Wolfgang Mayrhuber – Chairman and CEO
Stephan Gemkow - Chief Officer Finance and Aviation Services
Frank Huelsmann – Head, IR
Penny Butcher – Morgan Stanley
Andrew Light – Citi
Michael Kuehn – Deutsche Bank
Jonathan Wober – Societe Generale
Lexi Dugan [ph] – Liberum Capital
Tobias Sittig – MainFirst
David Fintzen – Barclays Capital
Paul Butler – Macquarie
Andrew Lobbenberg – RBS
Tim Marshall – Redburn Partners
Deutsche Lufthansa AG (OTCQX:DLAKY) Q3 2010 Interim Earnings Conference Call October 28, 2010 4:00 AM ET
Frank Huelsmann: Welcome to our endless conference for the presentation of the results from January to September. This time we’re going to have same procedure as every previous year, which means that we will have a presentation of CEO, Wolfgang Mayrhuber followed by a presentation of CFO, Stephan Gemkow and then we’re happy to take your questions.
So, I’ll just hand over to Wolfgang Mayrhuber, who will give you his view on the recent performance and outlook.
Well, ladies and gentleman welcome to the Lufthansa Aviation Center and it’s just been pointed, Stephan Gemkow and I will inform you about the results of the first nine months and to say that we can present to you very respectable results today. It is in my opinion a reward for the persistent hard work for sticking to our principles and of course, the use of all the opportunities that we are presented to ask by the economic upswing.
Our ability to stay on course during the crisis and at the same time make the outlook the necessary adjustments to get leaner, to get faster, fitter and better without neglecting customers’ needs is reflected in these results. You’ll probably remember that starting into the year was not the most ideal one. We had extreme winter operation. We had a sort of self-fabricated losses of production due to strikes and the needless the airspace walk downs that follow the volcanic eruption in Iceland led to major production losses and resulted in immense cost for us.
But all this is behind and we have caught up again and the recovery of the markets helps us to record a positive results in all of our business segments.
Let us start with some key figures for the first nine months. We record an operating profit of EUR612 million that compares to EUR226 last year. This is a significant volume and higher than we had hope at the beginning of this year.
The group recorded a result of EUR524 million compared to EUR31 million last year. We have grown 86 million passengers have chosen Lufthansa and the airline crew. This is a growth of 22%, but includes of course the consolidating effects.
The freight figures are also quite remarkable. Lufthansa Cargo recorded an increase of 19.4% during the nine-month period. In both segments, recovery was quicker than expected and the cause that we have set was a good one and we guided our company nicely through the turbulence. Revenue increased of above offer and therefore, seasonal factor and the cargo load factor reached a very healthy level.
We continued also in the period to invest EUR1.8 billion of which EUR1.6 was spent on aircraft. With the recent order of 48 aircraft which was approved by our Supervisor Report Meeting in September. We outline that we will continue to modernize and expand our fleet. We have grown in a healthy way and did not live on any credits.
Cash flow has increased significantly. Free cash flow reach EUR1.3 billion, cash flow in total EUR2.4 billion. The operating margin has increased and that have dropped. At the close of the third quarter, the Lufthansa share is about 14% higher than at this time of the year. During the course of this year, it has increased almost three times as much as the tax and we feel there is potential in it.
Cash and cash equivalents have risen to internal and internal financing ratios has grown to 137.8%. The gearing has reached the target corridor and the equity ratio has stepped up closer to our target figure of 30%. My colleague, Stephan Gemkow, shall provide you with all the details a little later.
As I said before, we have achieved those figures in an extremely difficult year and have done it without any dubious compromises. It has paid off that with Lufthansa stick to our principles while so during crisis periods which are solid financial structure, quality orientations over our customers, continuing innovations and increasing long-term value. These are the foundations that our of substance for our success.
Ladies and gentlemen I do not want to anticipate the detailed report that you will receive by Stephan Gemkow in a minute, but just let me highlight some of the elements in the areas fields of our businesses.
I am going to start with the Passenger Airline Group. Course, the development in the airline crew altogether is very pleasing, the pictures shape a general recovery in the market and also this is the case for the premium segments. We do have a very large and growing customer base that shows loyalty to us and this has helped very much.
We have introduced the first three A380s. They are in service and enjoying a very reliable operation and people are interested in flying these airplanes.
Our cost reduction and efficiency improvements program climbed 27 is on track and is making progress in all the fields. It will achieve its goals to improve the earnings that Lufthansa passenger Airline by EUR1 billion by the year 2011.
Our company in Switzerland enjoys also the economical surrounding in its domestic market and in the sixth year successful with Lufthansa now.
At Austrian airlines and British Midland, we advised you that we have to expect losses this year. There are losses. They are not worse than plan despite the circumstances we were in. The restructuring and reorganization measures that both airlines are progressing accordingly, according to our plan and we see only notice some success with both airlines.
At BMI, for example, the real big unnecessary reduction stuff has already been completed.
And is also in airlines has recorded a significant increase in number of passengers, more than 10% growth and is cash positive for the full year. This was the target that we have set for them. However it’s not give generating year around profits again Stephan Gemkow will show you how the curve works.
Brussels Airlines is making also progress. It’s growing also at the same time in Africa and gives us a better foot print to destinations in this important continent.
German Wings had a difficult start in this year, but in the meantime significantly expanded its offer and confirmed its market leadership in the relevant markets, for instance, Cologne and Stuttgart. It has been rewarded in a survey to be the best low-cost carrier.
Nonetheless, the results of the current business year at German Wing shall be lower than in the previous years.
Now, as I turn to Lufthansa Cargo, this unit in particular has seen the steep decline at the beginning of the crisis and again, the steep rise of the distance after we have seen that the market condition change. It reacted very quickly. It managed to turn around with a major impact on their cost and also their flexibility to react has reduced working hours and adjusted their capacity accordingly. This was a compliment for the management and I have to say it’s a true showcase of how Cargo reacted to the market condition change.
The MRO business is a business that sees the crisis later. It’s not an early indicator, it’s a late follower. In the meantime the recovery of the global air traffic has also seen the worldwide demand of MRO or services to grow again. However, there revenue for the first month were smaller than last year. As expected, the MRO will be using with profits to our balance sheet, to our P&L. But the company will further improve its result by the end year and is gaining momentum in the market.
In Lufthansa System, which is our IT house, we have installed a new CEO, Stephan Hansen has had the experience, worked for us many years before and has been outside with another firm and has come back. He will continue the cost-saving program that has been initiated last year. But he also steps up a new program in order to substantially improve their profitability of this unit; this segment will have a smaller profit than last year.
LSG Sky Chef, our catering unit is seeing also the recovery of the global passenger traffic and therefore, it is also in the rise of revenue in this business unit. The increase of those figures are also particularly important in the premium segments, which is positive for Sky Chefs. Our chefs therefore expect a good full year result, above the previous year, which will also be above the previous year discounting the D&O insurance case, which was a one-off last year.
In summary, I have to say that we had a bumpy start because of events that we could not influence directly but we comment the accomplishment – we’ve accomplished a remarkable comeback and have now seen this company is again at the level where it should be and growing cautiously, but steadily.
We are therefore not going to rest on our lowers of this change, but you would prepare ourselves for probably the changes. We know that markets are shifting fast and management is prepared for any shift, up and down. Our decentralize and market oriented management philosophy that we have implemented with our modulus structure, both in the field of airlines and the aviation group with the service units is in our opinion of major importance for the development of the entrepreneurship within the group and it gives us a much better feeling of what’s going on in the market.
We respond faster. We articulate measures in each individual business units and this is part of the reason why this in combination with the transparency that we learn from each other helps to act faster than some of our competitors can do.
If you allow me just to look at the outside, ladies and gentlemen, of course, the year seen a recovery in the economy worldwide and it’s obvious that mainly in Asia, and there particularly in China, obviously growth rates that are very pleasing especially also for an export oriented country like Germany.
The altered economic environment has led IATA to correct its financial forecast. They now expect profits of about EUR8.9 billion for the airline system worldwide by the end of this year. However, if you calculated back, it’s only $3.6 per passenger which is of course not a solid base. If you then look at the European scenario, they anticipate a loss of 1.3 billion collectively for the European network and carriers, and carriers of IATA.
Now, Lufthansa differentiates itself drastically in this field. I think you have potential also in the future to grow, why? Because there are many opportunities inside the company, but I also see opportunities within the legal framework. And if I – let me touch on the framework, directly I have to say there is discrimination going on finance by our taxpayers.
For instance, discrimination for export credit guarantees. There is a distortion between the lending rights which have been addressed. There is an opportunity to rationalize the European single skies where we fly to long distances. We have to abolish all of those elements including subsidies on small airports. So, from the outside I think it can get worse. It should be reversing in an area where we see opportunities of getting more efficient, that’s why we work in Berlin, in Brussels everywhere to get the politicians to understand where the opportunities are, in order to facilitate its growth in Europe.
If you allow me to look a little bit forward and with respect to Lufthansa, I have to say that we are footing on a solid foundation. We are aware of our strengths, but at the same time we absolutely know that there are weak points which we have to correct. We shall continue to grow, but our growth will be not only steady and measures, it will be a controlled climb rate and it will be profitable growth.
We are looking with partners, to work with partners and want to asset our self both in the home market Europe in the global market as well. As it stands today and with no major changes to the market and framework conditions that we face with, we can expect the full year operating result exceeds the EUR800 million threshold, a very good result. And as a result that will probably allow us also to pay the dividends, but of course you know this is not yet enough in order to recover which we knew in this year especially since we were growing was not possible to do.
We are well-positioned because of our structure as a group, but also with respect to the global footprint especially into growth areas. And if you allow me, finally, I would say that I do thank also you for your interest in our company, further questions where a person and they learned a lot from and it gave me also always an insight of how does the capital market think about us and what should we do in order to balance the interests of the shareholders, the interests of customers and the interest of those who work for us.
So, the next conference, my successor Christoph Franz will be here and he will present together with Stephan Gemkow the results. It is a great pleasure for me to say that this company is able to retrieve top talents out of its own core. People that we know that have worked successfully in various positions of the company and that will make sure that we will be stable even in dynamic changing markets.
I’m also very happy to say that Carsten Spohr, who has worked in the airline passenger side before and has in the last couple of years managed the Lufthansa Cargo business and in that time has experienced all kinds of ups and downs in that field to join the group board and run the passenger airline side, Lufthansa Passenger Service Airline side.
And of course, we are very lucky that we have somebody who was experienced in cargo and worked for many years in Lufthansa Passenger side, for instance, building the Munich Hub and lately doing the service unit, Karl-Ulrich Garnadt, who will be proposed to the board to run Lufthansa Cargo in the future.
Having said this, to know that Stefan Lauer, who is our director of labor and chairman of the airline group and Stephan Gemkow, a well-known CFO to you and also chairing several supervisory boards of our group, combined a very small efficient and absolutely competent executive board that can tap on talents on the group. That’s why I’m absolutely sure that this company will change as it needs to be change and continue revenue to continue on the success path and deliver what our shareholders wants to see, profits and value.
Thank you very much.
Let me also welcome you all to our presentation now for results for the first nine months of this very eventful year.
The dynamic markets recovery in 2010 is reflected in considerable top line growth at the Lufthansa Group. Revenue climbed the first nine months by a total of 24.9%, adjusted for the effects of consolidation, in essence also in airlines and BMI growth still came to 13.8%.
The main performance driver was trafficked revenue in the passenger and freight business, which was up by 30.6%. Adjusted per consolidation affects, the increase would have amounted to 16.5%.
While the results of minus EUR171 million for the first half year was still marked by the nonrecurring effects of the pilot strike, the so called Ash Cloud. The winter and so forth the general market recovery is now also visible in the results. With an operating profit of EUR783 million alone in the third quarter, this group generated a total operating profit for the first nine months of EUR612 million. This represents an improvement in our adjusted operating margins of 1.5 percentage points to now 3.5%.
It should also be noted that the results still includes negative earnings contribution of Austrian airlines and BMI of EUR137 million in total. Although, these were reduced by operating profits in the third quarter as well.
EBIT improved significantly by EUR749 million to now EUR957 million. Lufthansa reported a net profit for the period of EUR524 million or EUR1.14 per share. Cash flow from operating activities will end up by 68.6% to EUR2.4 billion, and capital expenditure mainly for new efficient aircraft came to EUR1.8 billion in gross terms.
The balance sheets key figures have improved again to net debt now stands at EUR1.5 billion down from EUR2.2 billion at the start of the year and the equity ratio rose by 1.6 percentage points to 25.1%.
Thanks to a research in share price, the markets cap on the reporting day increased to EUR6.2 billion, I think today it’s roughly EUR7 billion.
As I mentioned earlier, the third-quarter of 2010 is the first partner this year without nonrecurring expenses. Looking at the development of margin makes the earnings improvement clearly visible.
In the first quarter, the adjusted operating margin was still minus 5.4% due to strike and winter cancellations. But in the second quarter, we achieved the margin of 2.7% despite the distortion caused by the airspace closures.
In the third quarter, we managed an exceptionally high 11.1%. Of course, the third-quarter is always the strongest in seasonal terms, but the figure also reflects the progress made in cost management and in the restructuring efforts at the new airlines in the group.
The strong performance is primarily driven and shaped by the airborne companies. So, I would therefore like to take a closer look at developments there.
The sales situation has improved continuously since the beginning of the year. To make a proper assessment of the current market situation, however, we cannot just focus on the enormous growth rates compared with the crisis year 2009. Instead, we must also compare current sales volume with peak crisis levels such as those from 2008 for example.
[Inaudible] has start to see the passenger business on the like to like basis, in other words without the additional growth generated by Austrian Airlines and BMI. And as you can see it has grown substantially at year on year rates of 4.1% in the first quarter, more than explained 5% in the second quarter and 7.4% in the third quarter.
In the first quarter, sales were still well down on 2008. But in the second quarter, the reach pre-crisis levels again leaving out the negative Ash Cloud effect in April. In the third quarter, sales outpaced their pre-crisis leveled by 7.4%.
The same trend was visible throughout the aviation industry, of course. Nevertheless, Lufthansa is benefited more than most from the overall market recovery. But our competitor still posted sales levels at or even below last year’s Lufthansa has already generated organic growth of 5.1% and including the larger consolidation base of Lufthansa Group has actually achieved growth of 17%.
This is partly for regional reasons. Lufthansa benefits from its broad network with particularly good exposure to the growth regions of Asia Pacific and Africa. 30% of our traffic performance comes from the Asia-Pacific and Middle East Africa regions. And of course, the company also profits from the particular dynamism of the German economy.
As we all know however, volumes are only one side of the coin. The 2009 crisis was above all of the price crisis and not a volume crisis, but with regard to revenue and pricing the pictures is just as clear, at least for long haul traffic, average yield here in the third quarter of 2010 shown as a dotted line were also back at a pre-crisis levels and trafficked revenue as well both on 2007 and 2008 levels.
The thrust behind the positive development in the passenger business therefore comes primarily from our long haul roots and our excellent positioning in the premium and business travel. As it glance at the individual traffic regions shows, average yields went up significantly in all long haul regions and load factors improved at the same time as well.
In the traditional markets, Americas and Asia-Pacific, we were able to increase our average yields by 17.4 M. 16.7% respectively. In the third quarter, they even improved by approximately 25% in both regions.
In the growth region, Middle East Africa grew average yields were up 7.9% and 20.1% in the last quarter alone. Alongside the capacity increase fulfilling 23.3% versus the previous year. This is of course a very pleasing performance.
This demonstrates Lufthansa’s particular standing in the premium segment, a segment that is vital for us. One of the key indicators for our revenue quality is as you know the performance Lufthansa passengers airlines long haul revenue accounted for by business and first class.
In the first nine months, it rose by 1.2 percentage points to 47.3%. Even though the ongoing fleet rollover, for instance, by flying an Airbus A380 versus in 747 aircraft automatically produces the structural shift towards greater capacity in economy as the number of economy class seats increases in relative terms by more than the number of business class seats. This effect by the way is even more pronounced than the short-haul where we have exchanged fairly large number of 50-seaters against 90-seaters.
As expected, developments in short-haul traffic within Europe are rather different. Hereto, the improved trafficked revenue substantially by 26.3% were adjusted for consolidation steel by 4.9%. Average yields were however slightly below last year contracting by minus 2.1%. This partly reflects the structural shift in demand presence us more and more customers opt for economy class in short-haul routes. And it is as I explained also the result of our response to this development.
Our strategy is part of restructuring programs like Climb 2011 or Austrian Next Generation detects unit cost sharply and short-haul traffic. And we achieve this primarily by using modern fuel-efficient planes with more seats in the back particularly and therefore a much better cost position per seat. It also alters, as I explained the ratio between economy and business class which is consequently and have to be reflected in a general decline in yields levels. I will return to the details of the fleet restructuring later on.
Combining the different trends and long haul and short-hauls shows that business revenue increased by 29.2% and average yields by 10.5%.
Developments in the freight business, I believe more dynamic. Hereto, transport volumes have been back a bus pre-crisis level since the second quarter. In the first quarter, we even sold 11.8% more than in the same order to company. From January to September 2010, sales volumes were up by more than a quarter on the period in 2009.
For Lufthansa Cargo too, the strong exposure to Asia and North America pays off. The boom in exports from Germany provided additional tailwinds enabling sales growth of 25.6%. Again, this shows the significant outperformance versus our direct competitors as capacities on the market remains scarce, the load factor rose by 9.8 percentage points to 71.1% which is higher than in 2008.
Under these circumstances, Lufthansa Cargo was also able to raise its average freight rates to levels seen before the crisis. They went up by a group of 26.7% in the first nine months or by 35.1% in the last quarter.
Overall, trafficked revenue in the passenger and freight businesses climbed by EUR3.9 billion escape EUR16.4 billion. Volume accounted for 921 million, higher ticket prices and freight rates for 582 million, exchange rates for 575 million and consolidation effects for EUR1.8 billion.
Leaps on the revenue for the airborne companies were all sharply, while the ground-based companies and that cyclical businesses reported stable revenue developments overall. The passenger airline group reported an increase in external revenues of 29% to EUR50 billion.
Lufthansa Cargo’s revenue leaps by 45.6% to EUR2 billion.
At Lufthansa Technik, external revenue came to 1.8 billion which represented a slight drop of 1.1% on last year. A good portion of the short fall from the first half of this year was nevertheless recoups in the third quarter.
Our IT segment registers a fall of 6.4% in external revenue to EUR175 million. These reflects the still restrictive IT investments of the airline customers and also which we explained also perhaps usage of the reclassification of the business with Austrian Airlines which was accounted for external revenue last year and now it’s internal revenue.
By contrast, the catering segment benefited from the revival in passenger business especially in the premium segment increasing its external revenue by 6.3% 1.3 billion.
Let us now turn to the developments of the expense items, total expenses were up by 20.6% which was less than the increase in revenue. Adjusted for consolidation effects, fairly rose by 9.2% to a considerable extent. This was due to the year on year increase of 47.7% fuel costs to EUR3.9 billion, which is included in the cost of materials and services. Without this, the adjusted in expenses would have been just 5.1%
As usual I will us the individual cost drivers within fuel expenses separately. The cost of materials and services came to EUR11.4 billion in total and was therefore 24.8% higher than last year. On a like-for-like basis, the figure rose by 12.1%.
In addition to fuel costs, recent charges also make up a large part of the cost of materials. Lease went up by 26.3% largely due to the expansion of the group. Without the new companies, the increase would have been .1% primarily due to higher handling charges after his salt also increased flying activities.
Staff costs were up 11.9% and amount to EUR4.8 billion, this is a 2.8% increase adjusted for the effects of consolidation. The comparable number of employees however fell by the same proportion down 2.8%.
The fact that expenses moved in the opposite direction is partly due to the exchange rates and to higher additions to the pendulum provisions following a reduction in the discount rates to 5.5% which we have seen since the beginning of the year.
Depreciation and amortization was as expected as a result of the fleet modernization. It climbed by 16.9% to EUR1.1 billion or by 4.8% after adjustment for consolidation.
The familiar close-up of fuel costs reveals that alongside the effect of consolidation which increased fuel expenses by almost EUR400 million, it was primarily the higher oil price and adverse exchange rates movements that were responsible for pushing up costs on a EUR652 million and 153 million, respectively. The exchange rate effect was dampened by corresponding profits from FX searching of EUR60 million. They are not shown on this chart because these profits are not accounted for in the pure cost position but in the other operating income.
The actual fuel hedging result increased expenses only by mere EUR27 million and this is the reflection of the fact that we are basically at break even with our hedging.
But let us now turn to the actual earnings developments. The profit from operating activities as defined by IFRS improved by EUR553 million year on year to EUR869 million. As usual, we adjust this figure for a number of items to calculate our operating profits. Overall, we eliminated hundred EUR257 million for the first nine months.
The lion share thereof that is EUR175 million came from realized net book gains on the disposal of financial investments. These gains came about largely from transferring 8.5% of our Fraport stake to the pension fund, that’s a book gain of EUR94 million and from the sale of a part of our investment in Amadeus in April; I believe EUR67 million both in the first half of this year. This brought the group’s operating results the EUR612 million which represents an increase of EUR386 million or 170.8% compared to last year.
Adding now write backs of provisions gives an adjusted operating margin of 3.5%, 1.5 percentage points more than in the same period a year ago. In total, the development of the foreign exchange rates had a positive influence of EUR191 million on the operating results.
And now to the distribution of profits across the business segments, while segments were profitable in the first nine months of the year. Profits at the passenger airline group did fall slightly year on year by EUR21 million to now EUR218 million. However, we think this in fact very positive result given that the pilot strike and the airspace over in the first half of this year to more than EUR200 million of the bottom line and given the fact that Austrian Airlines and BMI still show negative earnings contributions.
In the third quarter alone, this segment earned an operating profit of EUR560 million. At the midpoint of the year, the passenger business was still showing a loss of EUR342 million. We are, of course, also expecting an operating profit for the full year 2010. We will take a closer look at the earnings contribution and the outlook scenarios for the individual airlines in the group in just a moment.
The swing in earnings at Lufthansa Cargo is still remarkable. After loss of EUR200 million in the same period last year, our logistics segment generated and operating profit of EUR230 million from January to September 2010. As the course of business remains stable, we are also anticipating a profit for the fourth quarter, which will more slightly enable us to add to the earnings achieved so far.
The late cycle MRO segments reported a moderate decline in profits in line with expectations. The operating results was solid as usual at EUR211 million, still down 7.9% on last year. For the full year, we are also assuming that the height earnings levels were not quite be achieved.
IT services was able to keep its results stable over the first nine months. As EUR12 million that was slightly higher than last year. In comparison with the results of previous years, but nevertheless highlights a need for action, which Lufthansa Systems has addressed by setting new priorities for product development and launching a restructuring program in the third quarter. This may lead to further restructuring expenses being incurred in the fourth quarter, which will depress the course of earnings.
For the full year, we therefore a decent date on operating result below last year’s.
And last but not least, the catering segment produced an operating result of EUR50 million which is only 5.7% lower than last year. Last year’s figures included a one-off payment of EUR40 million from the D&O insurance, however. Adjusting for this effect makes it clear how well the catering segment is performing too. Our chefs are benefiting from the resurgent demand in passenger traffic, especially in the premium sector and are continuing to implement the cost to management systematically.
In the passenger airline group, the operating profit of EUR218 million is divided among the individual airlines as follows: Lufthansa Passenger Airlines earned 361 million in the third quarter turning the half year loss of EUR203 million into the substantial operating profit of EUR158 million after nine months. For the full year, we are also expecting this substantial operating profit.
In the post-crisis year to SWISS, remains the airline in the group with the highest margins. Its operating profits slowed down by 158.7% to EUR194 million. SWISS also expects the significant improvement for the full year’s operating results versus 2009.
The restructuring of Austrian Airlines is continuing and the new markets and key strategy is playing well on the market. As a result, the company became profitable again in the fourth quarter recording an operating profit of EUR23 million. I would like to remind you that the previous year figure also included a 26 million positive one-off last year.
After nine months, the total loss now stands at EUR47 million. That is a significant improvement compared to last year.
With the targeted savings of EUR250 million, Austrian Airlines intends to reduce the operating loss or the full year considerably compared of last year to generate free cash flow. In 2011, the company should be making an operating profit again.
In the third quarter, BMI was also able to generate a small operating profit of EUR3 million. The nine months result came to minus EUR90 million. Nevertheless, the restructuring measures introduced in 2009 and the downsizing of the company are going to – according to plan which means that the target of the significant improvement and the result in 2010. The aim is still to generate an operating profit by 2012.
German Wings an operating loss of EUR11 million in the first nine months. Traffic volumes have increased sharply since the second quarter but could not make up for the burden caused by the winter, the strikes and the closure of airspace. And of course, Germanwings was particularly hit because of their traffic goes in this region. Steps to safeguard earnings have been taken, but we expect an operating loss for the full year too.
Let us now turn to the earnings indicated so many analysts are more familiar with EBIT and EBITDA. EBIT came to EUR957 billion, almost 750 million more than in the same period last year.
In comparison with the profit from operating activities, it includes the improved results from subsidiaries joint ventures and to associates with EUR71 million as well as other financial items of EUR17 million mainly from changes in the market value of hedging transactions. Last year, this item was severely impaired by the impairment on our prior foot investment then was EUR140 million.
As I explained earlier, the current level of depreciation and amortization has increased due to the fleet modernization. This means that the gap between EBITDA and the other operating result indicated as widened. Adding back to appreciation and amortization of 1.2 billion gives an EBITDA of EUR2.2 billion or the nine-month period. These represent an increase of EUR789 million and reflect the present recovery even more clearly than EBIT or our operating result.
Net profit for the period came to EUR524 million compared with EUR31 million for the same period a year ago. This is in spite of the year on year increase in taxes, expenses of EUR245 million. Net interest declined will just be to a minus EUR250 million mainly due to the consolidation affects and the precautionary buildup of liquidity. The net profit for the period corresponds as I said earnings per share of EUR1.14.
Before we close the books for the third quarter, let us take a look at the development of cash flow. Hereto, of the improvement in the operating performance can be seen for the similar dynamic.
Cash flow from operating activities to buy EUR987 million to a total of 2.4 billion. Despite taking delivery of 44 aircrafts in the airport period and the cost of modernizing the fleet and despite gross capital expenditure of EUR1.8 billion, the group was able to report a significant free cash flow. Interest and dividend income of EUR312 million as well as asset sales and portfolio disposal such as the Amadeus investment brought net capital expenditure down to EUR1.1 billion. Free cash flow, therefore, amounted to 1.3 billion.
The group still has a very strong liquidity position. Cash and cash equivalents stand at EUR5.7 billion, including non-current securities that can be liquidated at any time. The group’s liquidity in fact came to EUR5.9 billion as of the end of September.
At this point, ladies and gentlemen, I would like to the presentation of the nine months figures and take a look at the developments ahead.
The pronounced pace of the global economic recovery from which we and indeed the majority of the aviation industry are benefiting has, of course, also its downside. And so, the overall recovery has a direct effect on the markets for crude oil. The price of forwards for delivery in December 2011 has climbed to approximately US$87 per barrel. This of course has an influence on our cost forecast as well.
For the full year 2010, we are still expecting fuel costs of EUR5.2 billion. For 2011, we anticipate that the figure increase to EUR6.0 billion based on the current forward rates.
At the same time, the effect of price rises are reduced by our systematic hedging policy which we have not altered. Our breakeven price for 2010 steals US$78 and for 2011, it stands at US$88. Our hedging ratio for 2011 is currently 61%.
It is therefore all the more important to make our cost base as lean and efficient as possible in any area where we can exert an influence. That is by all the segments on pursuing these programs established in the crisis with undiminished vigor. It is a healthy discipline even during upturn.
An important role is played in this context by Climb to 2011. Indeed, despite a partly outstanding performance, there still fundamental price pressure in European traffic due to the shift in many passengers travel patterns. Further, progress has been made here in recent months and key areas of initiative. We have already implemented measures to secure savings of more than EUR230 million in the current financial year.
In administrative areas, agreements have already been signed that will deliver 70% of the targeted reductions in staff capacity in a socially acceptable manner. The hiring freeze in these areas is also being extended.
The different projects also taking shape with regards to suppliers alongside reduces sales cost and unflattering contract, the divisional maintenance concept with Lufthansa Technik is also bringing further cost-saving. The fact that the individual stations now will be on supplier relationships independently with the local Technik facilities makes the processes more efficient and the cost base leaner.
The collective barter agreements signed in the second quarter with cockpit and ground staff were an important step towards reducing unit staff cost by 10%. Generally speaking, productivity gains that has been achieved in all areas. On the ground alone, productivity is expected to be 10% higher than last year.
New pricing and sales processes have led to a 9.8% rise in passenger numbers and direct traffic. That is the traffic that touching our hubs. At the same time, the introduction of the new Europe Cabin from late 2010 we’ll reduce unit costs per flight even further although the new seats will lead to a more comfort on boards.
The rollover of the short-haul fleet is progressing smoothly. So far, 44 out of 49 50-seaters have been retired. This increases the productivity of direct traffic even further and brings the cost base in the area closer to the standard among competitors flying larger aircrafts without jeopardizing the USP of the Lufthansa brand. In fact, the new aircraft did not just provide greater comfort; they also are now fuel-efficient and thus combined economic and ecological advantages.
The measures to improve the fleet structure that has been in European Cabin as well as the fleet rollover in short-haul are also affect this driving the additional capacity increases in the passenger airline group will appear next year. We are anticipating growth of between six and 10% for the full year 2011.
But let start at the bottom in order to put the scales and network expansion to proper perspective. No less than 2% of the increase in next year’s capacity is due to the base effect of the hard winter, the pilot strike and the airspace closure in the first half of 2010.
Another fundamental component as a result of our optimization of unit cost, the productivity measures as part of Climb 2011 that I have just talked about bringing additional unit cost improving seating capacities. As of the winter flight timetable for 2010, we are also flying for A380s at Lufthansa with full capacity as well as the new A380 at SWISS.
The success of renewal of the fleet with larger and more fuel efficient aircraft types, automatically leads to an increase in seating capacity. The fewer network expansion accounts for just zero to 4%. We intend to use this to seize selective growth opportunities.
As in the past, we are guided by the prospects ahead and not afraid of integrating changes in these prospects into our up ticks. And with our high proportion of unencumbered aircrafts, we definitely have the flexibility to do so and we will use it if we have to.
At this point, I would also like to emphasize that the network expansions in recent years are responsible for the situation we are currently enjoying. Our very strong market position in Asia and in a much better position in the African market and the network that has made us a sought after partner, both for the new companies in the group, but also for the members of STAR Alliance.
We have also achieved position by having the right instincts to expand our route network without losing sight of profitability and this is precisely what we will continue to do in future.
Ladies and gentlemen, I have now reach and the last one in my presentation, the famous outlook. At the half year conference, I commented with despair that we had wish for a smoother and a calmer flight with the next, over the first months of 2010. But in facts, we came up against considerable headwinds, which by the way is good if you climb. But we are on travel altitude, backwinds are not too bad.
Now, three months later, we can justifiably say that we have made good use of the weather conditions to gain additional altitude. If you will allow me briefly to use an analogy from a different industry for a change, we have been able to get the horsepower to the ground. Above all the freight business and intercontinental passenger traffic have really put the pedal to the metal.
Despite varying dynamics in the different business segments, the success to date in the current stable developments and demand that all together led us to revise our expectations for 2010 upwards. We are therefore now assuming an increase in revenue which would now be well above last year’s even after adjusting or the effects of consolidation. By a continuous circus in the attaining our cost targets, we now expect the operating results for the current financial year to exceed the EUR800 million mark.
As always, this forecast is subject to the traditional disclaimers and that is that the economy develops as predicted and the other usual suspects, fuel price, exchange rates, whatever you can think of. So, we expect they’re not so have an unforeseeable impact on the business, but you never know. Apart from that, I stick to the more than EUR800 million.
As a result of the operating recovery, we assume as of today that the conditions for aiding the dividend for the 2010 financial year will be met. For this fine achievement behind us, we will continue to work hard to maintain our goal of occupying a sustainable leading position in the aviation industry in terms of profitability and value creation.
On current estimates, the fundamental assumption is that the operating result will continue to develop positively in 2011. One year imponderability that is difficult to forecast is the extent to which the plans National Aviation Tax can be expected curtail demand.
I’m sure you have prepared some questions or they have come up and we’re now very happy to take them as usual. Please be so kind and wait for our chime in colleagues of it was some microphones and give us your company. For those who follow us on the webcast later on, and now we’re happy to side with your questions.
Penny Butcher – Morgan Stanley
Penny Butcher from Morgan Stanley. Three questions, if I could. The first is you did detail in the speech regarding the yield developments, the third-quarter trends, so everything but the short-haul market. Would you mind sharing us with the number of – on that front, if possible?
The second question is related to the guidance on ASK growth in that 6 to 10% range. Could you perhaps indicate what you are expecting in terms of load factors for 2011? Is that sort of assuming broadly flat load factors or do you expect with that level of ASK increase that perhaps they might fall back a little?
And the third question. In regard to the developments in 2011, operating result, you do indicate that you expect it to expand from whatever the 2010 number is. Based on, I guess, unwinding the one-offs that you’ve incurred this year, do you actually think it’s possible to exceed the ‘07 level of operating result next year, just on an estimate at this point in time? Thanks.
Let me maybe start with the first question. Somewhere near the yield for the European traffic and the third quarter was minus 1.6% compared to the minus 2.1% for the nine month period.
So, let me just assume you have asked about the relationship of growth and seat load factor in years are going forward with our growth plans. To make a long story short, we do of course anticipate slight yields losses of everything else would be extremely ambitious and optimistic and we are not tightened optimistic, but we – for a number of reasons do expect to at least have stable yields if not improving yields on the long haul and this is not just a questions of market forces, but it also has to do with the fact that we have – in the presence of introducing a number of new revenue management systems which will give us a much better competence to fine tune our yields there.
And in the short-haul, anticipating the growth which we have here, we do calculate with our – let’s say mid-single digit yield losses. And in total, the seat loan factor should more or less remain where it is. So, this is of course kind of experiment. We feel encourage to conduct such an experiment by the fact that really most of the growth is extremely cost efficient.
It is not that we at aircraft can pay the price, it is that we have much more earning capacity in the short-haul aircraft; 8% almost of more comfortable seats. We will increase the flow in block hours significantly in the productivity of the short-haul aircraft and there are a number of other issues which make us very positive in this regard.
On the other side, however, and I mentioned this already, we will benefit from the flexibility we have. We are not blind and we will not run into the next year with ambitious growth and then at the end of the next year and the end of October of 2011, since you’re saying this was nothing. It was a flop, we will not have this.
So, if our plans don’t work out as planned and they all workout well, then we will of course also take corrective action. But this is not what we see currently from the market perspective on the bookings which we see. We are very encouraged to pursue our strategy.
And finally, the operating result, if I understood your question correctly that was do we expect to not only correct for this year’s one-offs but also put something more on top. It’s clearly too early to say what we expect. But our ambition is to do that, yes.
Andrew Light – Citi
Yes. Andrew Light of Citi. Also three questions.
First of all, I think you’re already selling tickets into next year. What’s your experience of being able to pass on the Eco tax, should it be introduced, in those forward bookings?
Secondly, can you give us an outlook for the capacity growth in Cargo next year? And is that a business that you are willing to invest more in, in terms of new capacity, new planes, given the success this year?
And thirdly, what do you think you have to do now to start to recover the investment grade on your debt? And is there a process of doing that, at the moment?
With respect to the tax, it’s really not yet the time to have an affirmative answer. But the booking outlooks for next year are positive. Now, what we have to do is not only compare it with last year or the last quarter, but we have to see how that would compare to areas where do you don’t have such a tax. That’s what we will do very closely. But as it looks like now, the impact is manageable.
As far as this cargo capacity is concerned, we do not expect to extend the fleet and add additional aircraft per se. and of course, this year, our capacity was rather depressed or our growth next year, which we can process a total of 10%. It will largely be fueled by belly capacity of the passenger aircraft, plus the additional effects from Austrian Cargo and whatever we have due to consolidation.
And Jade is expecting and planning to lease one or two more aircrafts to us, to also expand on the transpacific from China to the U.S.
And finally, it remains to be seen what growth we’ll have in aerologic as they have been in the buildup of full capacity this year. This will be the full capacity for the next year, so they will also be the one or the other percentage point. But it’s not growth which will be in any case be connected to investments there.
In terms of investment grade rating, of course we are very confident going into the stocks in January, February. Mathematically, we don’t look as great as last year because they always have trailing 12 months figures and so we have now the crisis in the backend when we slept together in the summer or in the winter of 2009 or 2010. We’re still coming from a high level, but given the dynamics in our business, we are extremely confident.
I have also no other indications on that those talks should be going well. Don’t forget the liquidity buildup, which we have and which we can make a use of. So, we’re going forward, I think. We are much more relax than we have been in the last two or three years.
Michael Kuehn – Deutsche Bank
Michael Kuehn from Deutsche Bank. Also three questions from my side. You just mentioned liquidity buildup, and we all saw the improvement in net debt over the first nine months. Can you give us an indication already what corridor you do expect to reach at the end of the year, in terms of net debt?
Then, secondly, you also mentioned that you should be able to pay a dividend for FY10. Would that be in line with your dividend policy from the past, or are you still a bit more cautious and would tend to pay less than 30 to 40% of the operating result?
And then, finally, I saw an article today in the Austrian press about a dispute on landing rights of Austrian Airlines into Russia and a pending renewal towards the end of the week. Can you give us any information on that topic, and if you do see any risk of losing those landing rights? Thank you.
With landing rights, I am optimistic. I mean it’s always a last minute decision that’s made and I think probably if noted that the European Commission has filed a complaint there. And to explain it, currently to European member states who are allowed to negotiate their bilaterals on an individual base under the umbrella of the E.U. Law.
Now, the request from the Russians is not in line with the E.U. Law and it’s not only Austria or Germany, many other countries in Europe have this issue. That’s why the commissioner has sent a letter and complaint and I’m sure that we will find the solution there as well.
Secondly, it’s not a one way street. If you lose the bilaterals, it goes in both directions. That means if the Russians want to fly to Austria and other countries, they must find a solution that’s why I’m not very pessimistic.
Let me answer your question regarding the dividend. First, we have not changed our dividend policy. However, our dividend policy as you know has always provided for a spread of 30 to 40% of its operating profit provided that the German GAAP accounts allow for it and we have not change this. But I – and as we not discussed this yet in the Board and not even talk with the Supervisory Board about it and as we still have three months to go, my feeling would be that we continue our dividend policy, but somewhere at the lower end of this range.
Simply because of the fact that the financial world is not completely intact as of today and that we still want to follow our precautionary and conservative course given the investments, which we have ahead.
In terms of the liquidity and net debt position, we mentioned that we have taken delivery of more than 40 aircraft so far. It will of course all depend on the cash flow into the last quarter, where we end. But you should not expect any significant change in that net debt position.
If this is also, this is basically what we expect also for the next year because our investment plans for the next year and/or business prospectus as we see them what allow for paying the investments out of the cash flow as well.
And if you allow me, I think it’s a heavy problem that after this year, we’re sitting there and have to discuss how good we can reward our shareholders with dividends. We will find a good solution.
After all, we all shareholders also.
Thank you. Good afternoon, three for me please. The first one in relation to perhaps non-cargo CapEx, since the cargo question was asked earlier. So, as improving demand conditions changed the CapEx plan for the next couple of years in any way. Maybe you could confirm the current plan for gross CapEx in 2011.
Then secondly following on from Mr. Franz’s comments on the potential passenger EBIT margin over the medium term. Are you prepared to talk in anyway about medium term target for the passenger division or in deed the group?
And the finally, I don’t think it’s been mentioned, but what is the fourth quarter year-over-year capacity outlook for the passenger division?
As far as CapEx is concerned, we indeed will see a slight increase in CapEx. So, far we have had plans to have gross CapEx 2.4 billion. Currently, our plans in the 2.67. Again, this will have to be seen in the light of the future business development that is if development does not go as planned. We’ll most likely also again be very restrictive here.
The investment which we have seen this year was restrictive because we have, for example, told all the non-flying airlines to cut their investment plans by 50%. Unless those were essential investments and as the crisis in terms of operating terms is over, there is really no good justification to stand on the breaks further. So, we are looking into growth opportunities for us – for taking other businesses and they, of course, will then also incur additional investments. What this means on the net level remains to be seen, but we will be careful and conservative there.
In terms of EBIT margins, the passenger airline midterm, this really is too early to say. I think the contexts of these statements were perhaps somewhat misinterpreted. What Christoph said was that for an industry, which is a normal industry, an 8% margin should be a normal margin. And we know that for a number of reasons, Lufthansa is in a not very normal industry. We have regulation, we have taxes, we have airspace closures, we have all kinds of stuff. But it has to be our ambition to come to those 8% or even more and we have seen 11% now and SWISS has shown double digit margins in the last couple of years, several times.
So, we’ll diligently work to get there. But really to set this as a target, we lack the base. Therefore, we still need some time and we need some stability in the business environment before we can really talk about this seriously.
So, yes, it is the kind of the vision. It is an ambition, but it is not a plan, which is baked into our figures.
As far as full year capacity is concern, we do not in the passenger airline group foresee any major changes in the fourth quarter. So, the current figures as they stand should also be the one to find at the year’s end.
Jonathan Wober – Societe Generale
Thanks. Jonathan Wober from Societe Generale. First of all, could you just come back on the CapEx question? Previously, you’ve put up a slide with CapEx figures expected over the next three years. Can you just give us what are the figures we should currently work on for 2010, ‘11 and ‘12, please?
And then the next question is you put up a slide earlier on, showing the IATA profit forecast into next year, which is falling relative to this year. IATA are being a bit more gloomy, thinking that capacity is going to exceed demand and yields are going to fall. Your outlook into next year is more positive. Your operating result will be better than next year as things stand, is what you’re saying. How can you reconcile the difference between those two points of view?
And then the final question is what’s the right tax rate we should be using for the current year?
In terms of CapEx, I can share with you the plans going forward. We do plan to increase CapEx in 2012 by about a billion over what we have planned so far. If we will be doing this remains really to be seen, but it all is dependent on the cash flow we generate. So, in a perfect world, where they development is planned next year, we expect to come up with 3 billion of total gross investment 2012.
In terms of potential differences and interpretation between IATA and Lufthansa, I think there is one, one thing was just always important to observe and that is where are you operating your business. this year has clearly shown that we outperformed the rest of the non-Asian carriers by far and this has largely to do with the fact that we are in the heart of Europe and that we have not only a very prosperous long-haul business and the focus on premium traffic, but that we’ll also benefit extremely strong from the export room of the German economy.
For the first time in years, the trade lanes to China were full in both directions at very good yields. And for years before, and I have seen this one when I was still at Cargo that flight from China to Europe had to pay for the return flight. So, that has been a fundamental shift in profitability on those cargo lanes to and from Asia and of course, it has also the same effect on the passenger development otherwise you wouldn’t have had more than 20% growth and 20% yield to increase at the same time.
This is something you cannot simply transport over the border and to other regions and to other carriers. Air France has shrunk significantly or as in the presence of shrinking cargo capacity, many other carriers have given back conversion slots in the crisis, so that capacity in the segment will be constrained, and in terms of passenger traffic development, I’ve laid out the developments which we are now benefiting from strong focus in Asia, extremely strong focus meanwhile on Africa.
Two or three years ago, we’re still at only 7%. Now, we are very strong there together with Brussels and with SWISS and with Lufthansa and we will continue to focus on the traffic region. So that in total, we are very confident that we are in a preferred position here and that not everything which is applying to other regions will apply to the same extension to us.
In terms of tax rate, I’m glad you asked me and not the finance minister. I can give you my expectation, but I think the more realistic expectation would be something on 25% as we calculate it now.
I think with IATA, we have to be fair. There has been such a momentum in changes recently that the pickup point has to be adjusted. There will be a conference in December, 3rd of December and I think we will then get the inputs in a much more deliberate way because they have taken in consolidation effects, fuel delivery of airplanes and looked at the various region and as you have seen, the pickup point this year has changed during the last quarter by more or less 5 billion.
So, I wonder how correct this is for next year. We will see.
Lexi Dugan – Liberum Capital
Hi. Lexi Dugan [ph] from Liberum Capital. I want just three questions as well. One, on the export credit guarantees, can you give us your view? Are you arguing for restricting access for other countries, or opening access to yourselves?
And second, did you have any comment on Ryanair’s recent capacity changes at Hahn? They’ve said they’re going to reduce flights by 30%.
And the final one is if you were able to break down the North Atlantic yield in Q3, and how the JV is progressing.
With the first two questions, I think it’s become obvious that the time we are export financing of airplanes are over. When you have access to capitals through leasing firms, et cetera, et cetera and it’s create a huge distortion and I have seen that momentum also in the United States, where people say this is not fair anymore. We have had eight airlines in Europe who advised the government and said, “Why do you spend all this money? It’s unfair.”
We have only, I think, one choice. Either you stop it or you open it anyone. Whatever happens it will be good for us. Either we have easier access or the others have to pay more. So, we work on that very hard.
Hahn, yes, I heard. They are reducing by 30%. I have no real knowledge of this whether its bargaining chip again at this rollup or its three airplanes which is not too much and they want to shift to somewhere else where they get more money. I always call them at others cost carrier and not low-cost carrier. And if the government is not willing to spend anything there, which I think there is necessary to stop subsidizing them then they have to go somewhere else. And I wonder when they are running out of territory because it becomes obvious now there are a lot of cases where they are sued.
Recently, there have been asked to leave Marseilles, because they have not adhere to local working rules, et cetera, et cetera, and there are some legal cases up which probably will make them to shift airplanes in some other areas. The yields you can answer.
Yes, I don’t know if I can answer the yield as detailed as you want to. But we are looking at this conference that yields from North and South America that is for the America’s region. And for the first nine months, this yield has increased by 25.2%, but in the third quarter standalone that has increased by 45.8%. This includes of course currency effects and fuel surcharges and stuff.
Tobias Sittig – MainFirst
Tobias Sittig from MainFirst. Three questions, if I may. Firstly, on the capacity plans next year, would it be fair to assume that there’s also a tactical element in terms of gaining market share in Frankfurt and getting more slots afterwards in your capacity plans, or is that purely economically driven or economically 2011 driven?
Secondly, Cargo, there’s been some mixed signals out of the market as to whether you were managing to implement that 20% price increase as of October. What’s your latest insight into Cargo yields and how they’re trending, and also Cargo volumes in the fourth quarter? There’s been talk about sort of a weak peak season. Maybe you can comment on that.
And lastly, on your liquidity, when should we expect that to normalize to your minimum plus levels, EUR3b or so, rather from currently almost EUR6 billion there? Thank you.
I will answer the capacity question because he has said it already before and then Stephan will go into the other two issues. Well, the runway will not open up next year; it will be the year after. So, the capacity increase that we have laid out here is a very structural and I think asset lean capacity increase.
As Stephan pointed out, the growth of number of airplanes compared to the growth of flights, the growth of SK is always shifting. And yes, while we will maintain the course once this runway is open that we will utilize it to the best is clear. But it’s not an issue for 2011.
So, the other question was cargo yield and liquidity.
Yes. First of all, I have to confess I gave you the wrong figure because this was cargo yields. Passenger yields were for the first nine months plus 16.7 and for the third quarter 24.7, so that is same tendency, but different dimension.
As far as cargo yields and volumes are concerned, we do the natural – we do see the natural reduction in growth rates. This is clear and this is what we would expect after such a strong recovery, everything else would be absurd. So, therefore, we don’t see a weakness, we do see growth, but on a smaller scale and this is very healthy and this is what we consider good, also looking into the next year.
We are very comfortable with that and have no concerns there as we have settled. So, earlier this year, we consider this whole double dip and other scenarios for a really theoretical models which have nothing to do with the real world.
In terms of liquidity, how long will we sit on this liquidity. That’s a good question. Clearly, we have much more than we expected and that more than we need. At the same time though, if we have the opportunity to finance aircraft its terms are extremely attractive. It would be foolish to use this liquidity for those aircraft in comparison.
So, therefore, we use the market conditions as long as we can and the question is how long will the market holdup and provide those opportunities, and as soon as they don’t do this and it’s more favorable to use liquidity, we’ll do so. At the same time, of course, we know that liquidity is also depressing the CVAs. So, we are artificially looking worse than we would otherwise be.
So, therefore, we have an own strong incentive to bring the liquidity down. And then, we also have ideas to do so, but it’s really something which we monitor, but which is not really one of our most urgent problems.
David Fintzen – Barclays Capital
Hi. Thanks. David Fintzen, Barclays Capital. It’s called two and a half questions. On the zero to 4% in your capacity growth that’s network expansion opportunities, is it fair to think about that as aircraft utilization, or there are things in the fleet that you have flexibility on in the year? And just as a slight follow-up to that, how much scope for utilization increases in the scheduled side for aircraft do you have at peak times of the year, peak times of the week?
And then just the second question, I think it was Delta last week mentioned the back of September was surprisingly strong. Just some color about how the quarter progressed in terms of demand. Did we – any sense that we left the quarter on a much better note than we entered? Thank you.
Okay. In terms of the zero to 4% growth as far as network is concerned, what we were talking about is new destinations and increased frequency to existing destinations. Higher productivity of the aircraft in terms of flying block hours was not part of the zero to 4%. That was part of the remaining block there.
In terms of aircraft utilization, I think Wolfgang wanted to say a word
I think what we’ve learned over the period of time that we try to get out of the seasonality as much as fast we can. And if you have seen the growth of steady utilization this year, I think that’s a factor where we would like to stabilize it next year except for the fact that in our networks like Frankfurt, where we try to change the peak structure, we will have opportunities for the future.
And this is something where we are working in the direction of opening the new runway and are ready in order to absorb that capacity later in a more efficient way. So, we gave our people here a target of growing the utilization of airplanes here and also, justifying investment that would go in to this very profitable hub here in the future with airplanes.
We’re looking about the destinations; I think we have an opportunity in the continental and intercontinental operations to look at destinations on all continents. And there’s a battle going on inside at the moment, which one would be the most profitable routes and there’s also a discussion between Frankfurt and Munich who will get the airplane for those routes. But I do have a number of destinations which are part of our growth plan for next year.
So, if you look at the growth of next year and Stephan nicely pointed out the base effects and everything. I think one element comes also to it, this is if you take the old network and add five or six or seven destinations to it. That’s an incremental growth we’ve come on top of it, it’s a new market, which is not in there. So, I think it’s also a different qualification of growth and we have done that in the past.
But last year, we were very restrictive with our capacity. So, I’m very optimistic that the capacity that goes in there can’t be sold at a decent yield. And if you talk about the yield decline, it’s also a structural question because the airplanes that are coming in are all bigger. So, we will most likely go at the backend of the bus, which means if you then compute the yield afterwards, it’s clear it has to come down by nature.
And this should give you a little feeling that we are not only flexible in steering, but our intention is to really as a competition going on who brings the best profit for the investment.
Paul Butler – Macquarie
It’s Paul Butler from Macquarie. Just two questions, if I may. I just wondered if you could comment on your view about the yield deterioration that we’re seeing in the short-haul business. Obviously it’s down this year. You’re expecting it down again next year. If you could just talk about what you see as driving this and when, if ever, we start to see that stabilize.
And then the second thing is I think you’ve said that at BMI the yields are not where you need them to be. I just wonder whether you could comment on how much they need to improve for you to get that business profitable in 2012.
BMI, of course, was working in area that was heavily affected by the volcano and the financial crisis and that’s why the structure of their customers during that period of time is more futile more than in other areas because business to end consumers were not as much effect as it is business to business.
Now, if we look at, and I think you pointed it out that they were profitable for the first time since the long time in the recent period. So, we have a feeling of what kind of numbers do we need in terms of passengers flight and yield in order to be profitable. That’s their target, while they are changing the route structure in order to shift to more profitable routes and manage our other sales organization, the improvement we see is exactly where they have to be and I don’t have the exact figures available for you now.
But what we have seen in the last three months is actually what we need in order to be there where we want to be.
I mentioned before with yield decline, when do we see a stop of the year decline? I mean the market is playing it out at the moment, various competitions as fierce as it can be. This is one element and some of those competitors who sold with the price, by the price margin alone, they can win the border realizing in the meantime that doesn’t work. But we are not hoping for them to become smarter, so we can raise prices. We want to do our business as good as possible by our own.
But again if you take 50-seaters out and take 100-seaters in, you automatically do it for the lower yield proponents of our customer base. That’s why mathematically we have to see yield decline. But doesn’t mean that we don’t get the same yield per passenger in the business class, we have just more economy class in there. That’s where the growth is.
Perhaps I should also enter and add another touch to your observation because we are not end happy with the development in the European yields because it is just minus per 6% now in the last quarter, which is just a reflection of the timing aspect of the yield recovery. It started First Nation and Atlantic, then went to other intercontinental regions, it then went to Europe and it will also end in Germany. We are quite certain about this.
But at the moment, we are just taking the corner there. So, we are not unhappy with this yield development. But clearly a number of corporates have kept the right to fly business class on short-haul into crisis and many have come back now because it’s their entitlement in their working contract and whatever you have. So, therefore, we think this continued recovery will be visible also going forward.
Andrew Lobbenberg – RBS
Hi. It’s Andrew Lobbenberg from RBS. Two questions. Can you update us on the situation of labor talks with cabin crew, and also at SWISS?
And then, secondly, you’ve grown very aggressively into Africa, and yet you reported quite strong yields there. What are we to take of the profitability of those routes? What are we to take of your ability to pour more capacity in there, if it really is going as sweetly as it sort of looks from that yield data?
As far as Lufthansa Cabin, negotiations are concerned; this is a process which is still ongoing. We’ve had, I think, nine rounds of negotiations so far and the next one will take place in November and we’ll take it from there.
In terms of SWISS, quite frankly, I don’t know. Do you know?
You are talking about the negotiation with the pilots?
They are ongoing with CapEx.
Seen in December as the meetings are. They’re contract is still running until the end of the year. But they decided to come together already now to negotiate before the contract ends.
In terms of Africa, we do see additional select growth opportunities there and there are some very profitable markets. Africa is meanwhile a very differentiated landscape. There are some markets which do not recover and other which are doing extremely favorably so. And we do have a number of destinations on our future, roadmaps which we would like to fly to so the – and I’m talking about the whole group. And this means that not only the revenue, the top line is looking good and the yields are looking good, but also profitability.
Thank you. Next question, Tim.
Tim Marshall – Redburn Partners
Tim Marshall from Redburn Partners. I’d just like to start by commending you on your ground transportation as well as your air transportation at lunchtime. I just have a question about what United Continental was saying on their conference call last week. They suggested there’d be a $100m transfer to their Star Alliance partners, or their Atlantic Plus-Plus partners, for the first nine months. I’m just wondering if that’s accounted for in these numbers, or if that’s a number that we’re expecting to continue, or should it grow as we go into next year?
And then my second question is just it seems that obviously the biggest structural changes that have taken place over the last four or five years has been over the Atlantic, in terms of the consolidation that’s taken place there. What prospects do you think there are, and over what timeframe? Are we going to see similar consolidation take place elsewhere in the world on an intercontinental form?
On Atlantic, plus plus if they have to give money to somebody else, there is also – there’s no free lunch there. Something against it, so it just shows the whole skim is working and they received value for that money that they have to transfer and it’s not a one-way street. Whoever is in the loop of growing at best has then the share in there.
With respect to consolidation, I think it’s fair to say that these other markets, whether it’s Asia or Africa or South America, open for foreign as a very difficult will take time. But whatever time it takes we don’t know. We see that – we think South America, there is consolidation going on. Within Europe, it’s consolidation going on. Within the United States, the question of transatlantic, transpacific is another one and my personal opinion is that it will take quite some time.
Andrew Light – Citi
It’s Andrew Light at Citi. Two questions. First of all, on LSG, Gate Gourmet I think is raising new capital to seize further opportunities. I believe LSG is not particularly core. Would you give them capital to compete for those opportunities and just generally a comment on the strategic positioning of LSG within the Group.
And secondly, could you just remind me when you expect to, I think; exercise your option on Brussels Airlines next year?
In terms of LSG, your observation is correct. It’s not our core business. But as we have the means in the group, we’ll certainly not forego any growth opportunities for LSG, and LSG has already this year got an approval for a number of smaller, albeit investment opportunities. But there is no lack of capital for LSG.
In terms of – what’s the second question?
Andrew Light – Citi
When do we exercise our option on Brussels Airlines, whenever it’s best for us. So, you could take or leave it like this. Of course, we continue to invest and then harmonize the network there. But this will also expand to focus in the broad and very valuable additions to the Lufthansa network in terms of Africa traffic as you know and we’ll also see product investments and improvements there.
So, there’s nothing I could tell you. There are opportunities and windows on where we can exercise and but we’ll not discuss them today.
Andrew Light – Citi
Is the latest July?
Not now, I don’t know. We have plenty of time.
The window is yet open.
And we have several windows.
Right. But in terms of calculations, it’s no big deal. The numbers, it’s really opportunistic when should we do it, and we run as if we were all raise together. I think that’s the most important thing.
They have taken on this new A330 to Africa, which for their shareholder was clear that probably it would be better to wait for them, but we have shown them how we can work through the crisis that we are very appreciative of how the combination worked, also in their favor. So, we are working quite – on a quite solid base.
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