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Executives

Andreas Hagenbring – Head, IR

Simone Menne – Chief Officer, Finance and Aviation Services

Analysts

Neil Glynn – Credit Suisse

Steven Furlong – Davy Research

Tim Marshall – Redburn

Michael Kuhn – Deutsche Bank

Andrew Lobbenberg – HSBC

Jarrod Castle – UBS

Donal O’Neill – Goodbody

Robin Byde – Cantor Fitzgerald

Ruxandra Haradau-Doser – Kepler Cheuvreux

Andrew Light – Citigroup

Deutsche Lufthansa AG (OTCQX:DLAKY) Q2 2013 Earnings Call August 2, 2013 7:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Conference Call on Q2 2013 Results of Deutsche Lufthansa. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Andreas Hagenbring, Head of Investor Relations. Please go ahead, sir.

Andreas Hagenbring

Thank you very much. Good afternoon ladies and gentlemen and a warm welcome to the Lufthansa Half Year Results Call. As usual, we will start today with a presentation of the results by Simone Menne and we will then follow with a Q&A session.

I’m happy to hand over to Simone.

Simone Menne

Yes, good afternoon also from my side, ladies and gentlemen. A year ago, I had my first presentation of Lufthansa results and it was a full year of exciting and challenging things happening.

And as you see, we are developing further, with new technology and international language. We had our first press conference today in English and modern German anymore. I’m glad that you follow us on this way and look forward to the presentation of the half year 2013.

So, where were the challenges in the first half year and where was the excitement. Certainly strikes and weather as well as currency and fuel price mostly challenge us. And we are glad that we concluded an important wage deal with our ground staff and continued to make progress with score.

We are proud that we received awards for Lufthansa first-class product and as the best Western European and Transatlantic Airline. We are now a new team on the board. And we are all excited about the launch of the new Germanwings business model.

We in the Lufthansa group are moving fast at the moment and I’m proud to say that we are moving in the right direction. We made clear progress and have produced a good result for the first half year, excluding one-off assets and restructuring costs and as importantly our results improved more dynamically in the second quarter than in the first.

You may not see that at the first glance on to the figures. The set of figures for the first half year is, I admit, a bit tricky to compare because of the many one-off factors in the past year. But I will do my best to guide you through the set in order to present you the real picture.

In a nutshell, the result improvements were driven by our passenger business and the maintenance division. Our biggest single unit Lufthansa Passenger Airlines showed the strongest improvement. It is worth noting however that market developments have become more diverse recently.

While, the North Atlantic is performing better than expected at the beginning of this year, Asia is currently not meeting our expectations. We expect these demand developments to continue and see that confirmed in our forward bookings.

I’m glad to say that this time we see no dynamics in our fuel cost forecast. Our estimate for the full year remains unchanged. You may expect updates on score today, but also the extensive score presentation, we made available in June, there is not much additional detail to share today.

It is fair to say, we clearly see progress in implementation every month and are confident that we will achieve our set target of €740 million gross contribution for the year. The numbers are progressing as expected.

To make a long story short, the first half year is in-line with our expectations. With the improvements in the first six months, we have made again a step forward towards our profitability targets. We are confident to meet the full year 2013 profit objective that is higher than last year’s reported €524 million. Our guidance remains therefore unchanged.

So, let’s start with the actual figures. The total revenue for the first half year of €14.5 billion was slightly below previous year. This was driven by the flying businesses. The Passenger Airline Group managed capacity intelligently by offering a high-end number of economy seats instead of business or first-class seats.

Altogether, capacity in available seat kilometers remained unchanged, keeping the traffic revenues stable in this context means that we did a good job, managing the yields per booking slots.

Lufthansa cargo reduced capacity in the freight business by roughly 2% and traffic revenues fell stronger making the overall traffic revenues come down. In light of this, we achieved a good operating profit of €72 million in the first half year.

The operating profit in the second quarter was strong at €431 million, distance laid into adjusted operating margins of 0.9% for the first half year and 6% for the second quarter.

As you see the numbers show a decline of the operating profit in the first half. This data however as I said in the beginning need some explanation. Because we did not only have multiple one-off profit in the previous year’s period, these one off profits also have been restated and even inflated due to the new pension accounting rules on the IAS19.

In other words, the profit numbers for the previous year shown here are extraordinarily high. And I would like to make clear that these one-offs were pure accounting effects with no actual cash flow spending behind it. Therefore, the cash flow figures are not as distorted and show a better picture of the actual economic situation.

Operating cash flow increased by 39.2% and the free cash flow more than doubled to €1.3 billion on constant capital expenditure, especially the second quarter showed a strong cash flow development.

The balance sheet figures improved as well. Net debt was again reduced by now €1.2 billion and the equity ratio strengthened also due to an increase in the interest rates by 60 basis points to 17.5%.

I’m pleased to see that also the share price accounted for the progresses we make. Market capitalization increased again during the first six months of this year by almost 10%.

Let us dig even deeper into the numbers. In order to make a fair comparison with the previous year, we need to look at a normalized operating result. For this, we need to eliminate the most relevant one-time effect and restructuring cost.

In the first half of last year, or more precisely in the second quarter of last year, we had one-off profits of €325 million. And as many of you recall, we transferred the operations of Austrian airlines into their own regional subsidiary Tyrolean Airways and we sold PMI to IAG.

In both cases, the driver of the positive impact was a substantial and P&L effective decrease in pension provision. That is why the changes in the IAF 19 which typically lead to an increase in pension provision, expert looking has had an almost multiplying effect on the already substantial one-off effect in the reported results.

If you allow me to simplify the case, you could say that under the new IAS 19 rules, the Pension Provisions for Austrian Airlines and PMI would have been higher initially. So the one-off profits when you dissolve the provisions become higher as well. Other exceptional effects are restructuring charges. They appeared both last year and this year. And they of course need to be looked at as well.

Now, let’s do the deep dive and calculate and normalized operating results. You can find a detailed bridge on page 6. The operating result for the first half year 2012, is €235 million, as you can find the top of the slide in the column at the left.

This includes one-time profits of €111 million from Austrian Airlines restructuring and €31 million from the resold PMI pension provisions as reported last year. These two effects were retrospectively increased due to a new pension accounting by another €210 million. In total, we had €352 million one-time benefit last year. This benefit has nothing to do with our actual business and occurred only once that we deducted here.

Simultaneously, we have restructuring cost of €27 million last year. These were costs for severance payments at Austrian Airlines that were necessary to execute the transfer to the lower cost subsidiary to Tyrolean.

The restructuring costs are recurring charges either, but we adjust for them as well. Eventually, this gives us a normalized operating result of minus €90 million for the first half of last year so, to say, the true profitability without one-time profits or one-time costs.

For the first half of 2013, we only need to adjust for the score restructuring cost of €71 million, which are one-off by the nature as well. Hence, the normalized operating profit is €143 million. Now, this allows for a judgment of the actual profit development. In the first half year, the profitability of the Lufthansa group improved by €233 million from minus €90 million to plus €143 million.

This positive development becomes also visible when we look at the individual cost items on page 7. Operating expenses were up by 1.1% in the first half of the year. However, this was driven by higher staff cost that climbed by almost 14.6% because of the one-off benefit and score restructuring cost effective the staff cost line.

In other words, last year our staff cost for the first half were lower by more than €300 million. It’s one more time, we’re just for the one-off effect and restructuring cost, staff costs were up by only 2.4% and the operating expenses in total were even down by 1.4%. This good development was mainly driven by lower cost of materials.

In the cost of materials, fuel costs fell by 2.5%. The main driver of this development is not lower fuel prices. They are being compensated by a negative hedging result in our case. It is the lower fuel consumption which stands from a mix of less flights and more efficient aircraft. We produced the same capacity with 5.1% less flights.

Let me further illustrate the positive effect of the accelerating sleep roll-over. Last year we managed to reduce the average fuel consumption by around 3% to now only 4 liters per passenger for 100 kilometers flown. And we work hard to further optimize it. The lower number of flights had a positive impact also on other cost items.

Fees and charges reduced by 0.9%. Within this division, all cost items that are driven by the number of flights are not by the number of passengers, decreased year-on-year for instant landing and ATC fees, this cost of materials by the way also contain the German air-traffic tax, €167 million alone in the first half year.

This is not only a burden for us, up certainly one of the reasons why a key industry in the strongest European industry cannot perform as well as it could. We therefore hope that the recent political dynamics around this topic will continue in the right direction.

Depreciation and amortization, was at €931 million, an increase of €36 million or 4%. This is again, due to the fleet restructuring. As we are currently phasing out all the aircraft, and replace them with newer technology and more efficient aircraft, we have to make impairment charges of €93 million on the old planes, around €45 million more than last year. While, these charges are not part of the operating result, they do have an impact on our net group results. Scheduled depreciations were 1.7% lower than last year.

As I mentioned earlier, the one-off effect were not really cash relevant. The similar to the normalized result that we looked at, the cash flow figures are showing a positive trend.

Operating cash flow increased strongly to €2.3 billion a plus of €651 million. The huge swing in the working capital line is largely because of the one-off effect again. We adjusted for them during last year, because they were not cash relevant as I already mentioned. As we do not have to make these adjustments for this year’s period, there is a stronger change year-on-year in this line.

Investments increased slightly to €1 billion. Free cash flow hence increased strongly by €721 million to €1.3 billion. I pointed out at the beginning of my presentation today that on the back of this net debt has fallen to a low level and the equity ratio started to recover. We hence feel comfortable with the development of cash flows, net debt and equity ratio in the current market environment. And we aim to continue this development.

Cash flow generation will remain key for us to be successful on a sustainable basis, as it ensures future investment and fleet products and customer service.

Let us now leave the group level and look at the individual business segments. At first glance, we see a, strongly decreasing operating results for the Passenger Airline Group. It fell by €137 million to minus €64 million. But again, in this segment we have to be aware of the positive one-off effect and restructuring cost, of together €325 million in the previous year. If we take this into account it becomes obvious that we made good progress here.

The detailed view into the individual passenger airlines is a proof for that. Lufthansa Passenger and SWISS, who were not affected by the one-time effect improved their operating results. Lufthansa passenger improved by €177 million or 66%. This increased the operating result by 16.7% or €9 million to €63 million. Both Lufthansa Passenger Airlines and SWISS have made substantial progress in their respective restructuring assets.

And the score, Lufthansa Passenger Airlines has initiated a review of its organizational setup. All processes have been put under review and more than 220 measures has been identified for implementation of the new processes.

The savings will contribute some €180 million to the Lufthansa Passenger bottom-line, once they are implemented. We are currently in discussions with employee representatives regarding implementation milestones and measures.

On top of this, and much more obvious to the outside, we have initiated the transfer of Lufthansa’s non-hub services onto Germanwings platform effective since 1 July. While it is still too early to give a thorough feedback on the financial performance of the business, we are very satisfied with how smooth the transfer has worked out and how well the product is accepted by the market.

Forward bookings for this business look good and the overall implementation plan is on track. We have full confidence in our colleagues at Germanwings, which has done something similar with our Geneva operations, they have adapted the product outside their hub Zurich to become more competitive. This is building up a dedicated network operations, staff and fleet of nine aircraft for the West of Switzerland in Geneva. This way, it can reach a higher productivity and lower cost position in general. This has also started very well, and we are keen to see further progress.

While Austrian Airlines has continued with its restructuring efforts as well, they have reported a decline in profits. However, adjusted for the one-time effect we have discussed earlier, Austrian has actually improved their operating results by around €20 million.

Altogether, the three airlines achieved an underlying profit improvement of more than €200 million. This sustainable improvement is also visible in lower non-fuel unit costs. They declined by 1.1% in the first half and by 2.7% in the second quarter.

The logistic segments also recorded an improvement versus last year. The operating profit improved by €13 million to €61 million. Lufthansa Cargo thereby benefited from lower depreciations as the scheduled amortization of the MD11 fleet has come to an end.

As Cargo also demonstrated their higher flexibility again, they fully compensated a 10% revenue decline on the cost side. Market conditions remained where they were in our last call in May. We will be discussing this with the current trading details later.

The maintenance segment performed positively. The progress in all profit – the progress in all profit improvement measures is most obvious here. On the basis of growing revenues, and reductions in all cost lines, the operating results climbed by €73 million or 50% to €290 million.

The catering segment reported an operating profit of €19 million, €3 million lower than in the previous year’s period. This was primarily caused by higher staff cost that included early retirement payments as well as consolidation effects. You might remember that our UK joint venture with Alfa Group, means that the contribution from this company has become a below the line contribution, due to its de-consolidation.

IT services also had to register decline in profits. The operating profits sell by €3 million to €5 million.

And finally the segment others, it is marked by the restructuring costs of score. These are provisions for staff measures. In the first half year, we had score restructuring cost of €71 million compared to none in the previous year.

At this stage, we usually look at the regional traffic and yield overview to analyze the passenger business in more detail. This time, I would like to first take a look at how our current capacity strategy and seat configuration is affecting the yield revenue – the yield figures sorry.

As I had already explained in the past presentations, we have refigured our seat mix on Lufthansa Passenger Airlines long-haul AC Soft. We replaced the number of business class seats by economy class seats. Simultaneously, the new aircraft models that we phase into the fleet such as the A380 have more economy seats than the old aircraft they replace.

These two effect both, main that our economy capacity is growing disproportionately versus first and business class, as you can see on the upper part of the chart.

In the first six months, economy capacity grew by 1.4% while we reduced premium capacity by some 8% in the total network. Mathematically, this has a strong dilutive effect on the overall yield figure as the share of lower priced economy tickets is increasing. Because of this we saw a lower yield figure in total, even though the yields were up or flat in the respective travel classes.

Indeed, we did see a yield increase in short-haul traffic and on the long-haul routes, we achieved higher yields within the premium classes. Finally, the yield was also stable within economy class on the long-haul despite the disproportionably growing capacities. Altogether, however, due to the changed mix of economy versus premium capacity, the yield declined. And this has been the strategy we have been communicated for some time now. It is important to keep this in mind while looking at the overall yield figures on the next page.

Having said that, let us take a look at the traditional regional overviews. In the first half year, we kept passenger capacity virtually unchanged at last year’s levels. The passenger kilometers grew by 1.4%, while the yield was down by 1%. This means, revenue were roughly on par with last year. At the same time, we reduced the number of flights by 5.1%, so that the revenue per available seat kilometers, the rough was slightly up while the cost per available seat kilometers, the cost has come down mainly due to lower fuel and fee expenses.

We also saw stable revenues in the second quarter, where passenger kilometers grew at 2.5% and yields were down 2.5%. During quarter two, the strong regional differences and its worst currency effects that we have seen in the first quarter continued and even amplified. The currency effect was primarily driven from Asia Pacific where yields sell more than 9%, almost half of this was attributable to the weaker Asian currencies.

The mid-east and African region also saw a strong yield decline. On the contrary, the Transatlantic and short-haul traffic performed well. On short-haul, we achieved small volume growth at stable yields and on the move to the North and South America, volumes grew 6.9% while the yields even increased by 1.2%.

But in total, the yield was down 2.5% in the second quarter. On a constant currency basis, it was only 1.1% lower. Taking the change in premium versus non-premium offering into account, I would say this was a fair development.

While I’m confident in saying that we are applying the right strategy and can actually see in the numbers that the rough optimization beats yield maximization, the diverse development of the traffic regions is a challenge. You can see in the numbers that particularly Asia Pacific has seen a major deterioration especially when we are including currency effects.

Due to our balanced regional portfolio, the positive development in the Americas and the very solid performance in Europe, we are able to compensate for this development. However, currency movements are certainly a major parameter in our revenues these days and we are carefully watching how this will develop. The more diverse, the split between the different traffic regions becomes the more difficult it will also become to balance the positive and negative effects.

As I said, the trading environment is becoming more volatile but on aggregate we currently see no softening of the trend. Our forward bookings indicate that the passenger volumes will continue to grow year-on-year, while especially the regional differences in the yield development seem to continue as well.

Network wide, average yields remain stable. Foresight is and remains shorter than it was some years ago but it is certainly no news to you. More specifically the routes to Asia Pacific and Mid-East Africa are still facing negative yield challenges, while the Transatlantic traffic should further benefit from positive rates.

In short-haul traffic, our forward bookings currently indicate stable yields year-on-year. Our overall capacity strategy remains unchanged as well. We will continue the restrictive capacity path and have even further trimmed our plan slightly. On the full year, we now expect the growth of only 0.7% instead of the 1.0% we had forecasted earlier.

Capacity will remain restricted also throughout the winter time-table where we currently plan with a slight increase in capacity year-on-year. The differentiation and short-haul and long-haul capacity developments remain unchanged. In the full year, we intend to cut short-haul capacity by 1.7% while long-haul is growing by 2.1%.

For the logistics business, we still expect trade volumes to recover in the second half of the year. More precisely, after the end of the summer break in September. Accordingly, we currently plan to grow capacities at around 5% in the second half, this means flat cargo capacity for the full year.

As you can see, there has not been a general change on the demand side, the same is true for our fuel cost. We still forecast a fuel bill of €7 million that means €400 million less than in 2012. As we have had already savings of €90 million in the first half year, we should see roughly another €300 million to come of the course of the third and fourth quarter, mainly driven by volume and lower prices which however continue to be partly offset by negative hedging results.

With the external conditions being overall unchanged, let us take a look at the individual profit forecast for the segment. We expect that all segments and airlines will either maintain or improve their operating results this year. The service segments will continue to deliver strong earnings contributions, but we also expect recovery in profits of the flying businesses. Overall, we have only made minor changes to the respective guidance.

Due to the good performance in the second quarter, we now expect that the maintenance division will also deliver a higher full year operating results. On the contrary, we have to come a little bit more conservative on the – for the catering division. For the reasons mentioned before, we now expect the operating results to roughly match last year’s number.

For IT services, we still expect the profitability to go up again. Our expectation for the cargo business is unchanged too. We anticipate a three-digit million Euro profit that shall beat last year’s number of €104 million. This does however, depend on the market to come back in the further course of the year.

In our largest business segment, the Passenger Airline Group, will plan to moderately increase the operating profit. This increase in profit will be driven by Lufthansa Passenger Airlines including the new Germanwings and Austrian Airlines. While SWISS wants to maintain it’s already relatively high margin in Euros.

The Passenger Airline Group is planning for this profit increase despite the fact that we expect a three-digit million Euro amount in one-time project cost at the Lufthansa Passenger Airline to occur in quarter four.

These costs are called by the accelerated product roll-outs that we have decided to implement. To give you some examples, our goal is to have a new business class being rolled out on the entire long-haul fleet of Lufthansa Passenger Airlines by mid-2015. By the end of this year already, we have updated 25% of our entire fleet. By the end of next year, it will be 75%.

At the beginning of 2014, we will also start to retrofit our early A380s with the onboard wireless internet service. We will use the lower slight activity in the winter time-table for installing all these product upgrades. You can see, we are not only improving our results but we are simultaneously investing into our fleet and products.

We currently have 236 new aircrafts on order, which will steadily come into operations by 2025, mainly to replace maturing aircraft within our fleet. This will be the core of our fleet strategy for the coming years.

A decision on an additional order of long-haul aircraft will be taken in the coming months. By fixing this today, our customers can be sure that when flying with us, it will be in a state of the art, modern and fuel efficient aircraft.

And due to the fact that we own about 90% of our fleet, we have great operational flexibility. You can have, rest assured that we will continue to be able to adapt our capacity into a changing market environment while having the cost benefit of a new technology AC Soft.

So, let me come back to the financials now. We finish with a obligatory profit outlook for the group, it has not changed. We are confident to reach an operating profit for 2013 that will be higher than last year’s figure of €524 million. This profit increase already incorporates restructuring cost from score similar to last year’s at a low three-digit million amount in project cost in the fourth quarter, I explained to you just now.

Altogether we have satisfied with how Lufthansa Group and the financials have developed so far this year. Despite the volatility of some major drivers of the business, we see no actual signs in our booking forecast or elsewhere, which would change the development we have seen so far.

With this message, I would like to end my presentation of the results today. But before I answer your questions, let me draw your attention to our next expert session events, which will take place in October.

On October 4, and October 9, our CEO of the Lufthansa Passenger Airlines, Carsten Spohr, and our Germanwings top management team would be delighted to meet you in either London or Frankfurt to present to you the current development at our mainline business and the progresses we are making with the new Germanwings. If you are interested, please book and block the date in your calendar. We will – you will receive the official invite and more details over the course of the next weeks.

Thank you very much for your continued interest in our business. We’re happy to answer any of your questions now.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question is from Mr. Neil Glynn of Credit Suisse. Please go ahead.

Neil Glynn – Credit Suisse

Hi, good afternoon, everybody. If I could firstly ask a question with respect to your operating margin at group level. I know as to your second quarter operating margin of 6% was the highest that we’ve seen since 2008. However, the first half margin has been broadly in-line with recent years, which obviously highlights the first quarter’s poor performance. Can you provide some color on how recent labor agreements enable you to better absorb the low season with a view thinking about the upcoming winter?

And then second of all, just a point on the up-gauging dilution of pricing for the first half, I understand that that unwinds somewhat in the second half if the comps get easier. But I would get this also has ramifications for unit cost development. So, it would be quite helpful if you could provide some guidance on next year unit cost for the passenger division in the second half or the full year? Thank you.

Simone Menne

Okay. So, let’s start with the operating margin. Yes, we are actually pretty happy about the margin in the second quarter. And there you see that we just are making big improvements and in comparison to the first quarter that some score effects are showing up more clearly. And that obviously takes the ramping up period. So, when we talk about contracts with the unions regarding seasonality, yes, we are making progress and that obviously in the future should help to further make the quarters and the differences between the seasons more like, and the margin in the low seasons better. But that will take a little bit of time.

Just to explain to you, we did in-build seasonality for our crew in the contract we did last year with our cabin crew union, we are targeting to build that into our pilot’s arrangements and negotiations too. And it is in-built in the Germanwings so that we also there can increase productivity. There are some seniority clauses so that will not be valid for 100% of the stuff in the first minute. So, therefore you cannot expect that already on full flow in the next winter.

So, for the unit cost guidance, for the second quarter – second half year, sorry, sorry. The strategy for flight reductions will continue. So, and this was driven by unit cost reduction. So we have fuel fees and so on. We cannot guide here especially but we are – what we expect is that this will further continue. Then, so there, you definitely could expect good continuation of what we are seeing.

X unit cost decline by 2.7% in the second quarter. So, unit revenue or RAS was stable and that is I think an important message we want to give.

Neil Glynn – Credit Suisse

Many thanks.

Andreas Hagenbring

Thanks, Neil.

Operator

And the next question is from Mr. Steven Furlong of Davy Research. Please go ahead.

Steven Furlong – Davy Research

Yeah, hi. I was just interested in, honestly you’re market leader in cargo and you’ve maintained quite bullish comments in terms of the post September. Is that from what you’re hearing from customers, is it certain trade lanes, is it the supply environment that gives you the components there? And then maybe just one other question, just on, I know it’s early days we’ve talked about the Germanwings. I know it’s – to some extent a cold story. But do you think that – the new Germanwings concert can gain more market share or have revenue benefits as well? Thank you.

Simone Menne

Okay, Steven. So, yes, for the cargo, what we have seen in cargo, which gives us some confidence there but I admit I said that already in the last quarter. We have seen charter business catching up. And charter business is the business where we can see longer into the future than on the very short booking behavior in the normal logistic business. So that is one indication.

And you may have followed the IATA figures, also IATA saw in comparison from May and June catching up figures in the cargo business. So, this makes us confident that we see finally an increase in the demand.

For Germanwings, well, we see very good forward bookings here. And we obviously see the customers adapting this product on our de-central services. So what we expect is there to keep or gain market share. And we then have to look into the revenue developments there when this business is going on.

Steven Furlong – Davy Research

Yeah, that’s great. I guess, we’ll hear about it more in October?

Simone Menne

Yes, definitely. This is why, this is why we scheduled this expert session, I think there is something to look forward to.

Andreas Hagenbring

We would have so much great news to share today, but we want to build the tension.

Steven Furlong – Davy Research

Great. Thanks so much.

Operator

And the next question is from Mr. Tim Marshall of Redburn. Please go ahead.

Tim Marshall – Redburn

Hi there. Just one question really, on the aircraft order for the long-haul aircraft order that you said will be finalized in the next few months. My understanding was that the end year order until you reached the 2015 target, as my understanding was incorrect on that? And then just, whether it’s going to be an order for growth or an order for replacing your current fleet?

Simone Menne

Okay, Tim. Well, we always said in my opinion that we have a short-haul and a long-haul order and that is irrespective of the 2015 achievements. The only, we needed for replacement of our fleet, this time we are looking on let’s say the smaller size so no A380s or 747-800.

Tim Marshall – Redburn

Okay.

Simone Menne

And it is mostly roll-over, it’s just deliveries starting from 19. And it is growth beyond 19, 20, half of market size.

Andreas Hagenbring

So, Tim, maybe just a side remark. If you look into full year presentation there, there was a graph on the Lufthansa Passenger Airline business and we categorized long-haul, short-haul and you can see that there was a still new order open.

Tim Marshall – Redburn

Okay, got it. Okay, that makes perfect, that makes perfect sense. And perhaps one just follow-up question, on capacity in the Asian markets that you’re suggesting are bit weaker. Are you doing anything on your capacity and what is the competition for capacity in those markets?

Simone Menne

Well, actually, we have not planned to reduce further capacity if you want to indicate that. What we are doing is there, looking into the currencies, looking into the point of sale. As you would recall, we change – we did retract from Hyderabad and Kolkata. And we are flying with two class fleet in some of the destinations so all that should help for the result.

Tim Marshall – Redburn

Great. Thanks a lot.

Operator

And the next question is from Mr. Michael Kuhn of Deutsche Bank. Please go ahead, sir.

Michael Kuhn – Deutsche Bank

Yes, good afternoon, also a few questions from my side. Once again on yields, you tripped out the effects of the shift in booking classes for the overall group. Could you do something similar for Asia to give a better impression on how things are going there? And also in that connection, there was some deterioration in either trends in the second quarter versus the first quarter. I think you at some point spoke about stable trends, so should we see yield development on a similar level of decline in the third quarter compared with Q2 or should we expect maybe some improvement here? That’s it on yields.

And secondly, on the MRO business, here with significant results improvement and despite relatively moderate increase in the top-line, I guess that was mainly due to cost savings. And should we or can we project that rate of improvement into Q3 and Q4 or was there something special in the numbers? And then, one thing on score…

Andreas Hagenbring

And I think that’s the end of the final question.

Michael Kuhn – Deutsche Bank

Thank you, okay. On score, €740 million gross contribution this year is the plan, maybe some words on phasing in Q3 and Q4? Thanks.

Simone Menne

Okay, Michael. Regarding the yield, I cannot give you the split for Asia, what I can tell you is that when we look into the mix effect that we know that 2% of the long-haul drove was due to the higher share of economy seats. So, and obviously Asia is part of that so that maybe an information which may be helpful in this regard.

The yield figure and diluted by the fact that we do reduce short-haul and long-haul and grew long-haul. And also because long-haul yields per RPK are pro-definition, around about 50% lower than short-haul yields, because of the longer route lines. And you also would see a dilutive mix effect of higher economy share that will reduce in the second half because we introduced the enlarged economy cabin in the third quarter last year. So, it will not go further up but in comparison, actually you will have a more like-to-like starting from the next quarter.

For the maintenance improvement, you are absolutely right. That is mainly in the cost lines and that is coming out of score. We have reduced stuff in the Lufthansa maintenance, they have made a similar exercise as Lufthansa Passenger Airline and they started earlier. So they looked into all processes in administration and took out some hierarchical levels or put some functions together. And they are starting to reduce their stuff there already.

They have less cost of material, again coming out of a score project where they were looking into usage of material, which is down by 20% – and 20 million, okay, sorry, I said 20%, it is €20 million, sorry, 20% would be a lot.

And they just did not have to make accruals regarding losses of contracts they had in the past. So, this and several smaller areas, are the areas where they just were making big progress and therefore we see these results. That should be sustainable but obviously not a trend going up and up and up.

So, last question in score, we have no change in our guidance for the quarter two, for the second half, sorry. And there were no specifics actually in the second – first or the second quarter. And so, we stick to our guidance, we are making the progresses, we are planning and therefore I think we are pretty happy with the €740 million.

Michael Kuhn – Deutsche Bank

On phasing on Q3 and Q4, any details or more in Q3 due to more leverage in the quarter or most in Q4?

Simone Menne

No, as you know, we are quite conservative in giving guidance per quarter, because that is really difficult – also because of the ideas of the net profit increase. So but, you can expect that we will report regularly about progresses of different project.

Michael Kuhn – Deutsche Bank

Excellent, thanks.

Operator

Our next question is from Mr. Andrew Lobbenberg of HSBC. Please go ahead sir.

Andrew Lobbenberg – HSBC

Good afternoon. Could I ask please if you could offer some update on what’s happening with the cockpit negotiations? And could you try and explain to us what the impact growth of the Germanwings cabin crew deal which didn’t get a lot of detail in the public domain?

And then, just as a third question, could you tell us when we might hear more detail on the Lsg Sky Shaft expansion in neighboring business areas? Thanks.

Simone Menne

Okay, update on cockpit, we are still in negotiations. And as it is in negotiations, it’s very difficult to really say when they come to an end. As you know, this is the last one of the negotiations we have to finalize. So, we definitely are expecting that to come soon and we are confident that we will reach a compromise.

For the Germanwings arrangements, I just can’t tell you that we made a deal which is sitting into the Germanwings business plan. And we made a deal which is for a long period, meaning 39 months. So, and just to give you one more detail and then I will stop. A lot of the elements are success driven, so I think that should give you an indication that it definitely will help for the Germanwings business plan.

For Lsg, well, we are considering further businesses here, especially trained businesses, there are several tenders in Europe going on where Lsg is on the list. And that is the main area we are focusing on at the moment. So, we can expect to see something there, at least as contracts during the second half year.

Andrew Lobbenberg – HSBC

Okay, that’s great. Just the fourth – can you clarify, you said the 4th, and the 9th for the Germanwings thing. Can you just clarify which one is Frankfurt and which one is London?

Andreas Hagenbring

The 9th is in Frankfurt and the 4th is in London this time, so London first this time.

Andrew Lobbenberg – HSBC

Okay, cool. Thanks.

Operator

And the next question is from Mr. Jarrod Castle of UBS. Please go ahead sir.

Jarrod Castle – UBS

Good afternoon. Just a couple please. I mean, first of all, just on the guidance, you’ve retained the guidance in terms of operating profit 2013 would be higher. I guess, from the position of Q1 to where we are now, are you tracking ahead or in-line or behind where you think you’ll eventually come out for the year. And related to that, when do you think you’re going to be able to firm up guidance, couple of your competitors, you are and kind of bound by regulatory issues, have kind of firmed up their guidance?

Secondly, just in terms of low cost competition, I mean, Germany is being kind of highlighted a number of low-cost airlines, Ryanair, Welling, but on EasyJet side in terms of big gross push I guess, Q3, Q4. And so, are you seeing any kind of big push into your markets? Thanks.

Simone Menne

Okay, let’s start with the letter one, the low cost competition. At the moment, we do see not much of an impact or one of these airlines you mentioned come into the German market in high quantity. We still have our Germanwings operations, we have Abilene operations and to little bit of Norwegian and maybe Welling starting but on a very low level. And we have to see how that develops. But I don’t expect much for the second half of this year.

For the guidance, we are pretty happy with the guidance we are having. So, we can confirm it and to giving anything like lower or higher or in the middle would be not on my guidance, so I just stick to my guidance. When can I firm up, well, we will have more insight in Q3.

Jarrod Castle – UBS

Okay, thanks very much.

Andreas Hagenbring

Thank you.

Operator

And the next question is from Mr. Donal O’Neill of Goodbody. Please go ahead.

Donal O’Neill – Goodbody

Hi guys, good afternoon, two or three questions from me. First one is in regards to your short-haul growth plans through the winter. Can you just elaborate on the nature of those growth plans whether it’s capacity growing from central lines, whether it’s increased seats or what will happen with the number of the slide dynamics there as well?

Second question, is on long-haul, and can you just – and tell us where you plan to grow on long-haul into the winter deal into the next 12 to 18 months, particularly given that Asia has been so weak, where we see switch of growth into other markets?

And last question, and just in terms of the Gulf targets and that seems to be more speculation this morning about your intentions to cooperate or not, but somebody in the middle-east, could you maybe clarify your position on that? Thank you very much.

Simone Menne

Okay. For the short-haul growth, I think that is nearly fully responsible to the fleet for new aircraft, so that we have more seats than in the fleet and not more aircraft but different aircraft more seats.

For the long-haul, there is not yet a decision, the airline teams are sitting together to figure out who should fly where. So there is not yet a decision how we will distribute between the airlines and the regions. So, there, I cannot give you any further details there.

And regarding our partnership for the long-haul, yeah, I may have said a sentence which was misinterpreted I do not see any changes in our position in comparison to the last year or months.

Donal O’Neill – Goodbody

Okay, that’s great. Thank you very much.

Andreas Hagenbring

Thanks Donal.

Operator

And the next question is from Mr. Robin Byde of Cantor Fitzgerald. Please go ahead.

Robin Byde – Cantor Fitzgerald

Good afternoon guys, just two from me please. Just on the MRO and your contract pipeline. Your contract win-rate seems to have improved particularly in Q2. So, I just was wondering has something fundamentally changed in the market or how your pricing contracts, or in the competitive landscape?

And then, secondly, just on CapEx, could you just update us on your full year guidance for CapEx, the run rate seems to have come down or has come down quarter-on-quarter. So, are we still sort of targeting or should we still be targeting €2.6 billion growth for the full year? Thanks.

Simone Menne

Okay, Robin. Contract win rate, yes, that is very positive what we have seen in Lufthansa techniques and the maintenance. And I think that is not a substantial structural change. We did not see any of the other suppliers, they are not offering or offering totally differently than in the past. I think it is due to the very good relationship and the reputation Lufthansa Technique has. And to well, partly of course they improved their cost position and therefore they can offer a good price.

So, regarding the CapEx, the original plan was €2.9 billion, so you are right. I think you should go for little bit less. I think at the moment, €2.6 million would be a more realistic assumption now. We looked into CapEx planning outside of fleets and so we are I think quite confident with €2.6 billion.

Robin Byde – Cantor Fitzgerald

Okay.

Andreas Hagenbring

Thanks Robin.

Robin Byde – Cantor Fitzgerald

Okay, thanks very much. Thank you.

Operator

(Operator Instructions). And the next question is from Ruxandra Doser of Kepler Cheuvreux. Please go ahead.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Hello, Ruxandra Haradau-Doser with Kepler Cheuvreux. I have one question. And at I sense that the contract of the CEO is running only until the end of May 2014. When do you expect to supervise the report to the site and the CEO position as off into in 2014?

Simone Menne

I don’t say that because it’s the supervisory board who decides that, sorry.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Okay. Can you give us now the fuel assumption on which you base your 2015 operating result target?

Simone Menne

No, no, we only give the guidance for the running year which is €7 billion.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Okay. Can you give us a breakdown of how capacities of each airline will develop in H2?

Simone Menne

I don’t have it here but if you come back to us, and to Investors Relation, they will give you the detail.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Okay, thank you. And finally, I have a very simple question. You are now half way with the cost savings program, and so far we have not seen any improvement of your reported figures. As of when will you start to deliver all this?

Simone Menne

The very easy questions are obviously and the most complicated ones to answer. So, yeah, we are half way through. But we mentioned always that especially in the beginning, we have all the restructuring cost, severance payments, redundancy packages, so that of course has an impact. As we mentioned earlier, we have all the new product developments and project costs which comes in already partly now. But flow Q4, we have a big chunk as we just mentioned. So, we have to go through that unfortunately before we see it in full impact on the bottom line.

So, but if you look at the normalized results, you can see dynamic improvements and in Q1 and Q2 already. So, I think that is important, look into the normalized one and then you get that we have the results there.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Maybe just one more question.

Andreas Hagenbring

Yeah, I think that will be the final one.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Okay. On your cost savings, last year you made significant progress on your cost savings, you achieved €680 million versus €280 million targeted. This season, it is more difficult now to deliver on cost savings given that the low hanging fruits have been already collected?

Simone Menne

No, I don’t think so. When you see and look into the slides we delivered, you see that we made further improvements in cutting our costs.

Ruxandra Haradau-Doser – Kepler Cheuvreux

Thank you very much.

Andreas Hagenbring

Thank you.

Operator

And you have a question from Mr. Andrew Light of Citigroup. Please go ahead.

Andrew Light – Citigroup

Hi, good afternoon. Just one question, several years ago, I mean, as the famous chart which show what was core and what was less core in Lufthansa, even cargo I think it was one time less core and certainly IT was in case ringing. Over the kind of last couple of years, one by one they have become core again. Is there any – there is no criticism but is there anything out there that we think is non-core whether it’s an equity stake or division or is that done, the group is now evolved to a ton of ultimate state?

Simone Menne

It’s a little bit developing as – like strategy is developing. So we constantly look into what fits into our portfolio and to what is core and what isn’t. You know, we said LSG is not for sale. But the biggest or the closest group, are still the airlines which is, let’s say in this planet system the suns and all others grew from that. And we will look into the portfolio from time to time, especially for the smaller ones and make then decisions how it fits into the portfolio.

Andrew Light – Citigroup

Right. Let’s say for the time being anyway, it look now just purely on score I must say.

Simone Menne

Well, there – definitely we don’t want to misdirected by a long sale processes that wouldn’t help at the moment.

Andrew Light – Citigroup

All right, okay, thanks very much.

Andreas Hagenbring

Thank you, Andrew.

Operator

There are no further questions at this time.

Andreas Hagenbring

Then, thank you very much everyone. Thanks for your continued interest in Lufthansa. Looking forward to talking to all of you soon. And have a great sunny day as of this year in Germany. Thank you, bye.

Simone Menne

And a good weekend. Thank you, bye.

Andreas Hagenbring

Bye.

Operator

Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you for joining. And have a pleasant day. Good-bye.

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