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

Among cost-cutting measures designed to boost annual earnings by 1.5 billion euros from 2011 levels by the end of 2014, its flights within Germany and Europe - called point-to-point services - will be operated by Germanwings from January 1.

Flights to and from its hubs in Frankfurt and Munich, which connect with long-haul services, will remain Lufthansa-branded, while Germanwings will offer a lower-priced alternative on other routes, Lufthansa Chief Executive Christoph Franz told journalists on Thursday.

The new service will not offer any business class seats, but there 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 at Germanwings could be sustained in the longer term only if labour representatives agreed to maintain its current cost structure, with labour costs that are about 20 percent lower than the rest of the Lufthansa group.

The plans have already met with resistance from Lufthansa cabin crew. The UFO union, which went on strike in the summer over pay and conditions, said that the new plan could hinder current mediation efforts.

Franz declined to detail how much Lufthansa would save by bundling its European direct services with Germanwings, but he forecast that the new, enlarged Germanwings would be in the black by 2015.

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

Germanwings, meanwhile, widened its operating loss in 2011 to 52 million euros from 39 million euros in 2010. The airline currently has 32 Airbus A319 aircraft flying to 90 destinations and transported 7.52 million passengers in 2011. From January, Germanwings will have 89 aircraft, fly to more than 110 European destinations and is expected to serve 18 million passengers in 2013.

Charts accompanying Franz's presentation showed that Lufthansa and Germanwings combined have about 30 percent of the low-cost carrier capacity in Germany this year, with Air Berlin (AB1.DE) at about 26 percent. The remainder is shared by other low-cost carriers, such as Ryanair and easyJet.

Ryanair carries a total of about 79 million passengers a year, compared with 58 million for easyJet.

(Reporting By Marilyn Gerlach; Editing by David Goodman)

• A Permanent Economic Emergency