Andreas Hagenbring - Head, IR
Christoph Franz - CEO
Simone Menne - CFO
Neil Glynn - Credit Suisse
Steven Furlong - Davy
Jarrod Castle - UBS
Penny Butcher - Morgan Stanley
Tim Marshall - Redburn
Damian Brewer - RBC
Donal O’Neill - Goodbody
Andrew Lobbenberg - HSBC
Oliver Sleath - Barclays
Robin Byde - Cantor Fitzgerald
Alexia Dogani - Goldman Sachs
Deutsche Lufthansa AG (OTCQX:DLAKY) Q3 2013 Earnings Call October 31, 2013 8:30 AM ET
Ladies and gentlemen, thank you for standing by. This is your Chorus call operator. Welcome to the Conference Call on First Nine Months 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.
Yeah, thank you very much and good afternoon everyone. Thanks for joining the call at this time today. We know you already had a very intense day at airport this morning and to release it at once. So we tried to have it pre-released a week ago, so today wasn't too much of a hassle for you.
I've got with me Christoph Franz, CEO and Simone Menne, CFO of Deutsche Lufthansa AG, and we we'll now just run, jump right into it. Christoph?
Yeah, thank you Andreas. Good afternoon, ladies and gentlemen, and a warm welcome to today's telephone conference. Many of you had time to discuss the key numbers of the Lufthansa Group interim results already last week. Nevertheless we proceed as usual today. So I will start by providing you with our key third quarter figures and my assessments and then I'll focus on certain topics and challenges and Simone Menne will subsequently present to you the more detailed figures with the corresponding finance and deputation.
I regret that I cannot stay for the question-answer session later today. But it is important to me to at least present to you the more qualitative aspects of the first nine months as well as my own assessment, so sorry about that. I will not be able to spend, to stay here until the question-and-answer session, but I know that you will be in best hands with Simone to have all your questions answered later on and for those of you, I will be seeing in our Road Show in New York next week, I'm looking forward to discussing things further then.
So let's jump into the core of the matter. Lufthansa Group recorded an operating profit of €661 million after the first nine months of the year, and in the third quarter alone we had an operating profit of €589 million.
We've seen this is very solid and good results. It is what we expected and was achieved despite substantial one-off cost of €200 million during the period.
Adjusted for these one-time effect and Simone will provide a detailed overview later on, the operating results or the normalized operating results recorded a year-on-year increase of €277 million. So this is an increase of approximately nearly 50%, which is I think quite substantial. And what is the good news in it all Lufthansa Group business segments contributed with positive operating results.
The Group revenue is stable. First, let's be honest, we had previously expected an increase. You know about the foreign exchange rates and their volatility that has burdened us on the revenue side, so we know that it has also been helpful to a certain extent on the cost side.
The progress we have made with regard to our transformation program is reflected quite well looking at the free cash flow developments, which totaled €1.6 billion, and which marks a very substantially increase of €582 million compared to the previous years. Against the stable net investment of €1.4 billion, this clearly reflects the actual improvement in the underlying operating business.
The gross investments at the Lufthansa Group totaled €1.9 billion during these past nine months; the figures won't part with the previous year. So we can conclude that the operating results from January to September has improved, if we deduct these one-off costs and this is clearly reflecting that we're continuing and successfully continuing to implement our SCORE program. And even going little step further, we are doing so at a faster rate that could be expected and are therefore incurring higher one-off costs than we had predicted basically provisions for social cost in relation to our redundancies. So the projects opening up these redundancies they are progressing faster than we had anticipated and this has allowed us to also create these provisions.
Nevertheless, head win had slowed progress with regards to the improvement of our underlying results on a quarterly basis. As a result of all these elements, we anticipate the full year operating results for the Group between €600 million and €700 million, as we have already communicated last week, which includes one-off cost of some €300 million.
So let's have now a brief look at the Group's business segments, but I will be very short because Simone will give you some more detail. Basically, with regards to the service companies more or less progress in all segments and even LSG Sky Shaft, which has a little bit of declining operating profit is expecting to be at the same level at the end of the year.
If we are looking at the Passenger Airlines segment, Lufthansa Passenger Airlines is now showing reversals of the trend. The third quarter results are clearly above previous years. And one key aspect of that turnaround the development of Germanwings and I will get back to that later on.
The second positive element in this respect, I want to highlight is Austrian Airlines because we are all aware the turnaround has been realized and this year even without any one-off effect we can expect for the first time positive operating result at the end of 2013.
On the whole, our third quarter figures, we see that quite respectable and also reflect the solid progress in terms of our overall SCORE objective. We had set the right cost. We are implementing the changes as promised, and we feel that our strategy is working, up and there is always a buzz. We must continue with our efforts at full speed and there will be no time to rest or relax. And the remaining seven months I'm in-charge, I will make sure that this is -- the speed of change will be kept and I'm sure that also my successor will continue that same way as I explained already in September.
Looking a little bit further ahead, we do not expect that this process of change is ending in 2015 with a completion of our SCORE program. This SCORE represents only the first milestone in the management of the continuous changing within our company and as long as the environment and the markets we are operating in are dynamically changing, this will also be reflected in internal changes for the Lufthansa Group in order to stay the market leader here in Europe and keep this leadership position.
Looking now at the pipeline of cost contributions to our operating profit, as I mentioned, we are in the implementation of many, many activities. We feel that we have made good progress since we last showed you status in June and hopefully you will share that impression. In 2012, SCORE contributed €618 million to the Group's result and for this year we have planned SCORE contribution of €740 million. Today, I can share with you that I'm very confident that we will reach this figure and you will find that our pipeline of measures is even fuller today.
So let's look at some few examples of the project and structural changes which we have implemented in 2013, starting with our four flying businesses. The structural changes during the past years not only years especially as I focused on this again, the cleanup of the so called regional fleet, which basically is now in its fifth year of implementation is showing adequate consequences, positive consequences on the bottom-line. And on top the transfer of our non-hub services to Germanwings these is also showing very nice improvement. Altogether that means that we expect the shortfall traffic at Lufthansa Passenger Airlines and Germanwings, to be profitable for the first time in five years. I think that's a very positive signal that we're on the right track.
For Germanwings, we expect the bottom line improvement of €90 million for the full year, also a remarkable success. We have increased the number of passengers with yields remaining stable and cost developing as anticipated. It is a great product, which we have now implemented in the middle of the year and customers like it. So things are moving in the right direction though we will have to continue in the same direction in the next two years.
We have also continued to implement the structural changes in our administrative functions. The major project here is the outsourcing to the newly founded NDT LGBS Lufthansa Global Business Services. The company will officially start operating in January 2014. In the past nine months though SWISS, LSG, and Lufthansa Technik, already started to transfer their respective administrative functions to the Group shared service centers particularly those outside Germany. The whole process we feel is well underway.
And now let's look at some of those changed projects, major projects, which are underway. First of all the restructuring of the process organization and Lufthansa Passenger Airlines that I mentioned earlier, this will allow our largest entity to achieve a lean, efficient, and competitive overhead structure, and sustainably reduce costs contributing at least €180 million to the anticipated €920 million in 2015. We already have concerns about our labor representatives for a number of measures and we will begin with a rollout shortly.
The second major workflow is comprehensive package of measures to improve the profitability of our long-haul flights by a sustainable 10% reduction in unit cost. Shorter long time, traditional fuel efficiency measures, the introduction of a premium economy class or true class flights on certain routes, are only some of the initiatives, which altogether are contributing to this 10% reduction.
And the third workflow I will highlight today is the alignment of the Lufthansa staff pension agreement, which is something of high importance for the company though not included in this SCORE program because its effects will show up on the bottom-line only midterm. We have seen increasing substantially increasing pension obligations in the last years due to the low interest rates and the higher average life expectancy. So the company has cancelled all German defined benefit pension schemes and we will start now negotiating with the employee representatives for future agreement on a defined contribution basis. We feel that's a very important long-term structural change, which is going to be implemented.
Ladies and gentlemen, let me nevertheless underline that all these efforts are not an end in themselves. I would like to emphasize that for us it is a means in order to finance the successful performance of the company in the next five and 10 years to come. We're doing all this to lay the foundation for higher profitability in order to make sure that Lufthansa can defend and prove its leading market position here in the European environment.
There is a significant progress but still we are also transparent that we feel the current margins and many of you will share that perception are far too low for a company of our size. So Lufthansa will continue through our shares to improve results and reach our targets, but let me use this opportunity today to say quite clearly that we also expect here in the new German government coalition that it's been formed that we have to improve also that they have to work on the legal framework, which is quite burdening here in the German environment and that there is need for action.
Yeah. With regards to the markets developments you all are aware of the IATA forecast indicating that there will be growth as well in the passenger transport as in the cargo segments. We will have a cautious approach with regards to capacity development nearly exclusively the remaining growth will be triggered by our fleet rollover and as the average fleet aircraft size of the outgoing aircraft is smaller than the average aircraft size of the incoming aircraft this is triggering some more available seat kilometers but with regard to the number of aircraft that is not the intention to go but to keep or even slightly reduce the number of aircraft. Because we feel growth is not function of market share, so we're not running to keep market share for any price, but we feel it is dependent on the right level of profitability and this is exactly what is our priority and what we want to achieve first.
Our success at the same time in this environment depends also substantially on constant investments and here too we have delivered. The modernization of our fleet is continuing and, as you know, we have communicated our just placed orders for 59 new long-haul aircraft with a total list price of €14 billion to be delivered between 2016 and 2025. So this is a mid to long-term perspective of furthermore fuel efficient than to less environment the burdening of fleets and providing us with a substantial reduction in unit cost into production.
We have also besides fleet investments in the long-haul aircraft and remember we also have this 100 Airbus A320 family order in the beginning of this year. So these two major orders in the fleet are complimented by investments in our premium segment. Lufthansa is now the only western airline with five-star rating for its first class product and may be for you guys our 800 seat available daily means that we fly the largest selection of first class seats worldwide. Hopefully, we have the opportunity to test it.
Nearly, 200,000 passengers have flown until today in our new fully lie-flat Business Class seats and we get excellent customer response. We are investing further. We try even to speed up the upgrading process to install the new seats across the entire Lufthansa fleet. Swiss, Austrian, and Brussels already equipped with new fully lie-flat Business Class seats. So here this rollover is already finished.
And next year, we will go one step further by starting to introduce BoardConnect, a product which is developed by Lufthansa System and Lufthansa Passenger Airlines provides our guests with a new in-flight entertainment systems in 20 of our A321 aircraft and passengers will be able to use wireless in-flight entertainment with their own devices on board. We will also be selling this innovation actually to other airlines Lufthansa Systems some days ago only signed a contract with Israel's El Al for this product and we are confident that there are many other airlines who are very interested to introduce the same feature on board their aircraft.
So let me sum up. All our activities focus on successfully shaping the future of the company and its employees and I think we have already achieved lots and this is also reflected in the nine month figures. The restructuring of the Group continues to progress. We have reduced unit cost. We have set new standards with our investment percentage. The need for change today we can say has been embraced by all of our business segments, clearly also an important element, which for the success of the SCORE program and also by almost all employees. And that in itself, I feel is a huge success.
The company is moving. Lufthansa has become fast and continues to speed up change.
Thank you. And I would now like to pass on to Simone Menne and silently have to run for my next meeting. Thanks a lot, bye-bye.
Okay, Christoph, thank you very much, and to ladies and gentleman, good afternoon also from my side. And as we have published the key figures already last week, I will focus today more on the background and additional information than on these. But in order to put things in context I would start with a summary of the key financial developments in the first nine months.
The Lufthansa Group produced an operating profit of €661 million of which €589 million were generated in Q3 as Christoph already mentioned. The profits include one-off costs of close to €200 million of which some €130 million occurred in the third quarter. If you take out these one-time effects as well as the exceptional effect last year we see a clear profit improvement of €277 million year-over-year. And I will present the break down with details on this later.
This good development was reached through cost control. We managed to reduce non-fuel cost in absolute terms and the unit cost in the passenger business. A decrease in a non-fuel unit cost of 1.2% is quite remarkable for an airline, which is not growing in terms of capacity.
However we faced the weakness on the revenue side that intensified in Q3. This was primarily driven by negative currency effects in the passenger business while on an underlying basis, the pricing remained stable at growing volumes.
Present checks especially when profit figures are distorted by extraordinary success, it is always important to pay attention to the cash flow development. Operating and free cash flow remained strong in the first nine months on a similar capital expenditure. This helped us to reduce net debt quite significantly and to strengthen our equity ratio. Another development we are indeed looking at with satisfaction.
On the next slide, we show you all figures at a glance. At the left hand side the full nine months comparison and on the right hand side the comparisons of the third quarter this year's with last year's, so to get an idea of the dynamics within the year. As you can see the Group's revenue was almost unchanged versus last year, at €22.8 billion for the first nine months or €8.3 billion for the third quarter respectively.
Key driver for the reduction of Group revenue was the significant reduction in cargo revenues. We are introducing the normalized operating profit mix to the operating profit here, as we will look into these in more detail in a minute.
EBIDTA and net profit have changed in line with the operating profits and are hence below previous year. The cash flow development is indeed very pleasant. We see an increase for the first nine months of roughly 24%. The good improvement of the equity ratio is partly owed to the positive results, underdevelopment in the interest rates, but it is also a consequence of the significant reduction in net debt. Markets capitalization finally is roughly on the same level as at the beginning of the year.
So let us move on and have a look at the sectors that have influenced the year-on-year development. We come to the same bridge now. You know it's already from the half year results. Before we cross it let me say some words. As much as you I prefer a clear transparent view on the financial development of the business. We certainly do not produce these kind of bridges to either confuse or distress anyone from the reported numbers. Whereas we are working towards our financial target of €2.3 billion of operating profit in 2015, we need to prove for us as well as for you that we are making progress in the underlying business.
As you know a substantial part of the profit improvement we are expecting for 2015 will come from one-off cost going away, and the science of them is expected to increase next year with project costs climbing to some €300 million.
So please expect us to further strip out core restructuring and project costs to allow for better judgment whether we are on track to achieve our profit targets or not.
And now, let's cross the bridge and come to the Q3 numbers. On the upper part of the slide you see the full nine months. Last year's nine months profit of €907 million was overstated by €325 million due to multiple one-off items. The main one-off came from the transfer of operations from Austrian Airlines to Tyrolean Airways that lead to a reduction in pension provision, which was booked as a profit. This was clearly a one-time event. Also included were one-off effect from the default PMI pension provision. Adjusted for these positive effects and €27 million restructuring costs, the comparable profits for last year's period would have been €582 million.
In this year's nine month profit we have booked restructuring costs of €168 million. These are provision charges that we make for staffs leaving the company either immediately or in the mid-term, as long as there is certainty these employees will be leaving the company.
You see in the lower part of the slide, that in the third quarter alone, we had almost €100 million charges. The main reason for this high numbers that we achieved an important milestone in the streamlining of administrative processes at Lufthansa Passenger Airlines, as Christoph explained to you earlier.
Besides the provisions made for redundancies we also saw the first project cost caused by the accelerated product upgrades in the passenger business. These costs are for example additional expenses for maintenance work, downtime of aircraft, certification cost of a new product, and some of these more.
The magnitude of project cost that we currently have go beyond a regular business year. So we show them as one-off items as well. Excluding these one-off costs, the operating profit in the first nine months of 2013 would have been €859 million. And this means an increase of €277 million versus last year.
During the same month for the third quarter, we see that the operating profit improved by €44 million versus Q3, 2012. This means we are able to reach an underlying improvement in the third quarter, but admittedly at a slower pace. The reason for this was an additional head win on the revenue side as many currieries weekend strongly against the euro. This development in the quarter reminds us that head wins can occur anytime and we must always find a way to compensate them to avoid longer-term impact. It is a call for pushing continuously for the measures that we have in this called pipeline and we reiterate that, if this is not enough we must think about additional actions if needed.
And our cost performance shows that we have been and we are doing the right things, excluding both the one-off cost on the one hand but also we have some lower fuel cost, our cost went down by 0.9% in the first nine months. And as you can see we had declines in most staff cost position.
The staff cost line however shows a strong increase of 13.1% here. And here you find the restructuring cost. Excluding those staff cost would have been up by 3.1% and of this 2.2% were due to the lower pension interest rates that had no cash effect. In Q3, non-fuel cost increased slightly by 0.4% and staff cost increased by 4.6%. Both figures are normalized for one-off items again.
As always, a detailed overview of translating the profit from operating activities into the operating profit can be found in the annex. In there you will find for example, book gains or losses that are not included in the operating result.
Impairment charges on the aircraft that became held for sale are not included in the operating results as we consider them to be non-operational too.
Due to the accelerated fleet rollover we have been however €159 million in the first nine months, a significant increase of €76 million year-on-year. This is a phenomenon that we've seen for some quarters now. Due to the accelerated fleet rollover specific aircrafts are leaving the fleet for sale prices lower than the residual book value.
As you know, we currently write-down our aircraft over 12 years to residual book value of 16%. Against this background and in accordance with IAS 16, it is likely we will have to adapt our depreciation policy in order to avoid these regular and significant impairments in the future. Therefore we will review our depreciation policy jointly with our auditors over the next couple of months. This could alter any depreciation period and the residual value target. We will update you on the outcome probably in March with a release of the annual accounts.
Let me conclude the Group numbers with a cash flow statement. The operating cash flow was strong in the first nine months and was not distorted by multiple one-off. It grew by €491 million to €3 billion. This did cover of course our net investment €1.4 billion comfortly, leaving us with a free cash flow of €1.6 billion. And as a result, our liquidity position further improved to now €5.4 billion and net debt could be reduced as I have already shown you in the beginning.
We are very pleased with this development as it will ultimately pave the way for higher equity ratio as we had expected it.
In order to better understand the underlying business performance let us now take a look into the segment. As you would see we have put explanatory banners to any segment, which has been impacted by one-off factors, either in this year's or the previous year's period. Let's take others and consolidation as an example. We show that the operating result was impacted by €168 million restructuring costs, hence the strong decline.
For Logistics, MRO, Catering, and IT we are looking at clean numbers. In Logistics, the operating profit reduced to €43 million, a decline of €24 million, which fully occurred in the third quarter. As Christoph said, Lufthansa Cargo for the first nine months was suffering from the poor market condition and other than anticipated in the summer the demand did not come back in that period. MRO, on the other hand showed an exceptionally strong performance. Its revenue grew by 3.6%, which was mainly driven by growth in external business. As the operating expenses remained on a similar level to previous years due to exceptionally good cost control, the result improved to €333 million. Catering saw a decline in operating result of €12 million to €63 million.
The company had refocused its portfolio of subsidiaries and for example one of its very successful subsidiaries LSG in the UK was integrated into a 50:50 joint venture and has turned from an above the line to a below the line contributor. As a consequence here external revenue was lower and profit declined.
IT service was able to improve its results by €4 million to €17million. This was primarily driven by revenue growth both internally and externally. The measures implemented at Lufthansa Systems have been effective. Our IT segment is successful in many fields of its business. However, the operating result is still lagging behind our expectations. We therefore plan together with the management of Lufthansa Systems to outsource the infrastructure segment to a major international player. We intend to improve the overall global competitiveness and profitability of Lufthansa Systems and secure jobs with this move.
In the passenger business you have to be aware of the multiple one-off effects. There were percentage change year on year are misleading. The Passenger Airline Group has achieved €497 million of operating profit in the first nine months. If we adjust for one-off effect we've discussed earlier this is in profit improvement of more than €200 million. In the third quarter alone the Passenger Airline Group produced an operating profit of €561 million at a margin of 8.5%. All airlines have been contributed to the better result. Lufthansa Passenger Airlines, which includes Germanwings, increased their operating results by €189 million to €300 million despite the additional project cost of €30 million.
SWISS improved its profit by €9 million to €182 million. These equates to an operating margin of 5.7% in the first nine months and about 10% in the third quarter.
Austrian generated €90 million in operating profit, which is a good development. Excluding the high one-off in the previous year, it means some €10 million improvement year on year. The Passenger Airline Group in general thus developed well in the first nine months. We must acknowledge however that in the third quarter the profit improvement slowed down. The main reason for the slowdown in passenger business were head wins on the revenue side.
In the third quarter, many currencies devaluated further than before against the euro. And this was no longer a single phenomenon for the Asian currencies but happened across all regions and currency. It was the negative currency effect that caused the yield decline of 3.1%. On a constant currency basis, the yield would have been up by 0.5%, which is better than in the first two quarters of this year.
Volume still outplays capacity growth in Q3, which drove load factors further by 0.7% points. From a regional perspective the trends remain the same as in the previous quarters, but were more pronounced in the third.
European and Americas traffic showed the strongest performance but in the Americas we have now also seen a currency impact in our deals. The underlying situation did not change though.
On a constant currency basis, shortfall yields would have been roughly stable and on the Transatlantic route the yields would have been up by 2.5%, which is fully in line with the previous quarter.
Asia-Pacific has been the weak spot again with yields down almost 10% in Q3. On a constant currency basis the yield figures however improved in Q3 relatively to the first two quarters of this year and we also managed to increase the load factor slightly. This is some progress but the situation remains depressed over all the Asia-Pacific region.
In mid-east and Africa we had a positive development. Yields were up 3% in the third quarter and even 7.6% on a constant currency basis.
While the revenue side remains disappointing, I'm happy to report to you that our unit cost provision improved again. In the first nine months, the non-fuel cost reduced by 1.2% and in the third quarter we even managed to reduce the non-fuel costs by 2.6%. This is the desired outcome from our measures. The RASK although showed a similar development it has come down in the third quarter. So while both revenue and costs are currently coming down they do at a different pace. We see the gap between them widen. We are hence further stabilizing our margin and have been able to compensate for the additional head wins. We must now continue to reduce unit costs further and stimulate the RASK in order to see a material earning progression again.
As far as the rest of the year is concerned we expect the trends that we have seen in Q3 to continue. The forward bookings indicate growth in passenger volumes year on year while the Passenger Airline Group will keep its capacity growth at around 1% in the winter timetable. We therefore expect a further improvement in those sectors. The regional pattern should be similar in Q4 too.
As the currency situation has not materially changed, the yields have remained depressed for the moment. As far as cargo is concerned we again remain cautiously optimistic about the peak season this year. Last year the peak season started end of November and we do think that it started earlier this year. Crucial will be however that our global price increase of some 20% will stick. Effective date for the price increase is today and we will be monitoring it closely.
Cargo plans for the capacity increase of around 6% in the fourth quarter, which means constant capacity on a full year view.
On the fuel side, we currently see a little relief. For the full year 2013, the fuel cost forecast now stands at €7.1 billion. As I indicated last week during our call already, which is less than the €7.2 billion, we had expected a couple of weeks ago. This means €300 million lower fuel cost in 2013 versus 2012. Given that we had €161 million lower cost in the first nine months. We should now been seeing more than €100 million benefits in the fourth quarter.
Taking the first nine months results and the current trading trends into account, we have updated the outlooks for our business segments. For Catering and IT services the profit outlook is unchanged. Catering expects to recoup the profit decline from the first nine months. The LSG Sky Shaft still expects a full year operating profit on previous year's levels. IT services will improve on last year's profit as they had already shown in the first nine months.
We also see the very strong performance at MRO continuing. Thus for the full year we now expect a significant profit improvement compared to the €328 million reported last year.
For the logistics, given the lesser than expected recovery in the trade business, and the weak performance in the third and fourth quarter, we have become more cautious. However Lufthansa Cargo will be profitable, and should report an operating result in the high double-digits.
Within the Passenger Airline Group all airlines should improve or in the case of SWISS at least maintain their profit levels. As we are expecting stable revenues in this segment, this would mean higher margins.
The expectation for the segment as a whole is broadly unchanged. After the moderate profit development in Q3 and the head wins on the revenue side, the potential for the rest of the year however is limited. The passenger business will certainly show an increase compared to the reported number of last year, which was €258 million, as we will probably stay below the restated number of €556 million.
We have already communicated our updated Group forecast last week. Given the developments I just explained we expect the operating profit to be in a range of €600 million to €700 million including one-off costs of some €300 million. These are some €20 million higher than in our previous forecast.
On the one hand we're making good progress implementing SCORE measures on the staff side as Christoph has shown. Therefore we should see around €200 million restructuring costs instead of €160 million as we expected earlier.
On the other hand we lowered our project cost projection to €100 million this year. This is €20 million lower than assumed a couple of weeks ago. The reasons are simply that the retrofitting of a few aircrafts has been rescheduled from the end of this year to the beginning of next year and that most of the project costs are being priced in U.S. dollars. So we get at least some relief from the weaker currencies.
Leaving this non-recurring cost aside, the operating profit before one-off costs will be in between €900 million and €1 billion this year. This is a respectable outcome in my eyes and shows that our efforts are paying off. And with this good message we are concluding this summary. And I'm happy to take your questions now.
Operator, are there any questions?
(Operator Instructions) And the first question today comes from Mr. Neil Glynn of Credit Suisse. Please go ahead.
Neil Glynn - Credit Suisse
If I could firstly ask a question with respect to the revenue environment and your actions with respect to that. It's very clear that revenue is obviously the issue today while cost developments are on track. And, Simone, you mentioned a need to stimulate RASK so I'm interested in terms of your view as to what can be done besides hoping for FX to change. For example, the U.S. carriers seem to be cutting capacity to Japan so perhaps is that a potential for you? And then just a couple of follow-ons if I can. You mentioned the operating cash flow as being the best way to consider developments year-to-date but operating cash flow was down 10% year on year in the third quarter, so just interested in understanding why that was. And then, finally, with respect to the fuel bill for next year, I'm just conscious that with ASKs going by 5%, I would assume fuel consumption doesn't grow by that length. We've also had the dollar weaken clearly over recent weeks so interested in terms of what you can say with respect to the fuel bill for next year at this point. Thank you.
Okay, Neil. Well what are we doing in revenue and I take here Japan as an example. We do exactly what the American carriers are doing. So we are reducing capacity by taking lower -- smaller aircraft. So we switched from AC-80 to 747 for example. We are pretty happy with our joint venture with the ANA. But we also try to switch the point of sales from Japan to other areas of the world, especially Europe to not see this strong effect in the currency. And things like that, actions like that, we look into in the different region, which we are -- we have in the whole world where we have the currency problem.
And so the cash flow, why was the operating cash flow down in the quarter three? It sounds it's 10% and it sounds like a strong decrease, but in absolute numbers we are talking of a double-digit figure here and it's a working capital effect. So that is also related to the currency, the negative currency development also means that any foreign exchange cash-in has become lower euro cash-in. So we are -- I'm pretty relaxed that most of our CapEx is mainly in U.S. dollars.
And then, for the fuel guidance regarding '14, at the moment we do not see a dramatic head win from fuel cost for '14, especially when we look at the euro versus the U.S. dollars. So we will provide you as traditionally in January when I'm in New York with clearer figures but no big head wins at the moment expected.
And the next question is from Mr. Steven Furlong of Davy. Please go ahead.
Steven Furlong - Davy
Hi, Simone and Andreas. Can I just ask about SCORE and more in costs? And I noticed that there was may be €450 million odd increase in the growth contribution pipeline for '14/'15; may you could tell us what they are. Presumably, they're just smaller contracts or projects that just add up to that number. And I know that's just a pipeline or ideal status. The second thing, I'm just wondering may be just on SCORE if you could just talk a bit about one of the big chunks of SCORE which wasn't mentioned by Christoph but I know it's like somewhere near €500 million, the procurement side. Might just talk about the synergy potential there in terms of joint sourcing in the different businesses. And finally on SCORE, in terms of the further head wins, could you just give us some idea what assumptions you're assuming in terms of broadening your budgets for revenue in the head wins for SCORE? Is it kind of a flattish unit revenue in '14 or '15 or is it kind of a variable number really? Thank you.
Okay, Steven. If I understood correctly, one of the questions was the increase in the SCORE pipeline?
Steven Furlong - Davy
Well, we are impressed by the ideas of our employees. And so we are really making good progress. I know of one major because I just spoke to a Project Manager, about the fuel efficiency and he is managing all over the Group the fuel efficiency program. And they increased their target but we also have further smaller initiatives where we see progress and so it's constantly flowing in. At the moment, it's actually execution implementation; it's not the lack of ideas. So we are pretty happy with that.
Regarding the procurement. Again, yes we are making progress here. We have initiative. We have stabilized our matrix organization with lead buyers in the different companies, being responsible for special groups of procurement. We are doing the indirect sales in the shared service center now and started with the first wave of indirect sale.
We have some good impact in IT, where last year we introduced a centralized IT procurement for the whole group and there we have also some good double-digit million results already, so that we are very confident also with the procurement part. And as you know, procurement, you make the contract and then you have the sustainable result, so it's coming in month by month.
Revenue expectation. Well, we have a conservative approach, but no specific guidance here. So I don't see at the moment but it's pretty difficult to forecast for the next two years. But I think we have a conservative approach and I have no major concerns here.
The next question is from Mr. Jarrod Castle of UBS. Please go ahead.
Jarrod Castle - UBS
Good afternoon and a number, if I may. Just given the cash flow development, any thoughts on where that will be utilized, i.e. potential pension top-ups, potential return to shareholders in terms of some form of dividend? Secondly, just on potential savings on the pension program going from defined benefit to defined contribution, have you got any ideas at this stage in terms of what the positive P&L impact may or not be? And then just lastly on cargo, I mean, I think you've been quite consistent saying that hopefully there's going to be a pick-up during this quarter. It seems like there's a lot of mixed messages from other competitors. Today, we had Air France, which was a bit more cautious; the same can be said about Atlas Air, yourselves and potentially some of the flight forward a little bit more positive. And, again, I'll just come back to although volumes are picking up, are there any indications that pricing will be sticky, in your view?
Okay Jarrod, so let's start with the cash flow. Well we will use a lot of it for the fleet obviously. So you know the orders and you know the order book and so that we have for some investments in CapEx in the next two years, which will be higher than this year's number.
For the pension, we stay with the policy as we had in the last years of round about €600 million, which was paid into the pension fund. For the dividend, we stay with the policy and to the remarks we had that we want to pay dividend as soon as we have and we see positive development and a positive trend. So, I think you rightly pointed out the three areas where we will use the cash flow.
For the pension changes and the impact, I cannot say too much, yet we have to negotiate it. And so it is depending from the negotiations with the Unions. I think the important part here is not the savings as such on the P&L, but it's also the risk and the forward long-term deficit we would assume or we would accelerate if we have a defined benefit program. So I think we do two things here, negotiate a new contract and there may be savings, but I cannot promise anything as it is a union contract and we have the reduced risk and that is very important thing I think which you will all also respect.
For the cargo, we have actually some figures, which made me confident. We -- as you can imagine whenever I go for a call now saying we see some improvements. The day before I have a telephone conference with our cargo CEO and they really are seeing numbers roughly and I'm talking this week now 8% increase in some areas about 2012. So we see Christmas business is catching up earlier than last year. Last year, as I said it was end of November. And so that is the indication its China, its Hong Kong and it's also partly in North Atlantic.
Jarrod Castle - UBS
And slightly just a quick one, if I may, and I'm just wondering what the answer is going to be. But clearly, a lot of SCORE growth contribution in 2014 clearly restructuring and project costs, would we expect a net benefit without quantifying the -- the restructuring costs would still need to be quantified in terms of the budget? Can you say anything on that at the moment?
You would like to have the net result for next year or --?
I think Jarrod is asking if you want to give some guidance if we end up next year, above this year in operating results. Right, Jarrod?
Jarrod Castle - UBS
You're a smarter man than me, Andreas.
Well, no guidance yet. I think we will give you a guidance in March.
And the next question is from Ms. Penny Butcher of Morgan Stanley. Please go ahead.
Penny Butcher - Morgan Stanley
Two questions from my side. The first is just to come back on the currency effect point; in particular, I think Simone, you highlighted that the I guess underlying trading trends in Americas and Europe remain the same as Q2 in terms of the underlying yields. Can you explain just exactly which currencies in Europe are the issue that sort of caused the wider gap to the reported number during the 3Q, just so we can sort of understand the exposures a little better? And my second question is in relation to Austrian; you have a paragraph in the release today that's explaining the current legal situation that you're in with regard to the transfer of employees; what is the worst case outcome there? So if the appeal is unsuccessful, what is it exactly that you will have to do if you are unsuccessful and how does that affect the restructuring? Thanks.
Okay, Penny let's start with the currencies talking about European currencies; we are talking mainly about the Swiss Franc. Well, I know Swiss is not considering themselves being Europe, but that is the main impact in what we see in Europe. And mostly it is actually Europe is impacted when we have tickets bought outside of the euro. So that's mainly what's happening in Europe.
But you're absolutely right for the underlying business especially for North America, we see a stable frontier. For the Austrian cost case, it is a quite complex case and we think and we are pretty confident that we even got within the judgment a way to prove that we will win in the second revision. Well it's too complex to explain here, but we are pretty confident. So I'm reluctant to talk about the worst case scenario being, because I really do not think it is necessary to think about it and we do not have according to our legal judgment any concerns here. But should it be then we should have to repay. But again I could exclude that even beyond the judgment as we are also pan [ph] parallel in negotiations with the Unions and we are quite optimistic that we also will negotiate a good deal. So we will not go back to square zero.
Penny Butcher - Morgan Stanley
Okay. And I suppose your view is you're not intending to change any part of the Austrian business plan given your views on a likely positive outcome?
No, we don't change the business plan. We are very positive about the development Austrian is doing. They just signed a very good deal with the ground staff. So no reason to change the business plan here.
A small detail for those of you who are looking into it. You will see that SWISS will be reporting and that they're expecting an operating result above previous year, but in Swiss Franc. However the Group guidance for SWISS is that it will be on par with last year in euros. Just a touch because you came from that angle, Penny, where does the weakness and European traffic come from it's really translating effect -- some effect.
And the next question is from Mr. Tim Marshall of Redburn. Go ahead.
Tim Marshall - Redburn
Hi there. The capacity growth starts up again next year but as it's coming, as I understand at least more in the back of the plane I wonder if you can give us a number as to what the growth in economy capacity would be. And then sort of thinking -- fundamentally, Lufthansa, you kind of position the airline as the premium customers and that's really sort of particularly on long-haul where the focus has been; by growing more in the economy business is there a risk it takes you more into competition with the Middle Eastern Airlines routes all those Asian routes? And then how confident are you that you can fill those extra seats without suffering from those competitive effects?
Okay, Tim, yes, the growth is coming out of the size of the aircraft as you well mentioned. And therefore we will have the structural change that there is a higher percentage of economy class seats. I cannot yet give you a number for the growth in the economy class. We also obviously have the implementation of the premium economy class here. So we also have a better product in the economy. So it's not only the economy class we have today, it is also the common economy class -- the premium economy class we will implement.
We still have the bigger first class of the world fleet and most probably also the biggest business class. So I think the growth in the economy does not put us into a weak position having too much of economy or not enough for premium. We will develop for the five-stars, for the premium customer, and again also our economy class product is pretty well. So I don’t see that we are exposed more than today for the Gulf carriers.
Tim Marshall - Redburn
And then just one more question on the sort of differences which are fairly notable in terms of your performance in Asia compared to Air France, say, on a unit revenue basis, excluding currency, where they were up and you were down. But then it's sort of flip side on Africa and the Middle East where you seem to do particularly much better than them; is there any sort of reasons that you can think that there would be such a difference between the performance of the businesses in the same period?
Well, we are actually we heard the numbers this morning and we --
Tim Marshall - Redburn
You've been given loads of time to think about it?
Yes, that's it and we were discussing it here, so you can assume before we had the call. We do not yet have a good reason, which jumps into our mind. We have at least not in Asia. In Africa, we have a lower capacity and a lower CBL factor and a higher yield. And so that is for Africa. But for Asia, we have to go into a deeper analysis before I can answer your question.
Tim Marshall - Redburn
And just thinking out loud sorry, I'm going to ask another question.
Tim Marshall - Redburn
Just thinking out loud, within the Americas there's been quite a bit of capacity that you've put into Latin America, which is obviously a smaller business for the other two. Has there been a big difference in the unit revenues between the North Atlantic and the South Atlantic?
A big, you mean in yield. So a big difference in the yields in North Atlantic and South.
Tim Marshall - Redburn
I do not have the figures roughly; gut feeling there is a difference. North Atlantic should be higher.
The next question is from Damian Brewer of RBC. Please go ahead.
Damian Brewer - RBC
Just a couple of questions, please. First of all, on the aircraft ownership structure, historically you've owned and had a lot of your fleet as being unencumbered; given the kind of impairments you're now having to make, is there any review of that policy going on? Would you look at a more of an ownership versus lease mix in future? The business is about operating rather than taking asset value risk. And then secondly, on the cargo side, obviously the cargo profits are down but you're still profitable and that seems to be pretty rare in this industry; what do you think is making the difference? Is it the higher value verticals you address in the business and is there more that you can do on that or is there something else that's in there that's making such a big difference?
That was only two questions. I was expecting more Damian, okay fine. And aircraft ownership, no, we don't want to change that telepathy. We did, as you can imagine, do a calculation when we did the fleet order what would lease mean in comparison to ownership or to regarding costs. Definitely and as we are in a good position to finance our aircraft, lease would be more expensive so higher cost. So we don't see that it would be a good move.
Secondly and that is related to the cargo profitability. We had a good experience with owning aircraft and then make our choice as to breathe with that capacity. And that is exactly what cargo is doing. Cargo is owning 18 MD-11, which mainly are owned by us and which are mainly fully depreciated. So if there is no market you can take that aircraft and take out the capacity without additional lease cost and obviously you save a lot of other variable cost and cargo is really good and managing this capacity and taking out variable cost according to the market. So therefore they are still profitable despite the fact that the market is difficult. There is a yield premium cargo can achieve also that is because they are pretty good in their differentiation of product of high class product. And as I mentioned earlier they are increasing the price at the moment. We are monitoring that if we can be successful with that.
Damian Brewer - RBC
And just as a follow-on on the aircraft ownership the review you will take may be leading into next March where that covers simply depreciable lives or will that look at the kind of residual value assumptions that are being taken as well or both?
It has to be looking at all because according to the accounting rules IAS and 16 we have to reflect the reality. So we look into both.
Damian Brewer - RBC
And one would assume the A342 fleet the most at risk during that review. Would that be correct?
No, not necessarily.
And the next question is from Mr. Donal O’Neill of Goodbody. Go ahead.
Donal O’Neill - Goodbody
A couple of questions from me. First of all, you've given an overall RASK performance in the nine months in the quarter. Is there any chance you could split that out over the regions, for the nine months, or the quarter indeed? Secondly, is there any update yet on the pilot negotiations? And lastly, just again on pricing, can you give us an idea about how premium has been performing from a pricing perspective, versus the economy classes? Thanks.
Okay. For the RASK for the regions, we cannot give that to you today. So may be if you stay in contact with our -- I look at some faces here because I just giving orders. But so Investors Relation please contact them, I don't have the details here today.
For the pilot negotiation there is an amended offer to our pilot union and we are confident that compromise can be reached, but the negotiations are still going on and it is partly also within the negotiations of the pension. So but we are pretty confident that a compromise can be reached here.
Regarding the pricing I don't have figures in front of me regarding the development. If I understood you correctly you want to know if pricing and premium develop differently to pricing to economy, did I understand you correct?
Donal O’Neill - Goodbody
Yes, exactly. Exactly, yes.
It was all stable per booking class, Donal.
And the next question is from Mr. Andrew Lobbenberg of HSBC. Please go ahead.
Andrew Lobbenberg - HSBC
Oh, hi Simone, hi Andreas. Could I ask you -- I think there was a mention from Christoph about the hopes of transport policy from the new government, as it endeavors to get formed. Could you talk a little bit about what your hopes are that you could try and get out of the new government in terms of transportation policy? Then I think may be last week, or so, there was some discussion that talks with Turkish were on the back burner. Could you just -- chat to us a little bit about why that didn't progress faster, or when you think it might progress faster perhaps? And then, just as a final question, coming back to the capacity issue for Summer '14 -- clearly that's a big debating point for the market. And clearly you've got a very clear issue of using larger aircraft to get your unit costs down. But what would cause you to lower your capacity assumptions for Summer 2014; what would be the triggers to call you to do that? And to what extent have you got that planning in process?
Okay, Andrew, yeah. Let's start with the policy, and the negotiations going on here with a political party is to build a new government. We are strongly asking for an abolishment of the passenger tax and we -- it depends a little bit of what party will win I assume, but that is just definitely something we are asking for. We are not impressed by the decision in Brussels regarding the emission and but again that's not the German government doing that. There is a financial transaction tax, which I strongly want and strongly made the demand that this should not be implemented because it has an impact also on us regarding our hedging into our pension. So that is the list we want to be looked at from the coalition negotiation here in Germany.
Regarding Turkish. Well, I attend a panel discussion last week and the only thing I said is just, there is no further development and the doors are always open. So there is actually no news and I wonder why it made up into the news, may be because there was nothing else to report but so no development but neither further or back.
And regarding the capacity. Well, there is a general rule which would made us consider to reduce capacity and that is if RASK falls below cash and we need to reconsider the capacity plan. As you rightly say, the increase in capacity comes just out of the fleet rollover. So reducing the capacity would just mean that we're flying with fewer aircraft and that we can do as I just explained because we have depreciated aircraft but that would be a huge market decline necessary, or the general rule I just mentioned.
Andrew Lobbenberg - HSBC
Okay, lovely, thanks. If I could just cheekily although I suspect the answer's a quick no, but is -- can you give us any indication of when there would be news about the succession for the CEO role?
I give you quick no.
And the next question is of Oliver Sleath of Barclays. Please go ahead.
Oliver Sleath - Barclays
Just two questions from me, please. First of all, on unit costs, we've seen an impressive development in unit cost decline so far this year. I just wondered, thinking about into next year with the SCORE pipeline, the capacity growth in the larger aircrafts, could we expect to see that rate of decline even accelerate; any color you could give there? And then secondly, on the capacity topic again, but specifically for the Transatlantic, from where you sit today how do you see the capacity on the Transatlantic into next Summer, looking at the timetables both from yourselves and from other airlines? Thank you.
Okay. The unit cost, there should be acceleration actually yes, because as you rightly said, we are implementing more and more SCORE measures and we have different planes. So we expect an acceleration, yes of the decline.
And North Atlantic was difficult to say at the moment because I did not yet see the figures from competitors. There is a temptation I assume because the market is developing good. We will pay close attention to not destroy the market. So -- I do not have any more of that.
And the next question is of Robin Byde of Cantor Fitzgerald. Please go ahead.
Robin Byde - Cantor Fitzgerald
Just one from me, please. Just on staff costs, excluding one-offs, these were still up just over 3% at the nine month period, and 4.6% at Q3. So can you just remind us what are the moving parts there? And is there any chance you can give us any guidance on staff costs into next year? Thank you.
Okay, yeah, if we take out the one-offs, there is an increase and it's mainly in pensions and interest rates and that of course is very much depending of the development of the interest rate. But there is also some restructuring costs included. So it should be lower next year but there is an inflation part, which would mean there is no decrease but a small increase next year.
(Operator Instructions) And our next question is from Alexia Dogani of Goldman Sachs. Please go ahead.
Alexia Dogani - Goldman Sachs
I had two questions.
Alexia, could you please speak up it's very difficult to understand?
Alexia Dogani - Goldman Sachs
Oh, I'm sorry. Sorry, apologies, hi. I had two questions as well. And just firstly, in terms of the capacity growth plan for 2014, and the 5% growth rate you talked about for all Lufthansa Passenger Airlines, can you talk about whether it's a similar growth rate for the rest of the companies? And I wondered also if you could give us a RASK lead between long-haul and short-haul. And then, just following on from that point, you mentioned, Simone, that you are putting smaller aircraft into Japan. Where are the larger aircraft going to be reallocated? And then my second question is just on -- corporate demand. I guess what are you seeing out of the German corporates, and I wondered if you had them in hand the statistic you usually give us, which is the premium revenues as a percentage of long-haul. Thanks.
Okay. Let me start with a very easy one, the A380 is going to New York. So which is a very good season now to go to New York for Christmas shopping? So I think that it's good to fill that aircraft to New York now.
When we talk about the German corporates, I'm just looking up the statistics. I guess I'm not clear that we have it available; if I cannot tell it to you today in this call you can contact Investor Relations. The capacity growth is 5%. Well for the rest of the company, so the other airlines and there is no, or there is less growth than the 5%. And I cannot give you a breakdown, but it's definitely less than 5% for the other group companies.
For the premium share, yes, we want to decline from 49.3% to 47%, but that's more the structural effect, which we talked about earlier, having bigger planes, having a bigger share of economy class then corporates not flying with us. So we don't in the booking classes, we don't see decline and no different behavior from the German corporate in comparison to former periods. So we're quite stable. So the decline you see 49.3% to 47% it's just -- its structural change and not different behavior.
Alexia Dogani - Goldman Sachs
And I guess did you have any feel as to the long-haul versus short-haul split of the 5%?
It will be more the long-haul than the short-haul.
We have no further questions at this time.
Then, thank you all very much for the pleasure as usual.
Thanks a lot. See some of you on the Road Show hopefully. Looking forward to that.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Good bye.