Many of Lufthansa’s European and domestic routes are to be merged under a new low-cost brand.
Existing budget subsidiary Germanwings is to take on flights within Germany and Europe except for services from main hubs at Frankfurt and Munich.
No name has yet been revealed for the new business arm which will be based in Cologne from January and handle an expected 18 million passengers in its first year.
The plans come as Lufthansa seeks to boost profits through a series of cost-cutting measures in the face of strikes by cabin crew over changes to pay and conditions.
Chief executive Christoph Franz said: “Combining our domestic German and European point-to-point services has enormous potential to improve efficiency.
“Our aim is to once again fly these services profitably under the umbrella of a single company.”
The move coincides with Air France-KLM revealing plans to develop a budget network using the Transavia brand.