disputed by others. The group has launched its Climb 2011 cost-savings program that is intended to reduce annual expenses by €1 billion from 2011.

As a first step, Lufthansa has decided to phase out all 45 remaining CRJ-100s/200s by the end of 2010. They will be partly replaced by larger Embraer 195s and CRJ-900s. Regional partners CityLine, Eurowings, Air Dolomiti, Contact Air and Augsburg Airways also have to prepare for more structural changes; Lufthansa is allocating more stringently markets to them to avoid duplication. Another option is merging regional MRO activities to become more efficient.

In the mainline area, Lufthansa is looking at ways to massively increase aircraft and staff productivity. Today, the Boeing 737 fleet achieves only 7.5 block hours daily, mainly because the aircraft are parked when demand is low during certain times of the day. The airline plans to launch a new, much more aggressive pricing program designed to stimulate demand, even at mid-day. Lufthansa will also negotiate with pilot and cabin crew unions to change some work rules blocking part of the initiatives.

Sources say the airline has made a basic decision not to phase out all or part of the European flying to low-fare affiliate Germanwings. That decision deprives the unit of a lot of growth opportunities.

And even if Lufthansa reaches its 40% cost-reduction target, it would still be at a higher cost level than what Germanwings or Easyjet achieves. Sources say retrenching from regional and hub-bypassing routes is seen as a strategic mistake because then Lufthansa would rely only on its two hubs in Munich and Frankfurt.

Photo: Lufthansa