Frank Hulsmann – Head, Investor Relations
Stephan Gemkow – Chief Financial Officer
Samantha – Analyst
Andrew – Analyst
Steven – Analyst
Robin – Analyst
Petty – Analyst
Deutsche Lufthansa AG (DLAKY.PK) Q2 2010 Earnings Call July 29, 2010 1:00 PM ET
Thank you very much. And welcome everybody to our conference call. We had a weak start into the year and it was a weak start into the day. Both show some improving trends and if we now manage to transform our outlook also into the stock price that would be a really good one.
But let me cut myself short and hand over to our CFO, Stephan Gemkow, for the discussion of our half year results and the outlook with you.
So far, the year 2010 has seen just as much thrill and rapid change as last year. When we published our results for the first quarter of 2010, I started my presentation by saying just that and this still continues to be the case.
However, beside from April’s volcanic eruption in Iceland and the following the following airspace closures, developments were much more positive in the second quarter. Growing demand, especially in cargo and intercontinental passenger traffic, the wage agreement with the pilots’ union and the trade union ver.di, the positive balance sheet effect of the Amadeus IPO and the transfer of Fraport shares into the pension fund all give us grounds for optimism for the remainder of 2010.
But first of all, let me begin as usual with an overview of the Group’s financial key figures. We were able to boost revenue by 23.5% to €12.6 billion. Adjusted for the effects of the newly consolidated companies, primarily Austrian Airlines and bmi, the increase corresponded to 9.9% with revenue amounting to €11.2 billion. The consolidation effect of the new airlines inevitably has the greatest impact on traffic revenue.
At €10.2 billion, this was 30% up on the year, excluding the newly-consolidated companies it was still 12.6% higher than in the previous year at €8.8 billion. However, it should be remembered that the first half of last year was hit hard by the slump in demand and tumbling prices in particular.
Although, the strong second quarter improved the operating results for the first half year, this figure remained negative at minus €171 million. This took the operating margin to minus 1%, 1.5 percentage points lower than in the first six month of 2009.
However, at €64 million, EBIT was well above the previous year’s €1 million. The net loss for the period was minus €104 million, another improvement on the previous year, when the Group reported the figure of minus €178 million.
At 37.9%, the cash flow from operating activities also improved year-on-year, coming in at €1.4 billion. This meant that capital expenditure was comfortably covered. Gross capital expenditure totaled €974 million, where net CapEx was €418 million.
Net debt was successfully reduced from €2.2 billion at the end of 2009 to now €1.8 billion. As a consequence, the equity ratio rose to 24.3%. These operational and balance sheet improvements contrasted with our market capitalization per end of June of €5.2 billion, a 3% drop vis-à-vis year-end 2009. The current figure is somewhat around €5.8 billion.
The figures for the first half were majority shaped by three factors, changes in the group of consolidated companies, non-recurring factors and the underlying recovery in demand. The chart number three clearly illustrates this trend. You can see that the Group’s operating result improved from months-to-months.
However, you can also see how nonrecurring effects impacted the first half year. The one-day pilot strike in February, which had an effect of €50 million meant that the results for February was even lower than the weak figure recorded for January.
We managed to return into the black for the first time in March only to be buffeted by natural and primarily political forces in April, when airspace closures led to Group-wide losses of approximately €200 million. In May and June, we once again began turning into a profit and generating considerable growth.
June was a particularly successful month, after a significantly lower result in the first quarter, we were thus able to post, despite the horrendous one-offs to post a 3 times higher operating result in the second quarter compared with last year.
However, the effects of consolidating Austrian and bmi too continue to have a major impact on the financial figures. I have already explained the consequences for revenue. Austrian contributed a €70 million loss towards the operating result, while bmi accounted for minus €93 million. Together, the impact therefore totaled minus €163 million. Adjusted for consolidation effects, the number of employees in the Group fell slightly by 2.3%.
We also observed another trend in the first six months of the year. The balance sheet figures were further improved. As I explained following Q1, the IPO of Amadeus, in which Lufthansa then held a stake of 11.6%, resulted in a positive effect on equity of €434 million.
Furthermore, we transferred the majority that is 8.5% of our 9.9% stake in Fraport to our pension fund in the second quarter. This means we have already paid the first of two customary transits to fund our pension obligations.
As a result, we were able to strengthen both our equity ratio and our cash flow, while nevertheless continuing to capitalize on the opportunities arising from the further development of the Fraport share. Our pension provisions currently amount to €2.6 billion.
Although the balance sheet total increased by almost 12% or €3 billion since year-end 2009, the equity ratio rose to 24.3%. Thanks to lower net debt, gearing, including pension provisions came to just 60.3%, 18.8 percentage points less than at the end of last year. This means, we are already back at the upper end of our target range of 40% to 60%.
Let’s go back to the operational development from the first half year. If we take a closer look at revenue trends in the various segments, we can see that external revenue at the Passenger Airline Group rose by 29% to €9.3 billion. This makes up 74% of Group revenue, excluding consolidation effects, external revenue of the Passenger Group increased by 8.8%.
A rapid upswing in demand and freight rates enabled the Logistics segment to boost its external revenue by 14.6% to €1.3 billion or 10% of Group revenue. This puts it slightly ahead of the MRO Business segment, which recorded a 5.2% drop to €1.2 billion as a result of an anticipated drop in demand.
I should say, though, that part of this drop is really due to the fact that formally external business is now internal due to the consolidation, so if we keep this in mind, the Lufthansa Technik external revenue basically would have shrunk by minus 1.9% and not by 5.2%.
Due to last year’s slump and the ongoing earnings weakness in the air transport sector, many airlines have reduced or postponed capital expenditure. Additionally, the changes in the group of consolidated companies led to the formation of reduction in external revenue.
The course of business for Lufthansa Systems mirrors these trends, as well again, as the new qualification of former external revenue with Austrian and bmi to Group internal revenue. The IT business segment accordingly posted a 6.4% drop in external revenue. Adjusted for the consolidation, it would have been on previous year’s level.
The IT business segment or I should say the Catering business segment succeeded in upping its external revenue slightly thanks to rising demand also in the premium sector. The segment recorded €799 million corresponding to 2.7% growth.
When looking at traffic revenue on chart six, the sharp 30% rise catches the eye first. Of course, this is due in part to the consolidation of the new companies, which made a major contribution of almost €1.4 billion. Higher sales were the second most important factor, accounting for €499 million.
Rising prices had a positive effect of €180 million and finally, exchange rate developments also went in our favor contributing €308 million towards the increase of Traffic revenues. The above-mentioned price effect was also reflected in developments in the various categories.
Overall, the outcome was very positive. The recovery which emerged in the first quarter continued to intensify considerably. In all, we managed to increase traffic revenue in the Passenger Airline Group by 28.8%, compared with the previous year.
I should say that this number is without Germanwings, as this is the not included and that explains the difference to the number mentioned in the quarterly report, where we have inclusive Germanwings 27.9% increase.
Adjusted for the effects of the enlarged group of consolidated companies growth corresponded to 8.8%. With an increase of 20%, sales growth outstripped capacity growth at 16.7%. As a result, the passenger load factor climbed 2.1 percentage points to 82.6%. Average yields improved by 7.4%, driven mainly by the intercontinental traffic regions.
However, let’s start by taking a look at the European traffic. In conjunction with consolidation effects, capacity increased by 30.6% overall, adjusted growth came to just 0.8%. The passenger load factor improved slightly by 1 percentage point, due to the structural shift in demand on short-haul routes, average yields remained 2.8% below the previous year’s figure.
The increase in the adjusted traffic revenue was barely noticeable at 0.2%. Including consolidation effects, growth came to 28.9%. Capacity on Transatlantic routes was stood up by 5.5%. Adjusted for consolidation effects, the figure was 0.7%.
Thanks to 9.2% higher sales, the passenger load factor improved by 2.9 percentage points to 83.9%. At the same time, average yields soared by 13%, as a consequence traffic revenue rose by 23.4%. At 18.8%, the adjusted figure was also encouraging. Developments were equally positive in the Asia Pacific traffic region, which is equally important to us.
Capacity here rose by 6.8%, excluding the new airline Group partners, capacity fell by 5.1%. Sales climbed 14.3% and the customer load factor went 5.5 percentage points to 83.7% as a result. Due to strong demand, average yields were up 12.2%, while traffic revenue gained 28.3% in total, even following adjustments, the increase here and Asia Pacific came to 17.8%.
The only area to show even stronger growth was our smallest traffic region, Middle East, Africa, where traffic revenue soared by 38.6%, excluding Austrian and bmi, the rise was 10.4%. Although capacity was extended by 34.2%, the load factor increased by 1.9 percentage points to 73.3%, thanks to a 37.8% rise in sales.
After eliminating consolidation effects, capacity rose by 4.9% and passenger load factor was 1.7 percentage points up on the previous year. Overall, average yields edged up slightly in this traffic region with a growth of 0.6%.
All in all, the quality of our revenue is also improving again. The share of premium traffic on Lufthansa Passenger Airlines long-haul routes, a very important benchmark for us, rose above 50% again to come in at now 50.8%. Although, this still puts it the below the pre-crisis level, it is well above the previous year’s figure at least.
At present, Transatlantic traffic is also used for international comparisons. These are important routes for Lufthansa Passenger Airlines too, as are our services to Asia. The good news is that in the second quarter, we’re matching our pre-crisis figures in both regions. We can see this by looking at our traffic revenue and average yields have developed since 2007 on chart eight.
Coming to chart nine, we are thus also benefiting from the recovery in income. Nevertheless, we are continuing to focus on cost management, of course, higher revenue went hand-in-hand with an increase in expenses, in total, expenses were up 22.9%. Even excluding consolidation, expenses would have risen. However, at 8.7% or 4.4% adjusted for fuel prices, the growth rate would have been lower than for revenue.
The higher cost of materials and services played a major role here climbing by 26.6%, excluding Austrian and bmi, the rise was still plus 10.5%. This development was primarily driven by a further 56.1% increase in fuel expenses. Adjusted for consolidation effects, the increase still amounts to 36.7%. I will, as usual, return to this later.
By contrast, at plus 1.1%, we kept our staff costs virtually on par with the previous year’s plans. The inclusion of our new subsidiaries takes the increase to 12.1% in total. In terms of depreciation and amortization too, the consolidation prompted a rise totaling 18.4%. The majority of this was accounted for by aircraft depreciation, even after adjustments, the ongoing fleet modernization led to a slight 3.7% increase.
Excluding changes in the group of consolidated companies, a 15.3% rise was recorded for other operating expenses. This was predominantly due to a €440 million increase in foreign exchange losses as a result of exchange rate differences.
This figure includes, among others, losses of €202 million from the valuation of foreign currency borrowing from the reporting date close by the higher U.S. dollar exchange rate. A figure of just €22 million was reported in the previous year. In total, other operating expenses grew by 28.5% for the Group.
A closer look at the expenses for fuel reveals that only the 0.8% reduction in the total quantity had a positive effect. This reduction corresponds to minus €13 million and was attributable to a 4.3% drop in the number of flights.
In spite of this, fuel expenses soared by 56.1% or €874 million to €2.4 billion. This was largely due to a 34.9% increase in the price of fuel, which corresponded to costs of €25 million.
The larger group of consolidated companies ushered in a €302 million or 19.4% rise in expenses. The higher exchange rate for the dollar also drove up expenses by €42 million or 2.6%. At this point, I have to add that though, that this currency driven increase in the fuel was almost completely covered by currency hedges.
As you know, our hedging concept is geared towards minimizing volatility rather than achieving fast profits. In the first half year, it generated a modest hedging loss of €18 million. This is regarding the fuel hedges.
Now, let’s see how that translates into our operating result. Therefore, on chart 11, we adjust the profit from operating activities, which totaled minus €66 million, for various factors to make it easier to compare it with the figures from previous years.
At minus €105 million, the balance of this elimination is considerably higher than in the first half of last year. Totaling minus €242 million, the result from non-current assets and financial investments was a major contributing factor here with a hefty €167 million attributable to book gains on disposals of financial assets, largely in connection with the Amadeus IPO and the transfer of the Fraport shares.
This is offset by the period end valuation of borrowings valued at €176 million, using the exchange rate on the balance sheet to date, which needs to be added on. After subtracting the reversal of provisions, we are left with an operating result which, unlike the figure for H1 2009 is negative at minus €171 million.
The adjusted operating margins that is including the reversal of provisions came in at minus 1%, as I said before, 1.5 percentage points below the figure for the first six months of 2009. However, if we look at the second quarter alone and keep in mind the €200 million one-off, the Group generated an operating profit of €159 million, despite the nonrecurring expenses. This compares favorably with the €52 million posted for the same quarter of the previous year and then without a one-off.
The sizable exchange rate fluctuations only had a minor impact on the operating result in the first half year. Cost increases due to currency movements were offset thanks to hedging and the Group’s almost balanced foreign exchange exposure. Overall, this generated a small positive currency effect of €131 million, equivalent to approximately 1% of Group revenue.
When you look at the individual business segment operating results, you will notice that only the Passenger Airline Group reported an operating loss of €342 million, while all the other business segments made a profit. I will take a closer look at the individual companies within the Passenger Group in a moment but first let’s start with the logistics business segment.
Lufthansa Cargo provides impressive proof of how quickly the company has succeeded in generating a profit on the same scale as Lufthansa Technik, following the dramatic slump in revenue and earnings encountered last year. This is the best first half result we have ever seen in our logistics business segments.
In addition to consistent cost management, this pleasing achievement is attributable to high demand and greatly improved freight rates. Furthermore, we have been seeing shrinking disparities in the Europe Asia traffic flows and this is for the first time in many years, which is benefiting Lufthansa Cargo in particular.
I’m sure you appreciate that given the present market uncertainties and Cargo’s role as an early indicator we are keeping a very close eye on current developments. And let me add that Lufthansa Cargo has posted these record results despite the fact that four aircraft were still grounded in the first half.
At present, we cannot observe a sign of this positive trend slowing down. In the light of this, we now anticipate a substantial positive operating profit for Lufthansa Cargo for the full year 2010, too. Although revenue was down, Lufthansa Technik managed to increase its profits slightly and exceed the previous year’s result.
Lufthansa Technik still expects to process substantial operating profit for the full year 2010. However, the tense earnings position at many [Lufthansa] airlines can be expected to further intensify the existing price pressure in the MRO market. We therefore believe it will be difficult to match the previous year’s high revenue and result.
Lufthansa Systems also saw a decline in revenue in the first six months of the year. However, the company continued with measures initiated in 2009 to safeguard earnings, which enabled it to grow its operating result. We expect this trend to continue throughout the remainder of this year and anticipate a year-on-year improvement in the second half operating results.
LSG Sky Chefs experienced a recovery in demand for catering products in all traffic regions, including in the premium sector and generated an operating profit in the first half of the year. Based on this positive development, we anticipate an operating profit for the full year 2010 that will also be significantly higher than the previous year’s, adjusted for one-off effect of €40 million from a D&O insurance policy.
Now, as promised, let’s look at the profit breakdown for the Passenger Airline Group, which recorded an overall operating loss, as I said, of €342 million. This loss is primarily due to a number of non-recurring effects.
In the first quarter, these were the consequences of the harsh winter, the pilots’ strike, which cost us around €50 million, and rising fuel costs. Then in the second quarter, we faced the airspace closures in April due, I shouldn’t say due, but following the volcanic ash. The impact of this amounted to some €200 million and was largely felt in the Passenger Airline Group. In addition to this, we had the initial consolidation of Austrian and bmi.
Lufthansa Passenger Airlines alone posted a result of €203 million for the first half year -- minus €203 million. Despite the various non-recurring factors, the company was able to improve on its Q1 result with a loss of minus €236, thanks in particular to yield improvements on its long-haul routes. The Climb 2011 program, which I will talk about in more depth later on also contributed here. We expect Lufthansa Passenger Airlines to improve the operating result for the full year.
SWISS managed to grow its profit and contributed €54 million to the business segment’s operating results. Support also came in the form of the Swiss franc’s performance against the euro. For the full year, SWISS continues to assume that it will outperform last year’s operating result.
Austrian Airlines also succeeded in displaying improvements in all its traffic regions. The Austrian next-generation initiative, the new market and fleet strategy and the network restructuring are all progressing successfully. It remains the objective to significantly reduce the previous year’s operating loss in 2010.
Capacities at bmi were reduced by 22%, as planned, but productivity increased by 15%. We nevertheless expect to see an operating loss albeit a substantially reduced one for the current year. The full effect of the restructuring at bmi should be felt in 2011 and 2012, allowing us to reach our goal of a medium-term return to profitability.
Although Germanwings recorded a slight revenue increase, the company was unable to stop negative factors such as the airspace closures and the high fuel price. As a result, it posted a €39 million loss for the first six months. As the losses can probably not be offset in the second half of the year, we anticipate currently a considerably worse result for the full year than in 2009.
Based on these individual analyses, we expect a clear increase in revenue for the Passenger Airline Group business segment as a whole. Our goal is to make up for the negative earnings contributions still delivered in 2010 by Austrian Airlines and bmi as a result of their first time consolidation and generate a positive overall operating segment -- operating result for the segment.
Going back to Group level, both EBIT and EBITDA improved considerably compared with the first half year of 2009. At €64 million, EBIT was positive in the first six months of 2010, contrasting with minus €151 million in H1 2009. This included €22 million from equity investments, which was up slightly on the previous year’s result of €20 million. The positive EBIT was driven primarily by other financial items, which amounted to plus €108 million, compared with minus €199 million in the previous year.
These included income of €170 million from positive changes in the value of hedging instruments considered as trading transactions under IAS 39, which was offset by new costs of €64 million from the change in the fair value of options used for hedging and you know that since January 1st, these must also be included in the financial result.
The previous year’s figure also included an impairment loss of €140 million on the Fraport shares. After taking depreciation and amortization of €812 million into account, the EBITDA is a substantially positive with €176 for the first half-year of 2010. This is equivalent to a 31.9% rise on the previous year.
The net result of the Group for the period also showed a considerable increase of 41.6%. However, at minus €104 million or minus €0.23 per share in terms of earnings per share, it remains negative. The net interest included in this figure fell by €9 million due, first of all, to the changes in the group of consolidated companies and second, due to increased interest expenses from the new borrowings made in 2009, and in total amounted to minus €147 million.
Despite the pre-tax loss, income tax expenses of €15 million were recorded, due partly to the non-recognition of deferred tax assets on losses incurred by Austrian and bmi. Last year, income taxes had a considerably positive impact on earnings of €117 million.
As the operating business continued to recover, the cash flow from operating activities also rose substantially climbing by €390 to €1.4 billion in the first half. Additionally to the €260 increase in the EBT, this effect was due to improved development of €478 million in the working capital. This essentially reflects the growing recovery in the operating business. Income tax payments of €37 million amongst others had a negative impact on the cash flow.
In the first six months, net capital expenditures totaled €18 million. This meant could once again be financed, is it correct, €418 million, sorry. This meant it could once again be financed by the cash flow from operating activities. The Group generated free cash flow of €1 billion in the first half year of 2010. This was €862 million more than in the previous year.
In the period to June 30th, cash and cash equivalents rose by a total of some €1.1 billion to €5.4 billion. Alongside this, the Group still has a liquidity reserve consisting of non-current securities that can be realized at any time.
These securities are worth €228 million, taking total liquidity to approximately €5.6 billion, more than twice our strategic limit of €2.3 billion. These funds will be used for further investment as part of our fleet modernization program.
There is no doubt that this improved financial profile and the positive earnings prospects were among the reasons why both Moody’s and Standard & Poor’s confirmed their credit ratings for the Lufthansa Group again in July. This means the company continues to be rated better than the industry average from a creditor’s perspective as well.
I come to chart number 17. Wage agreements with our cockpit, cabin and ground staff are an important factor in ensuring that things stay this way. For this reason, I would like to talk about the agreements reached with the pilots’ union, Vereinigung Cockpit and the trade union ver.di.
As you know, the collective bargaining with the pilots’ union Vereinigung Cockpit was brought to a successful conclusion on June 25th in arbitration proceedings led by Dr. (inaudible) after negotiations last lasting over a year. The agreement includes arrangements on wage settlement and framework agreement.
The existing wage settlement was extended retroactively by 24 months until March 31, 2011, resulting in a pay freeze. This is a positive outcome for our cost structure but it also sends out an important signal for the ongoing wage negotiations for the flight attendants in the Group.
We also succeeded in putting important productivity improvements in place. These will reduce costs significantly, especially in European direct traffic and therefore make an important contribution towards the Climb 2011 initiative at Lufthansa Passenger Airlines.
Viewing the negotiations, an agreement was also reached on the matter of defining the regional segment. The previous 70-seater rule was replaced by a new 95-seater threshold and supplemented by a dynamic scope clause.
This arrangement means that in future, slightly more than one-fifth of the smallest aircraft in the Group at the regional airlines can be operated outside the Group wage settlement. This is an important step, as this guarantees sounds development prospects for the regional segment.
Both parties agreed on a floor for the share of cross-border traffic routes that is traffic between the domestic markets of our Group companies, Group airlines, flown by pilots from Lufthansa Passenger Airlines. As this agreement conforms with our strategic alignment for the coming years, it does fortunately not pose any interference.
The same applies to Lufthansa Italia, where it was made clear that the airline’s further development will be built on Italian standard national terms and conditions of employment. This preserves the strategic potential of that airline.
The next rounds of collective bargaining also began with the trade unions for ground and cabin staff, as wage settlements for both areas expired at the end of the first quarter. While negotiations for the flight attendants’ trade union, UFO, are going to be continued at the end of August, on July 7th, and following several rounds of negotiations, Lufthansa and the trade union ver.di reached an agreement on the main points of a wage supplement settlement for around 50,000 employees at the Lufthansa Group in Germany. On July 27th, one day before the acceptance deadline expired, the agreement was approved by the employee representatives.
This entails extending the existing wage agreement up to December 31, 2011, which amounts to a pay freeze lasting 22 months. For the financial year 2011, staff will receive a one-off payment, depending on the profitability of up to 2% of the basic annual salary. The agreement also provides for additional profit sharing. This means that staff can earn a higher profit share payment in the future as business performance permits.
However, there is less pressure on the Group’s cost structure in weak years, which is a sensible arrangement given the cyclical nature of the aviation business. The agreement also lays out how partial retirement will be handled for ground staff in the future, especially for groups of employees working shifts. Details of this are currently being drafted and will be announced in September.
The new crisis clause to replace the one that has just expired will also give us greater flexibility during difficult times. The planned agreement on the use of temporary staff, including the extent and duration of such use will also increase the company’s flexibility and planning certainty.
By the end of November 2010, proposed to use and will be developed in order to improve competitiveness of LSG Sky Chefs and therefore safeguard employees’ prospects and jobs in this very specific business segment. These solutions majority contribute to our Climb 2011 initiative, all projects are being pushed forward.
Until the end of the first half year, we have implemented measures that ensure us 70% of the volume of €300 million planned for 2010 with an upward trend. We hold onto the initiative’s targets. As part of this, we placed an order for another eight regional CRJ900 next-gen aircraft in July. Providing a fuel consumption of less than 4 liters per hundred passenger kilometers, these aircraft will replace smaller models in the regional segment with an inferior unit cost profile and lower fuel efficiency in the first half of next year.
To see how important this move is, you only need to look how fuel costs have developed and I’m on chart 19. Our current mix appellation for 2010 still amounts to €5.2 billion at a futures price of US$76.47 per barrel of oil. This includes consolidation effects totaling some €400 million. At present, our breakeven price is between US$77 and US$78. If the market price exceeds this level, we consequently will benefit from our hedges.
Despite the expected increase in expenses, we remain confident because current business developments remain highly satisfactory. Demand for both passenger and freight services are strong and stable. Some rates are even higher than in 2008 before the crisis hit.
Of course, it will be impossible to keep recording high growth rates indefinitely. We will start closing the gap with the benchmark figures in the foreseeable future. Nevertheless, a strong and sustainable recovery in demand gives us grounds for optimism.
Ladies and gentlemen, following all the turbulence of recent years, we’d have liked a smooth flight in the first half of 2010. However, various non-recurring factors in the first four months made for a strong headwind and had a huge impact on the course of business at the Lufthansa Group.
Thanks to the Group’s structural and operational stability, we were nevertheless able to capitalize on dynamic developments in the aviation market and gain altitude. The freight business and intercontinental passenger traffic are developing particularly well.
However, the change in passengers’ travel behavior since the beginning of the crisis is only allowing for a slow recovery in European traffic. It is questionable whether we will see a rapid return of the premium share in this segment, as we had experienced just a few years ago. We will therefore continue to do our homework and keep pursuing the cost management programs at all our companies.
In another pleasing development, our restructuring and integration initiatives are running according to plan and we are already profiting from the synergies within the Airline Group. This does not, however, change the fact that the consolidation of Austrian Airlines and bmi will still have a negative impact on the result for the full year 2010.
We will continue to strive for our profitability targets. The mentioned dynamic business developments seen in recent months have considerably encouraged our confidence that we can achieve these targets. We now anticipate a positive operating result in all business segments for the full year 2010.
This also leads us to continue with our expectations for year-on-year improvement in our operating profit for the Group as a whole. On today’s estimates, we should post an operating profit in line with current market expectations. This means, that we are comfortable with analysts’ current estimates. The range in particular is much more realistic than it was at the beginning of the year and we believe it also realistically reflects the relevant opportunities and risks.
Having said that, I have already explained that as of today at least for Lufthansa I expect more opportunities than risks for 2010, market volatility remains high, though and the industry is, as ever, vulnerable to exogenous influences. It is therefore not possible to quantify the operating result in any more detail at present, even though I realize that -- this means plenty of people will have -- looking at shot 21 will have to get out their graph paper and ruler again. We nevertheless stand by our meanwhile established ambition of sustainably taking the leading position in the air transport industry also in terms of profitability and value creation.
Our ambitions reach, however, well beyond the current financial year, so please allow me to look somewhat further into the future. Where are we heading? I can tell you straightaway that the medium-term prospects for Lufthansa have further improved.
We are represented in all major regions and better than before, and have a balanced, varied customer base. Our cost-cutting measures lead to structural improvement of our profitability. We have not rushed into acquisitions without thinking. Instead, our actions have been carefully considered and based on what makes strategic and commercial sense.
The past and current years have shown the advantages that result from the combination of perspectives in the airline industry, together with the earnings stability of the service companies in our Group. In other words, we jump at least as high as the others, but we take off from a higher point.
Of course, our industry and the Lufthansa crane are still exposed to risks. I have already discussed the structural change in demand for short-haul traffic and our actions to counter this development, as well as, the ongoing restructuring at Austrian Airlines and bmi. Our Group structure and our balance with management support -- risk management support us to address the market volatility.
The proposed German aviation tax poses a problem. If it is introduced, we will be exposed to a one-sided distortion of competition. It is still too early to assess the potential consequences, as the law only exists as a working group draft and the legislation process will take a long time. However, one thing that’s already clear, experiences of aviation taxes in neighboring countries are not encouraging, not even for the federal government.
The capacity increases in the industry, particularly in the Gulf region, is another factor. However, it remains to be seen how the market will develop for this supply and whether sufficient demand can be generated.
Summing up, we believe that we are all well-positioned and that since we feel that our approach has been validated and strengthened. We are confident that we have the best opportunities to capitalize on the coming upswing and keep growing profitably.
Thank you very much for your interest and I’m now looking forward to your questions.
Good afternoon, gentlemen. I was going to ask maybe two or three questions, please. Sorry, first of all, I just want to kind of quantity kind of the range, because -- of consensus estimates and if you can kind of confirm that that’s the range you’re happy with. I see operating profit of around €200 to close to €600 million. Is this a range you are comfortable with?
With the qualifications I’ve made before, as you said, this is a range which is more reasonable than in the beginning of the year, but of course the consensus lies somewhere in between.
All right. And then just talking about your performance and just looking ahead to the full year, I mean, do you think there’s more of a chance that we could see some dividends at the end of the year?
You know, our dividend policy hasn’t changed.
And provided we produce an operating profit and provided the German GAAP results allow for it, we will continue with our dividend payment. And it is clearly a stated objective that we want to do that.
Thank you. And then just lastly, can you quantify how much of your currency hedging you’ve got going into 2011 on the dollars side, please?
We will have to check this. I don’t have the figure at the moment and we’ll have to see how this, because we have two figures. One is the ongoing cash flow hedges and the other one is the investment hedges but we’ll come back to this later, if you allow us to do so.
Okay. Thank you.
Thank you very much, and good afternoon. Stephan, probably some words on the price trend in cargo. How do you see the current price performance in cargo in the light of that you will introduce some additional freighter in service? Then probably your thoughts about that Air Berlin is joining Oneworld probably in 2012, probably some words on that.
APD, you already mentioned. It’s too early to quantify, but in the worst case, what could happen to Lufthansa? Then probably the yield performance in the first half, could you split the yield performance in the passenger division by price trends, mix and probably by currency?
And then the really last question is, you had an excellent performance in free cash flow in the first half. Should this continue or should we expect that these will continue with a lower pace in the second half and in these contexts, probably you can share the current CapEx plan for 2010 to 2012 with us? That is it. Thank you.
Yeah. I hope I got all your questions while I was scribbling. I think the first one related to the current price trends in cargo. I do not see any major trends there, other than we have to keep in mind the base effect, which will sooner or later come back to us.
So the figures will have to grow smaller but this is not due to an underlying weakness of the business or an anticipated weakness of the business. It is really a mathematical function when you are already on a higher level, the growth rates will become smaller.
But given the overall capacity development, which we have seen in the industry and the fact that a lot of conversion slots were canceled and the fact that a lot of freighter orders were canceled, we do expect to have a solid operating environment, at least for the next two years or so, is my personal guess.
As far as Air Berlin and Oneworld is concerned, I could say two British Airlines come together, so where’s the surprise? It is, I think, a normal thing in our industry and its normal competition. I cannot personally at the moment see what it really will mean to us because if you recall some years ago, BA already has a subsidiary called DBA and that was a comparable situation at that point in time.
And we will see how this develops into the feeder traffic into London, which is difficult, given the slot situation there or whatever it means but it clearly is a win-win situation, it makes sense for both parties, so I congratulate both on this deal, but I don’t feel particularly threatened by this..
The airline passenger tax as you said is a ridiculous nightmare at the moment because this is clearly a shot from the hip, which was not a thought-out plan after careful analysis, but which was really put on the table in the very last minute before the press conference.
It is, despite all rumors and public arguments too early to quantify the outcome because the outcome, if it will be introduced in this way as it is currently planned, will have two effects. One is it will overall dampen demand, more so for low-cost carriers than for scheduled carriers, that is the first point.
And the second point is we will lose passengers from the more peripheral airports, and I include Dusseldorf and Cologne and Stuttgart to foreign airports and what this will mean, I have no idea. So it will certainly be a measure which is not achieving the desired results.
As far as the yield performance is concerned, the question how much of this is price, how much of that is mix, I can’t really answer at the moment. In the Q2 alone, we had a 14.2% yield increase. If you exclude currency effect, it was 9.1%. Excluding also fuel, it was 7.3%. What the mix effect -- or what the consequence of the changed mix was, I can’t answer at the moment. We’ll see if we can provide this answer.
As far as the free cash flow is concerned, I am optimistic that we can continue with this performance if the markets continue to perform as they currently do. As far as bookings are concerned, the booking picture shows a further stable trend in all classes, very encouraging that should translate into the corresponding traffic revenues. And given the fact that we have a clearer picture on the cost side, we would also expect a strong cash flow performance here. Let’s see, what did I miss?
Yeah. CapEx, well, as I said, we would continue with our deliveries of aircraft as we have planned them. In terms of the remainder of the full year 2010, we had earmarked €2.25 billion, so you can see that we are slightly more than 50% ahead of us. But it’s fairly linear as far as the year proceeds. Next year, we have planned to have €2.4 billion and 2012, €1.92 billion, but this can of course still change if we should make any changes on the short end or on the smaller aircraft.
You answered all the questions. Thank you very much and keep going. Thank you.
Perhaps if I may, in between, answer Jared’s question, as far as the U.S. dollar hedging for 2011 is concerned. The total rate is 84%.
Yeah. Good afternoon. Three questions, if I may. Firstly, on the holding costs, could you just split that up for me? You’ve got €162 million of operating negative result from the holding. What is currency in there and what is really the underlying operating cost in the holding and how should we picture that going forward?
Secondly, on European yields, I think that’s still the biggest trouble spot. We’ve got statements from Ryanair, from Air Berlin, that they want to raise prices. Would you see that as an opportunity to raise prices yourself or would you rather go for lost market share and try to recover that?
And lastly, are you satisfied with the kind of unit cost performance that we’ve seen in the second quarter? If not, where would you like to see more improvement going forward?
Thank you very much. You rightfully pointed out the €162 million holding costs, roughly 100 million, slightly more than €100 million are due to currency there and €70 million of that is due to internal currency transactions, which are offset by the corresponding gains in the Group companies and €30 million of those €100 million are really genuinely Group currency effects affecting the Group operations.
The price development, I think, fortunately, we are in a situation where we don’t really have to say either/or, you can see the page one performance and there we have seen an extremely strong yield increase and we have tried to capitalize on the market situation as good as we could.
And we have not left out any opportunity to increase yields and particularly also not in the cargo business, and so we continue to do that as we go forward. The growth rate, by comparison, is much smaller, so we expect on a basis adjusted for consolidation, in the passenger business we expect a growth rate of 2% to 3% growth.
In total, including the addition of bmi/Austrian, it will be 12% roughly. So -- but if we concentrate on the core business, I think the question will be answered in a way that we’ve put yields first, because we have to improve profitability there but at the same time, with a turnaround of bmi and Austrian, we will provide a better quality for the revenue base which we now have. The revenue base has increased by 30% and that is quite substantial. So this is not our primary concern that we are perhaps not growing enough.
Am I satisfied with the cost performance? I don’t think anybody at the Lufthansa Group is satisfied with the cost performance. However, if we adjust the unit cost development in the Passenger Airline, which on the surface has increased by 10.9% and if we adjust this for fuel increase and foreign currency, we are at 1% only, but we also have to keep in mind that we had enormous one-off effects with the airspace closure and with the strike and with the winter operations. €14 million alone additional, the fees for airports shut for deicing the aircraft, plus the deicing fluid, all of those things of course have added to the cost base.
So in the absence of those one-offs, I would expect the unit cost performance to be better anyway plus as I said before, we are right in the midst of a fleet overhaul, and take out about 40, 50-seater jets, replace them with 90-seaters that will dramatically improve the unit cost performance in the short-haul business. Plus we have all the initiatives in place from Climb 2011 to the program that’s the LSG business, Lufthansa Technik, Lufthansa Cargo, I’m not happy with the current cost performance, but I am very confident that we will be a lot better in the future.
Thank you very much.
Samantha – Analyst
Thank you. Two follow-up questions on Cargo and on yields. On the cargo side, you mentioned another couple of aircraft coming back in. Could you maybe just give us guidance on that capacity growth for that business on an FTK basis? There do seem be some signals of a bit more capacity coming back into Cargo, so just what your plans are there and maybe a follow-up on European yields, yields like 2.8% in the quarter.
Could you give us some color on the development of yields in Europe during the quarter? I know it’s difficult with volcanic ash, but just trying to get a feel if your European yields are at the bottom. Thank you.
Thank you, [Samantha]. Until the day before yesterday, I have to say, we had a planned Cargo capacity growth of about 6% for this year. Now, as you all know, we have this incident in Saudi Arabia where we lost one aircraft and so the capacity growth will be, I guess from today’s perspective, slightly less than that.
However, having said this, it will be not a lot less than that, because we are taking the grounded aircraft back into service, and we are of course trying to speed this process up. So currently, Lufthansa Cargo only expects some few freighter cancellations, and the customers have already been informed about this.
Overall for this year, I think we will be slightly below 6% then. In the next year, of course, we will hopefully see further growth, you know, that we are growing also the other platforms, straight in Shenzhen and AeroLogic is getting more aircraft. So that I think we are -- as far as capacity goes, we are well-equipped and we are comfortable there.
Your question regarding the European yield situation, I would like to answer it more qualitatively. As I’ve shown, it’s minus 2.8% in the H1 in Europe and here, if we look into further detail, I think we can detect a trend that the European yields already are -- not already, but are also recovering following the Intercontinental yields and this is also including the yield mix.
It means also in European short-haul traffic we have a growing trend of recovering premium traffic, where we don’t see this yet still is Germany, and that’s where we also do not really expect a rapid yield mix improvement here. And this is kind of holding back the overall figure for Europe and Germany in total.
So having said this, I am a pretty confident that if we don’t get any external shock in the future, that the trend will become more pronounced in Europe as well and in Germany, we just have to make our homework and cost reductions in order to cope with the changed environment.
Samantha – Analyst
Thank you very much. Thank you.
Good afternoon, Stephan and three questions for me, if I may. I’m interested in your thoughts just to return to the outlook as to how things developed. Obviously, the revenue number surprised in the second quarter, now we have had some -- clearly, a lot of disruption thus far this year, but aside from the disruptive effects, is there a suggestion of a slight creep-up in costs to effectively absorb the revenue and make consensus still realistic, despite the fact that revenues were so much higher? Maybe to deal with than one first and I will follow up with two very quick ones.
I’m not sure if I really got the question right, Neil. But of course, the one-offs which we have had would have made us much more confident a lot earlier in the year. So we have had a kind of shaky time in February/March when we had the strike and the winter situation.
Then we became more comfortable as far as our then outlook was concerned. Then we got the airspace closure, and again, we had to look at our outlook and had to use some fantasy. But after the airspace closure, we looked at the forward bookings and we saw that there was no lasting impact from the airspace closure, but instead, the growth figures showed basically the same trend as before the airspace closure.
And then we were further encouraged by the June figures, which I believe on a monthly basis have never been better, despite the fact that we have consolidation of Austrian and bmi. So looking into the advance bookings as far as we can see them in all classes -- and this is really business, first, and economy -- we are very confident that we can make up for the negative one-offs in the first half, provided we don’t have any erratic oil price movements as far as they would still affect us and provided that we don’t have any other shocks in this year. So meanwhile, we are very comfortable, and this comfort is really driven by the revenue base in particular.
Great. Just to follow up on that, and somewhat related, how concerned, if it all, would you be in terms of the second half of the year, if demand continues to improve, that that can also have a negative impact, an inflationary impact on your cost line, aside from Climb 2011?
We are not too concerned. Because it’s clear that part of the cost has to go up with the increased production. This is just inevitable. It translates into fees, into fuel consumption and so on and so forth. But the cost factors which we can influence are very much under control. I’ve mentioned the zero round for 50,000 staff, that’s half of our total staff which we have in Germany, until the end of next year, which gives us some relief there.
And I’ve mentioned the unit cost improvements on the ongoing fleet overhaul, which would have been a little bit more difficult if the demand side wouldn’t be there. But given the fact that we now get new aircraft and we are able to fill those aircraft, the unit cost performance directly feeds into the bottom line. So I do see somewhat of a decoupling between the revenue trend and the cost trend, and in the absence of further negative one-offs, I am more confident there.
Great and maybe just one final one. Now that you have the labor agreements -- well, largely in place, can you give some indication as to how you expect the total labor cost line to look year-over-year for 2010?
Basically, we have now -- on an adjusted base, we have now seen an increase of 1.1%. I would say -- this is the core Lufthansa Group, without the new companies. I would say it shouldn’t be more than that.
However, having said this, I also mentioned that the wage agreement includes a variable part, which will be driven by the Group’s results at the end of the year. So we will certainly not have -- if we would not produce an operating profit, I would assume the staff costs to be flat. And if we are going up with a profit, staff costs will rise. But I think it’s just fair.
Great. Thanks for your time.
Hello, good afternoon. Just a question with regard to disposal so far with Amadeus and Fraport or the transfer there, quite good development. How do you think now going forward about your portfolio?
Secondly, on the rating agencies, you mentioned that I think one of the issues of the downgrade in the past was your cash flow development, which seems to be very strong at the moment.
So how do you expect the rating agencies to look at it going forward? What about further funding of the pension fund? Is there a second tranche then coming in the second half? And maybe last, you had €150 million interest cost in the first half, according to slide 15. Is that roughly the same you expect for the second half? That’s it. Thanks very much.
Thank you. Let me start with the first question, disposal of assets. Our view over our portfolio has not changed and we have made clear in the past what we see as a core business and we don’t see as a core business.
You know that catering is clearly not core business, and in the past, we decided to stay put because we figured that there were financing risks for a possible transaction plus we think that with the recovery of the underlying passenger business, this trend will also become more visible in the catering business. And it needs to be visible before we can possibly think about anything here. But the situation strategically has not changed here and that is basically the big item everybody is thinking about.
And then to make one thing clear, in the Systems and the IT business, we have had a couple of months of very interesting IT orders and the status quo documentation. And we have a new CEO on board since a couple of weeks now.
And we are there in very promising discussions as far as the future profitability of this business is concerned. And this could also include that we will develop parts of the business further, parts of the partners remains to be seen. But clearly there’s a lot of positive dynamic in this business, and we will see how this develops. As far as our rating is concerned, I mentioned that it was just confirmed.
I think there is one thing we have to understand, and that is that if you just look into the mathematical calculation of the relevant ratios, we have a trailing consideration of the last year or so. That means that the downgrade last year -- performed with the crisis clearly ahead, but still on the base of relatively sound past figures.
Now, the situation has changed, in that because of this trailing calculation, the figures of the last year are not too strong, but the outlook and the current cash flow performance is much stronger. So we do not see any pressure -- any downward pressure on our current rating at all, given the situation. We hope that we will be able to prove a further improvement in the relevant ratios, but that in the foreseeable future, perhaps in the middle of next year or whenever this might be, we can also look at a better rating than we have it today.
The funding of pension plan was done with the Fraport shares. This was a smart move, I think. Going forward and looking at our cash flow generation capabilities currently, I see no reason why we should not fund the second tranche then of course again in cash. Clearly, this is what we have in our plan and if nothing unforeseen happens, we will also execute this.
As far as interest rates are concerned or interest expenses, I would not foresee any major change in the second half because as we have seen, we have a lot of liquidity here. So we do not expect ample additional financing.
We currently have performed some aircraft financing simply because it was the cheapest way to finance the asset, but we will not continue this forever. We will also make use of our cash. And so in that regard, I would, for your calculation purposes, just assume that the interest expense remains where it is.
Okay. Great. Thanks very much and I hope you will be proven wrong and German premium will recover soon.
Thanks very much. I should add -- don’t get me wrong. I mean, we will, of course, also have interest expense in the second-half.
Yeah, yeah, absolutely.
Andrew – Analyst
Good afternoon. In the interim report, you talk about ticket price increases made at the end of June. So presumably those are not in the second-quarter results at all and we can look forward to that in future. Is it just being introduced at Lufthansa Airlines or are you including other group airlines? And also, can you say roughly what the percentage increase in ticket price, average ticket price, is as a result of those moves?
[Andrew], hi. The ticket price increase was done by Lufthansa and SWISS. But the message, as such, I think you can ignore, because we have also taken down the fuel surcharge. So this was the kind of change from a surcharge to the -- we rolled it over to the price, actually and then that’s the oil effect.
Andrew – Analyst
So a zero increase effectively?
For the time being, yeah.
Andrew – Analyst
Right. And secondly, on freight rates, there was an article in IFW early this week suggesting that Asia to Europe air freight rates are falling quite substantially. It seemed to be inconsistent with some of the comments you have been making. Can you comment on that?
Who made this observation?
Andrew – Analyst
This rag, International Freighting Weekly, the freight forwarders magazine.
I certainly cannot confirm this. And I should say that we, of course, have for the first time -- as I mentioned before, for the first time in years a strong export out of Germany, which is filling the flight in both directions. And this trend has started in March and was not driven by the currency situation of the weak euro. So we would expect, given the currency situation as we have it, that this should not change anytime soon and I also would like to really say that we are currently in the low, low season of air cargo. And yet Cargo is producing record results, so we are only approaching the peak season in air cargo, and therefore, I have no concerns in this regard whatsoever, and it’s also not reported from the Cargo business.
Andrew – Analyst
Okay. All right. Thanks a lot.
Thank you very much. Firstly, just coming back to the outlook for the full year and just to sort of push you a bit more on this. Rather than a range of forecasts, your website -- investor relations website currently has a median forecast for the current year of €404 million. I assume that’s the number you’re comfortable with.
That’s the first question. Second question is just on the Fraport transaction, having transferred the shares, does that affect the position on the supervisory board that Lufthansa has?
To answer the second question first, no, it has no effect. The only effect is that Wolfgang Mayrhuber has vacated the suite and Stefan Lauer is now a member of the supervisor group of Fraport but this has nothing to do with the stake. It has just something to do with the situation that Wolfgang Mayrhuber will retire from the Lufthansa Board.
As far as the question regarding the outlook is concerned, I know that you are pushing me in this direction. But I have also said that we are not able to quantify it. So what we see is a range -- looking at it in various ways, what we have in mind is something from a minimum of €198 million, a maximum of €448, the median is €404, as you rightfully said. The average is €399.
And our target, which we always warn you, our arrow at the end of the chart, which we always warn you to really take literally, shows them the right direction. I think this is the range we are comfortable with. Quite frankly, I very honestly think it would be of no help to you if I would today confirm €404 million.
The business is now an almost €30 billion revenue business and talking about double-digit million amount of profit back or forth on the operating level makes no sense, this is something which will happen one week or not, and it just doesn’t help. I can’t give you more guidance than that. But the range, we are absolutely comfortable with. I mean, it really reflects the chances and it reflects the risks and in that regard, I think our arrow at this one chart of the profit development is the best approximation to our current expectations. But this does not include that the (inaudible) would be impossible.
Okay. Thanks very much.
Steven – Analyst
All right. Two questions, please. Just on Cargo again. I think you mentioned in your statement or in your report that you see an end to resurgent demand is not insight. So just can you talk about what indicators you would use on the demand side or is the booking curve quite short? But I guess maybe you made that statement, given your view on supply as well, as you said already, Stephan.
Just a second thing, maybe, just like to touch on briefly, just talk about Brussels Airlines and how you see that company performing, you don’t see any impediment to you taking over the options and consolidating that company in the years ahead?
Thank you, [Steven]. As far as cargo is concerned, nothing has changed with the visibility there. It’s extremely short, so we cannot just, as in the passenger business, we cannot rely in the freight business on the booking alone, that would not tell the whole story.
I think there is a combination of indicators. One is indeed the short-term bookings, which are fairly stable. Second is the supply equation, which I have mentioned. Third is, of course, we have indications as we are in close contact with our major customers. The Cargo business has only 15 or 20 major customers basically as forwarders and they are responsible for the overall air cargo flows. So their expectations and what they see in their talks with their customers are also guiding us in this direction.
And then of course, we also look at currency effect, as I’ve mentioned before, which have some induced effects on traffic flows. So all of that makes us relatively safe, plus add to that the situation, as I said before, that we are now basically on the low season and we are only entering into the normal high season. So even if the peak would not be as high as in the past, we would still be comfortable with our situation there.
As far as SN Brussels is concerned, I’m not sure if I fully acoustically got your question. I can only say that we expect a good performance going forward. The synergies are on plan and we are expecting a total in the run rate of €60 million there. Operating result is up over previous year.
So given the current performance, I think there is little reason not to exercise the call options. But again, we’ll decide this when the time is there, but from the current commercial performance, we have at least no red light which would warn us not to do it.
Steven – Analyst
That sounds great. Thanks.
Robin – Analyst
Hi, there. Just two questions, please. Firstly, on the MRO, I think you’re suggesting a weaker operating result in the second half. So can you say a bit about what’s driving that? I think you mentioned pricing. But do you have any major external contracts coming up for renewal, for example?
And the secondly, on the Climb and the cost savings, can you tell us what were the costs that changed in the first half, were these material and are there any material costs or provisions to come this year for various restructurings, including Climb? Thanks.
Thank you, [Robin]. As far as MRO is concerned, I’m happy to be a little bit more precise here. We just – we -- first of all, we have no major contract to come up for obligation, so there is no major risk we don’t see or which we already see, which we expect. But we can see is simply the fact that overall, of course, due to the fact that a number of aircraft have been utilized less, there is more price sensitivity at the MRO provider side and this has an impact on the expected yields of MRO going forward.
Secondly, I think we have a situation that we have to recognize, that Lufthansa Technik has, I don’t know, 200 plus airlines as customers in the world and the major airlines are part of this, but just a smaller part. Most of those airlines are relatively small and are not regular visitors. Many of them just come with one or two aircraft per year because that’s what they have. And all of them have been affected by the global economic crisis and not all of them are already again back in good shape today.
So we’ll have to live with the fact that here and there, we have a counterparty risk which we have to observe, we have to take precautions for, all of which can possibly impact the operating result at Lufthansa Technik. In the absence of this counterparty situation, I would still expect Lufthansa Technik to perform basically on the known levels. Here, we are not talking about a major hit, but I would quantify the deviation in the expected profit somewhere in the lower double digits.
Robin – Analyst
Okay. Thank you. And then just on the Climb and cost of change, please?
Climb, there we have had €6 million extraordinary depreciation in the first year.
Robin – Analyst
That was in the context of 16 CRJ 50-seaters, which we have parked and which are up for sale. Plus we have another €6 million set aside social cost for the personnel reduction at Eurowings. Other than that, there is nothing more included in the figures.
Robin – Analyst
Petty – Analyst
Great. Thank you. Good afternoon, everyone. I just had one follow-up question on the cost side. In the statements, I think I’ve calculated correctly that in the second quarter, your other operating costs, which I guess typically include a bunch of different areas, including the FX gains or losses were up around €600 million. I’m trying to figure out what was the main driver there. Why was that so aggressively increasing, besides perhaps volcano expenses that you may have included in there?
Or another way of asking the question on a full year basis, you mentioned earlier that the unit costs, if you exclude in the passenger business, the one-offs and FX were up around Europe €0.01. What type of level would you expect then for the full year, assuming we have no further one-offs?
Hi, [Petty]. Thank you for the question. As far as unit cost expectation goes, I can only say we expect it to become better. But I think our expectation is -- it will certainly impact the 1% and drive it lower, but the point really is the other effects, which have driven it up to 10%, and they make it more difficult to deal with.
But in the absence of one-offs, I think rather than having 10% increase we should see a couple of percentage points less going forward. But the adjusted figure certainly will also come down and I’m confident that we will have it at least stable at zero.
And as far as the other operating expenses are concerned, you are absolutely right. It’s about €500 million currency exchange losses, which have different causes. One major cause, I think, I mentioned that is the due date evaluation of the financial liabilities, which is non-operative and that has had an impact of €202 million. And this was largely driven in this time window by the U.S. dollar increase of 14 point something percent, which of course, as an increase in this position was largely hedged. And so we have about €160 million of the currency part of the currency part of these cross-currency swaps included in the financial result. So the net effect is much less than the €200 million, I just mentioned.
On top of that, we have, of course, also here consolidation effects and we have effects on the devaluation of cash, which we have, for example, in Venezuela and other places. We have a whole bunch of smaller things.
One thing we should also keep in mind, if we look at the overall currency situation and that is that if we include the P&L effect and if we include the operating FX in the balance sheet and if you include the non-operative effect, we have just had a burden from foreign currency on the Group result of €45 million, which, given the volume of the revenue line is really marginal.
But coming back to the other operating expenses, most of that is really driven by a number of issues. One part of that, for example is increased provisions for travel agencies. That was up 11%, simply in line with the additional sales then we have additional rent -- rental expenses was up 13%. We have had IT expenses going up. We have had a little 5% gain for advertising and stuff.
We have had service payments going up slightly. That is more or less a question of our food chain, where we have bought accounting services from call -- from our Lufthansa revenue services and accounting centers. So we have a whole bunch of smaller nitty-gritty items here. The biggest, by far biggest is the foreign currency issue. That was partially offset in the other operating income and partially offset in the financial result.
Petty – Analyst
Okay. That’s great. Just to clarify, on particularly that liability component you said of €202 million, the offsetting component of that is not actually in other operating income, it is in the financing expense?
Petty – Analyst
Okay. That’s great.
Petty – Analyst
Yeah. Thank you.
Hi, guys. I’m just wondering to see how long we can make this conference call go on for. We’re trying to challenge Air France here. I wanted to just ask you again whether you are still feeling committed to the 747 800 or whether how many delays we’re going to have until you show any sign of wavering there?
And in other words, I wanted to ask about Lufthansa Italia, because you spoke about how the cockpit crew changes might enable you to fulfill the commercial potential of the business. How big a headwind or how big a headache is it in terms of the P&L at this time?
So 747-8, we are, of course, committed to take them. I think it’s the most beautiful aircraft which has been designed so far and I think that answers the question. As far as Lufthansa Italia is concerned, clearly, that this is a startup operation which needs about two years, and at any time if you start such a venture and we started this right into the crisis. So we might as well add one year.
The profit performance of that part of the Lufthansa Passenger Airline is of course not satisfactory. We know that a number of good things are happening at Lufthansa Italia and also as far as the connectivity of Malpensa is concerned. We are monitoring the situation there closely.
And I think, as I say, we have a number of good efforts underway, a part of that has to do with improving and enlarging the distribution platforms there, because one of the problems, which we have analyzed which have really -- which we have really underestimated in the startup phase was simply the fact that, yeah, Lufthansa is a well-known brand in Italy and it’s a loved brand and people love the product.
But we underestimated the fact that Lufthansa Italia is not flying to Germany from Milan. And so there is a lot of push from our side, but there was comparably a small pull from the customers or travel agency side, because they simply did not think about Lufthansa Italia when they were thinking about flights to Barcelona or elsewhere.
So that’s something which we have clearly identified and as I said, there are some other things which are on a good way. But clearly, also honestly, we are not happy with the profit performance. We have to change a number of things there and we monitor it carefully.
When we look at the headache, is it a British Midland sized headache, a Germanwings sized headache or something a lot smaller?
No, no, I would say it’s something like a Germanwings headache.
Okay. Thank you.
I just couldn’t resist asking a question, given what Andrew has just said about the length of the call. But I’ve got three minor questions, I suppose. One is could you just remind us what the percentage of premium revenue was in your long-haul business when it last peaked? I think you said it was 50 point something at the moment, but I just wondered what the last peak was.
Secondly, could you just talk on the cargo side a bit more about this balanced trade and I don’t know if you can kind of give us any feeling as to why and how long you think that might go on for. But for instance, what the different load factors are Europe to Asia versus Asia to Europe and what you think that benefit might have on the business.
And then thirdly, no one has actually mentioned A++ and the recent kind of Continental/United issues. And I was quite intrigued by your comment in the release about the heralding a new dimension of Alliances and I just wondered what you meant by that?
We have to come back your last point because I was just distracted. But the first point answer is 54.6% was the peak -- all-time peak of premium revenue on long-haul.
At 58 and have recovered, I don’t know, 1.5 percentage points since last year here. But we still see an upward trend there. As far as the Cargo load factors are concerned, currently you can assume it’s fallen both ends and there’s no room for further, at least further planned improvement.
What is missing to 100% is simply a consequence of the Cargo business, because in the passenger business, as you know, you have hundreds of people 80 kilogram and occupying one seat and if one passenger is not showing up, the next one is taking the seat.
In the cargo business, you have a much more complex yield management because you have volume, you have size and you have weight. So if one piece of machinery is canceled, if you are happy, you can replace it with a similar piece of the same volume but with a lot less weight or you replace it with the same weight but less volume or whatever, and all of which has immediate effect on the load factor and it has effect on the yield there.
So therefore, from the sales perspective, it is both directions 100% full and as I said, history tells us and this is really, the worst thing which we’ve recorded over the last years was that we did not have a peak in the fall. But quite frankly, if we continue today’s performance in Cargo, I don’t need a peak. So but if a peak comes, this should drive revenues up further, given the fact that capacity is simply limited here and…
And could I just come back on that in terms of currency? Do you feel the kind of benefit -- two-way benefit is to do with currency, obviously it’s helpful, but do you think it’s sort of a bit -- it’s something else as well?
Well, this balanced traffic flow situation occurred at a time when the euro was still a lot stronger.
Okay. So it’s not necessarily currency-related?
No. That’s what I tried to express.
This has kind of given me some comfort that even if the underlying normal demand would have perhaps become a little bit weaker, the currency effects, which inevitably have led to stimulation of German exports, which then ultimately in the future will translate into more exports, that this effect is still coming. So therefore, I’m positive that we can at least have a stable flight on this altitude. As far as, A++ is concerned, could you please…
Well, I was just intrigued about when you talk of new dimension of alliances in terms of the positives, perhaps you could just talk a bit more about A++.
And given the recent clearance and what you are aiming to do there in the kind of, well, when I say the short term, I suppose I mean in the next year and year and a half?
Yeah. We are working already in the context of A++. So the structures have been set up and it is, in our view, very functional. Clearly, they will have to pick up steam but we are very optimistic in this regard.
We are talking about a revenue base of more than $10 billion now, combined, which makes this the biggest joint venture on the Atlantic. And we, of course, not of course, but we have set it up in a way that we have two pricing teams, one in Houston and one in Frankfurt. And either end manages the pricing for the respective directions. So ex-Germany is done in Frankfurt, ex-Houston is done in Houston. And we have the experts sitting there from all airlines. That is, from Lufthansa, from Continental, United and Air Canada. And they take joint decisions, something which we have never done before. Despite all the noise around alliances, it still was a question of sales without preference as a nice objective, but never achieved.
Now we have achieved the sales without preference, which we now call natural neutrality. It does not make any difference for either carrier, which carrier they are selling, so they really go by the capacity they have available. The pricing is absolutely harmonized and in that regard we make much better use of the existing haul, which then, of course, not only translates into better capacity utilization, higher yields, higher revenues, it also translates into a more rational capacity development here.
Plus this A++ joint venture, different from the smaller joint venture in the past, is now also covering the feeder traffic. And that means on our end here in Europe, it goes as far as India and North Africa, Ethiopia, Eritrea and all those stronger traffic flows, they are also covered by this joint venture. And on the other side, it continues not only into the North American continent, but also with the connecting traffic out of Houston to Latin America. And so in that regard, we are very confident that this whole joint venture is commercially helpful and beneficial and that it brings sanity to the industry.
So, then, I would like to thank you very much for your interest and attention. And I close this conference call and we will keep in touch. Thank you.
Thank you very much. Take care.
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