Lufthansa said it will merge its European and German domestic routes under a new low-cost brand from next year.
The airlines hopes to improve profits and fend off growing competition from low-cost carriers.
Lufthansa also said it plans to build a logistics centre at Frankfurt Airport to replace an old cargo centre, with the investment pegged at a mid triple-digit million euro sum.
Lufthansa flights within Germany and Europe, excluding those from its hubs in Frankfurt and Munich, will be merged with its existing low-cost airline Germanwings from January 2013.
The service will carry over 18 million passengers in its first year. Lufthansa, Germany's largest airline, carries around 106 million passengers a year.
A decision on the brand name would be made in the coming months, the airline said.
Lufthansa is not the only European legacy carrier trying to find an answer to the low-cost challenge. The French arm of Franco-Dutch airline Air France-KLM is also overhauling its European passenger network, with plans to develop low-cost unit Transavia.
Lufthansa's decision to bundle its short-haul flights under a new low-cost brand comes after it and union representatives agreed two weeks ago to begin a formal mediation procedure this week, ending a series of strikes in a row over pay and working conditions.
The airline is also in the midst of identifying over €1 billion in potential cutbacks in the passenger business, in a sign that Lufthansa could be stepping up its cost-cutting programme.
