Deutsche Lufthansa (DLAKY) Q2 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: Deutsche Lufthansa (DLAKY)

Deutsche Lufthansa AG ADR (OTCQX:DLAKY) Q2 2014 Earnings Conference Call July 31, 2014 9:30 AM ET

Executives

Andreas Hagenbring - Head, IR

Simone Menne - Chief Officer Finance and Aviation Services

Barbara Schaedler - Head, Corporate Communications

Analysts

Neil Glynn - Credit Suisse

Damian Brewer - RBC

Donal O'Neill - Redburn

Alexia Dogani - Goldman Sachs

Jarrod Castle - UBS

Oliver Sleath - Barclays Capital

Stephen Furlong - Davy Research

Gerald Khoo - Liberum

Robin Byde - Cantor Fitzgerald

Victoria Bryan - Reuters

Natalia Drozdiak - Wall Street Journal

Richard Weiss - Bloomberg News

Panagiotis Koutoumanos - Frankfurter Neue Presse

Stefan Weier - dpa-AFX

Operator

Good morning and welcome to the Lufthansa Group's 2014 Half Year Earnings Conference Call. At our customer's request, this conference will be recorded.

May I now hand you over to Mr. Andreas Hagenbring, Head of Investor Relations, Deutsche Lufthansa AG.

Andreas Hagenbring

Thank you very much Ms. May. Good morning ladies and gentlemen. Thanks for joining our call on the Lufthansa Group's 2014 half year and second quarter results. As usually, our CFO, Simone Menne, will start with a brief review of the numbers, and then be available to answer your questions. Similar to our last call, we invite analysts and investors to ask the questions to Simone at first after the presentation and to media to join in afterwards. You can then of course register at anytime, and we will make it sort out.

Thank you very much. Simone?

Simone Menne

Yeah, thank you Andreas, and very good morning to you ladies and gentlemen. Thank you for attending this session. I assume you are all anxious to hear today's presentation and this is following our recent correction of the guidance, as well as the presentation of several market participants.

So let me recap, before I go into the detail of the second quarter. We were able to improve our results in the first quarter 2014. This was due to good cost performance, which shows the impact of our SCORE program; and of course, we also have the technical impact from the change in the depreciation policy.

Several factors prevented us from continuing that way and making improvements in the second quarter, and some of them became obvious with the May closing. We had several strikes, and another write-off of our cash in Venezuela, and we have a seen a continuous weakening of our revenues, especially in the forward bookings. These resulted in an adjustment of our guidance for 2014 and 2015, and I will show you the details on the following slide.

As a fast reaction, in order to stabilize prices, we have decided to cut back capacity growth in our passenger business for the winter schedule and for 2015. In order to overcome the structural changes in the airline industry, especially in Europe, we had already been thinking for some time about possible measures, and the first steps of the changes we are planning, were presented by Carsten Spohr three weeks ago.

Let me summarize this strategic roadmap; the airline industry is a growing industry, and the Lufthansa Group wants to participate in that growth. But in this dynamic and highly priced sensitive market, we cannot fully exploit the market potential with our current airline platform, in view of that, sometimes in flexible cost in governance structures.

With an expected concept, we work with the title Wings, we will establish multiple new platforms, with competitive cost structures to ensure that we can better translate general industry growth into profitable growth for the Lufthansa Group

Under the Wings umbrella, Eurowings will complement the Germanwings platform, which is focusing on Germany. Outside Germany, we will start with a dedicated presence in Switzerland, and are looking to expand it further also into Austria and Belgium.

Eurowings will be our short-haul low cost carrier for Europe with competitive unit costs. We target a unit cost advantage, measured in cost per available seat kilometers of 20% lower than Germanwings, which is already some 20% better than the cost of Lufthansa Mainline. It is only in this way that we can compete in the short-haul European market, which is concentrating on direct point-to-point connections more and more.

To react to the competition on long-haul, we will implement an additional long-haul platform, starting in winter 2015, which aims to capture potential on the growing leisure and private segments.

For 2020, we plan to shift revenue from today's 70% at the legacy carriers, and 30% with the service company, with 60% in legacy and 40% with new platforms and our service company.

To choose the right areas for future investments and keep up with the fast pulse of our industry, we will reorganize our innovation processes and crystallize our innovation activities in an innovation hub.

Of course, we will and want to improve the competitiveness of the existing legacy model, and this applies to both, the quality of the product and the cost structure. Therefore, we are discussing structures with our unions, as well with other stakeholders, to reach lower unit costs in our core business. Being successful here would allow a more competitive operation of up to 14 aircraft with the Lufthansa brand.

Furthermore, to secure our most important long haul market, we will strengthen the existing joint ventures. Be it in North America with United and in Canada, or in Japan with ANA. Additionally, we will extend our cooperation with Air China, with a goal of a fully fledged commercial joint venture for the important Chinese market, and we will continue with our SCORE program, which will be conferred into a constant improvement program to offset 1% to 2% of annual cost inflation. On top of that, we want to have sufficient measures ready to compensate a yield dilution of up to 1% a year.

As already mentioned in former presentations, we will modernize our system of key performance indicators. With a transparent value-based system, we will allocate our capital more appropriately and measure performance faster, in order to change the organizational behavior. We remain strongly committed to value creation.

Implementing this roadmap makes us better and faster aviation group, which should see the first choice for customers, shareholders, employees and partners.

And now we want to show you the half year results; the reported operating profit of the Group was higher in the first half year 2014 than in the previous year. The result improvement was driven by a favorable cost performance and supported by the change in our depreciation policy. In numbers, the half year reported operating profit improved by €41 million to €140 million. The normalized half year operating profit, excluding restructuring and project costs, improved even more strongly by €75 million to €219 million.

Looking at the second quarter only, however, the reported operating profit fell by €73 million to €349 million. The normalized operating profit declined by €30 million to €409 million. The main reason for the lower result, was a continuing weakness on the revenue side, as well as negative strike impacts, and the depreciation of the Venezuelan bolivar. The improvements made on the cost side and the benefit from the changed depreciation policy effect were not sufficient to compensate these three effects.

These developments are in line with our expectations which we have communicated in June. Hence, our guidance for the full year 2014 remains unchanged, at approximately €1 billion on a reported basis, and approximately €1.3 billion normalized for one-off. For 2015, we still expect an operating result of approximately €2 billion.

Let us now take a more detailed look on some key figures of the Group. Due to the negative pricing environment, revenues fell by 2.1% to €14.2 billion in the first half year, and by 1.7% in the second quarter, despite higher volumes sold. On the right hand side of page four, you can see the operational key performance indicators for the Passenger Airline Group. They reflect the weaker revenue development. The revenue per available seat kilometer, the RASK, was down more than 3% in the first half year as well as in the second quarter.

In the first half year, the operating result and net income improved by more than 50%. In the second quarter, the profit was below last year. This is because one-off costs were significantly higher in the second quarter 2014 than in the previous year. With €40 million cost for product upgrades and €10 million for restructuring expenses. Additionally, the pilot strike had a negative effect of €60 million, and we had to take another €23 million charge, because of the depreciation of the bolivar in the second quarter. These two impacts, were in total at about the same level as the tailwinds in the depreciation policy, which was €86 million in the second quarter.

Still, despite these results, the Group again generated a free cash flow of €546 million in the first half year. Financial net debt remains on moderate level at around €1.6 billion. It is almost unchanged from last quarter, and slightly lower than at the year end 2013. The equity ratio however declined to 16.6% in the first half year, compared to 21% at the end of the financial year 2013. The main reason for this, was an increase in pension provision, due to lower interest rates, without impact on profit or loss, that reduced equity by more than €900 million.

A look into the individual cost provisions reveals that we were able to compensate for the weak revenue development in the first half year, but only partly in the second quarter. One of the main drivers was fixed costs running during the pilot union strike, without revenues coming in. Therefore, the cost performance is difficult compared with last year. In the second quarter, operating expenses fell by 1.5%, mainly due to lower fuel costs and lower depreciation charges.

Group expenses for fuel were €103 million lower, compared to last year second quarter. Without this beneficial development on the fuel front, operating expenses had been 0.2% lower than last year. While depreciation was €73 million lower in this quarter than last year, because of the new depreciation policy, one-off costs amounted to €50 million, which was €43 million more than last year.

If we remove this benefit from fuel and depreciation as well as the burden from one-off costs, we would see the development of cost position, which we actually can influence. The so-called manageable costs, despite a €73 million charge from the bolivar, the manageable cost remains almost stable, up only 0.5% year-on-year in the second quarter. This is a fair development, given that we grew production by almost 2% in our main business.

As mentioned, the Group produced a free cash flow of €546 million. The operating cash flow decreased however by 24.7% to €1.7 billion, mainly because of the favorable working capital effects we have seen last year. Operating cash flow, still covered the higher investments comfortably. Net investment increased year-on-year on €1.2 billion, due to new aircraft coming into the fleet. In the first half year, we took delivery on 21 new aircraft, and have made down payment for another 46.

Financing cash flow was negative at minus €1.5 billion in the first half year. The main reason for this high number, is although that we redeemed an €850 million bond in March. Other than that, not much has changed, since the end of the first quarter. Our liquidity currently stands almost unchanged at €3.6 billion, and net financial debt remains fairly low, at €1.6 billion.

Let us now leave the Group level, and see how the individual segments performed. In the first half year 2014, the passenger airlines recorded a profit improvement of €43 million after adjustments for one-off items. This is however, exclusively due to the depreciation benefit. Without this effect, the operating profit would have been down by some €130 million. This can be attributed to the multiple strikes and the write-off of the Venezuelan bolivar.

The combined effect of these two had an impact of some €120 million in the first half year. Within the passenger airline segment, Lufthansa Passenger Airlines and SWISS managed to report a slight increase in normalized operating profit, while Austrian Airlines recorded a lower result. They have made profit and loss effective provisions for their ongoing litigation. At all airlines, we have seen a very volatile trading over the last month and weeks.

We will look into the operating key performance indicators in more detail in a moment. The cargo division has registered a decline in operating profit of €28 million year-on-year. While the change in depreciation policy had a negative impact of about €5 million, the decline year-on-year, was mainly because of a continued soft pricing and lower volumes than expected.

Maintenance again performed well, but did not reach the high profit level of last year. The operating in this business segment was slightly lower, with a decrease of €30 million to €206 million, compared to the first half year of 2013. This was however expected, as our maintenance division had an extraordinary good performance last summer, when it benefited from special contracts.

Our catering business at LSG Sky Chefs closed the first half year with a profit of €18 million, which is nearly on the level of the prior year period. IT Services improved this operating result by €6 million to €11 million. The result of other end consolidation was significantly better than last year. This was partly due to the fact that it was then burdened with €71 million restructuring costs, while in this year's period, we only had some €30 million. Moreover, positive currency effect helped improve the operating result here.

And now we want to take a closer look at the operational development of the Passenger Airline Group. You can see that we further optimized our production in the first half year. With 2.2% fewer flights, we produced 1.1% more capacity. This improves unit costs. At the same time, we were able to grow volumes by 1.1%, and keep the load factor stable. In the second quarter, we even increased the load factor slightly.

At the same time, we saw the revenue side incrementally weakening in the second quarter. The RASK on a constant currency basis was diluted by 2.1% in the second quarter. Currency developments had an additional negative effect on unit revenues of 1.2 percentage points, which feeds into the RASK decline of 3.3% that I was referring to earlier.

This seems to be less of a reduction unit revenue than in the first quarter. However, as the RASK has already befallen in the second quarter last year, we now see a decline on last year's decline. This is not a real decline as the figure might imply.

The developments over the course of the second quarter were very volatile. April was affected by the pilot union strike and was a weak month. Then in May, we saw unit revenue fairly stable on last year's levels, and only slightly diluted by currency effects.

At first, this made the April weakness seem to be a singular consequence of the strike, and thus look temporary. However, in June, the revenue weakness reappeared and then amplified. In June, we recorded the strongest decline in unit revenues year-to-year, with RASK being down by a high single digit percent figure.

This was partly a consequence of a shift in public holidays between May and June, and partly a consequence of missing bookings from the strike periods. But even without these effects, the revenue development still looks weak, which is where we had to change our guidance in June.

At the same time, we saw unit costs excluding fuel and currency effects reduce by 1.9% in the second quarter This is below our target of 4% reduction for the full year, but certainly this strike has negatively impacted the unit cost figures, and we had running fixed costs, while Lufthansa Passenger Airlines could not conduct any flights. Without the strike and Venezuela effect, the unit cost would have been down 4.1% in the second quarter, which would have been in line with our 4% target.

Continuing with the analysis of the second quarter, the price pressure appeared in all regions, except for Middle East, Africa, where unit revenues recovered by a strong 4.5%. In contrast to the first quarter, where the pressure was on Europe and North Atlantic, we now also saw strong dilution on Asia-Pacific pricing. RASK in this region dropped by 5.5% in the second quarter, despite only limited growth and capacity.

In Europe, the RASK looked a bit better recently, with a decline of just 1.1% on a constant currency basis in the second quarter, which was better than in the first quarter.

On routes to the Americas, the constant currency RASK was down by 2.7%, a singular number as in the first quarter. However, as I already mentioned earlier, the numbers are business leading, because we are now reporting against weaker prior year figures.

Altogether, we see markets in Europe and North America stabilizing on this low level. Given the weaker prior year comparison figure in the second quarter -- in the second half of the year, we expect a slight relaxation in the relative performance in the upcoming quarters.

The revenue softness seems to continue in the near term. Looking ahead, the forward bookings for the summer indicate a slightly better picture, partly due to a catch-up effect after the calm weeks during the World Cup, and partly driven by high leisure demand.

July has been developing better than June, with the short term bookings now slowly coming back. All this is driven by growing leisure demand. After the holiday season however, the weak pricing environment we have seen since March, seems to continue. September will be an important month to see if valuable short term bookings are coming back.

For the winter time table period, it is still too early, and the forward booking volumes are still too small to allow for a sound estimate. Nevertheless, as we have trimmed our capacity growth plans considerably, we believe that pressure on yields will ease in quarter four.

We will now grow only 3% instead of 5% in the winter schedule. We will take out the equivalent of three long hauls and five short haul aircrafts. With the new winter schedule, we currently project full year capacity growth to be 2% to 3%. Unchanged, we target a 5% unit cost reduction versus last year, of which about two percentage points are coming from the change in depreciation policy.

Also unchanged, we expect fuel costs to be at €6.7 billion in the full year, which means a relief of about €400 million compared to last year. Given that we have already some €250 million lower fuel costs in the first half year, we can only expect smaller reductions in third and fourth quarter. As this relief is mainly driven by a weak U.S. dollar, which is at the same time a burden on revenues, we would see €150 million to €200 million of the lower fuel cost to become a benefit on the bottom line. More than half of this, we have already seen in the first half year.

And this finally gets up to the profit outlook for the full year. In June, we reduced our Group profit expectation for the full year, to now approximately €1 billion. This was because of a negative impact from strikes and bolivar, as well as the weakening revenue environment.

Forward bookings for the summer are still depressed, but have shown signs of recovery recently. As prior year's comparable figures are getting easier, we should see some relative relaxation going forward. September will be a crucial month for our airlines, as we would see them, as the important high value bookings are coming back after the summer break. On top of that, with the capacity adjustments taken, we expect that we will be able to mitigate some of the pressure on unit cost revenue, especially in the fourth quarter.

Given the weaker overall industry environment, we adjusted the outlook for the passenger airlines, which are now expected in operating profit, just slightly above previous year. The profit improvement is lower than the benefit we would see from the changed depreciation policy.

Our largest union, Lufthansa Passenger Airlines is now expecting to increase its profits only slightly. SWISS is suffering from weaker revenues as well, but still targets a significant improvement, due to the lower depreciation. Austrian Airlines had to make provision for the legal cases outstanding, therefore, Austrian will only be able to report a profit on last year's level.

In the cargo business, we have to account for weaker revenues as well. The division now expects revenues below and an operating profit only slightly above last year's level.

Lufthansa Technik continues to perform favorably and even slightly better than expected in the first half year. Therefore, they should also be able to achieve a slight profit increase on the 2012 level. However, the profit is still expected to remain below last year, when the division benefited from some specific development. Our expectation for LSG Sky Chefs remains unchanged, with an operating profit slightly above previous year.

For IT Services, we still expect a slight decrease in profit. Unchanged is also our expectation for the SCORE restructuring cost on the Group level of €80 million and project cost of some €200 million for the full year. This all adds up to our expectation of an operating profit of approximately €1 billion to the Group level. This €1 billion still includes some €280 million in one-off costs. Excluding these, we expect a normalized result of approximately €1.3 billion for 2014.

And with this, I'd like to conclude my presentation, and open the line for your questions.

Andreas Hagenbring

Ladies and gentlemen, we would like to start a Q&A session for analyst and investors in English first. Afterwards, I will hand over to my colleague, Barbara Schaedler, to moderate the question-and-answer session for journalists in German or English, whichever language is individually preferred. So let's get started, operator, who do we have in line first?

Question-and-Answer Session

Operator

(Operator Instructions). So the first question we got is from Neil Glynn from Credit Suisse in Great Britain.

Neil Glynn - Credit Suisse

Good morning, can you hear me?

Simone Menne

Yes we can Neil.

Neil Glynn - Credit Suisse

Great. Thank you. The first question, if I could ask about your pension fund top-up, is it correct that you've taken a holiday on that for the second quarter? Just interested in your thinking regarding that, because with -- I recognize it's -- from an adjusted net debt perspective it's all neutral, but you have €4 billion of liquidity. So is this keeping some back for CapEx?

And then a second question on your ex-fuel unit cost guidance. You've obviously held that guidance despite the moderation in winter capacity, as well as the strike impact. Do you need to dig deeper to hit that guidance, or are there other initiatives being rolled out to ensure that you can achieve that? And then just one final housekeeping question. The project costs at the first quarter were guided at €300 million, so is this new today that they're guided to €200 million for 2014?

Simone Menne

Okay Neil. Well let's start with the pensions. Well its true, that we did not pay in the first half year. It is more a technical question that we need this liquidity. But as you well know, we can always work with this liquidity, as it is deliberate payment and we are not forced to do that payment during the year. So we are free to decide. But at the moment, it does not foresee that we will keep that for further investment or for the investments which we already planned.

For the unit cost, we are very comfortable, as the SCORE program works very well, that we can keep the unit costs at the guided level of the 4%, where of the 2% are depreciation, so that fully goes with our expectation. And for the measures we did regarding the pricing, we at the moment, feel that the capacity cut are efficient and enough, which we planned at the moment. Should there be further weaknesses because of, let's say, uncertainties in some markets, because of uncertainty in Russia or whatever, we will always be able to do additional actions. But that comes in case -- there are events which we are not yet planned in, so at the moment, no further dig-ins.

For the €300 million project cost, that was lowered in June, when we did the correction of our prognosis. But it is a change to the original guidance of the beginning of the year, so we have slightly lower project costs or slightly -- a reduction from €300 million to €200 million as you rightly say.

Neil Glynn - Credit Suisse

Great. Thank you.

Operator

So the next question we have got is coming from Damian Brewer from RBC in Great Britain.

Damian Brewer - RBC

Hello. Good morning, and thanks for time on the call. I've got four questions, if possible, please. First of all, just give us an idea of what's going on, could you give us some indication of what's happened with both the premium and non-premium RASK, whether there's any differentiation between the cabins?

And I'll give you the other questions as well. I'm a little bit perplexed what's going on with the employee headcount. In the cargo logistics business, volumes fell again and yet the employee count was up 0.3%. In the passenger airline business, the flying activity fell by 3% and yet the employee headcount grew by 0.8%. What's going on there? Is there a change in productivity or is there a change in scope of the business?

And then the third question. You're indicating ASK growth of 2% to 3% for the year, and the first half did 1.1%, albeit including the strike. If you're going to cut back in the winter schedule, i.e. for November and December, does this imply a significant acceleration of ASK growth for the first four months of H2, or is there just something being lost in the rounding there? And then the very final question. In the cargo business, why are profits going to accelerate in the second half of the year when they've been slowing and deteriorating in the first half, albeit with the AeroLogic consolidated into it? Again, I'm struggling to understand why you think the outlook is so much better there, but maybe there's something you can share with us that I'm missing. Thank you.

Simone Menne

Thank you very much Damian. So regarding the premium or economy yields, its similar developments in both, so there is no big change. We see differences in economy or premium here. For the headcount, there are two different impacts, one is actually the legally necessary consolidation, and for example, that hit LSG and cargo, with the AeroLogic. So we have additional headcount partly, because of the additional consolidation. We also have in cargo at the moment, a shift, so we have redundancy programs for existing employees and we need additional employees for the technical development with new IT products that we are working on electronically processes here. So that is the shift, and that should be overcome.

We have in the airline, a headcount, which is also partly consolidated, consolidation impact and the rest airline is actually -- the fluctuation is still going on and not yet accelerated in a way we wish we had to. We are sticking to our headcount reduction figures. As you remember, we announced SCORE 3500 and that is something we are still working on.

For the ASK growth, yes I think that is really lost in rounding. So in general, the summer capacity is unchanged. For the cargo profit trading, well we have achieved a shift into premium products, and therefore we expect one, some catch up of the market in autumn, which is seasonality, and some catch up in the premium product, because that was successfully done in some smaller segments, and now with the SCORE program accelerated to further premium products within the cargo.

Damian Brewer - RBC

Okay. Thanks. So, just to be clear, still on track for the 3,500 employees out of the airline. But just on the ASK growth, I'm still a bit confused. If you're trimming back for the last few months of the year and say you're running at maybe a couple of percentage points. So sort of, how do you get to the 2% to 3%? Is it -- are we looking maybe with the effect of strikes and stuff in the full year more like 1% to 2% or --?

Simone Menne

Damian, can we check that later on and you take that up with Investor Relations. But the figures I have here, it just means -- it should be just a rounding error, and we do not have any planned effects here, and I just suggest that you take it up with investor relations in detail?

Damian Brewer

Yes, that sounds perfect.

Andreas Hagenbring

We are happy to clarify it right now, if you don't mind. I know its unusual on this call. But really, we have reduced growth in the winter schedule by half to now some 3%, that's down four percentage points of growth that we actually planned for the last two months. So no change in summer trading, maybe little less than originally anticipated, but not materially less. But that this is exactly that flip down from five over four, because of the pilot strike, to now down to three, Damian.

Damian Brewer - RBC

Okay. That's great. Thank you very much, Andreas. Thank you, Simone.

Simone Menne

Thank you.

Operator

Mr. Donal O'Neill from Redburn in London. You may ask your question please.

Donal O'Neill - Redburn

Yes. Hi, guys. Good morning. I have three questions as well. My first question is with regard to fleet. A little bit off track, I know, but just when I look at your fleet plan, and it was something we didn't speak about at the Capital Markets Day recently, can you give us an idea of the profitability of the A340s you have within the system versus, let's say, your 777s or A330s? And I guess I'm trying to understand if there is an argument here for a more aggressive restructuring of the fleet at the moment or in the short term to try and boost your profitability.

Second question. As regards working capital development, should we expect similar trends in the second half of the year as we've seen in the first half of the year? And my last question is just in relation to Austrian. You've spoken a bit about the litigation going on there, but I know you haven't given a number and you may not give a number, but can you just expand on exactly what's happening there and what kind of an impact we should -- roughly what kind of an impact we should expect? Thanks.

Operator

Mr. Neil, has your question been answered?

Simone Menne

Sorry, we had it on mute. So the fleet development, the A340, it is in running costs -- it has not cheap running costs, absolutely right. On the other hand, the capital costs are not there. So there are not capital costs. So we obviously have to look through the lifetime of an aircraft. We already said that we should consider fleet size. We will definitely look at the A340, so you're right, and that would be a possible aircraft should be restructured more aggressively on the other than to making it more aggressively also may mean more financing. And at the moment, the economic case is not going for that, because we have no capital costs there anymore.

For the working capital, well we have some extraordinary effects last year which were positive, and that is specially the SCORE, where we have the restructuring program and in the profit and loss, we have seen it, but we have the payment now, so that has an impact. We also had an extraordinary impact regard import taxes in Lufthansa Technik, which had an impact on the working capital in the last year and is not coming this year, and in general, it is of course a pat of the development in the revenues, and that part, we can expect also for the second quarter, with a weaker than we had foreseen.

For Austrian liquidity, we will now, as you rightly assume, we will not publish the numbers. On the other hand, to give you a thought of the guidance, obviously Austrian has the weak market environment and the impact of the weak market environment is bigger than the restructuring costs -- not the restructuring, the legal costs, the provision for that, and so it is a lower figure than -- definitely please do me a favor, don't take the whole impact for this provision. The bigger part is the weakness in the market.

Donal O'Neill - Redburn

Okey-dokey. Thank you very much.

Simone Menne

Thank you.

Operator

And next question from Mrs. Alexia Dogani from Goldman Sachs. Your line is open up now.

Alexia Dogani - Goldman Sachs

Yes. Good morning. I had a couple of questions just on current trading. I wonder if you could touch a bit more on the Asia Pacific region and why you've seen that big swing from Q1 to Q2 unit revenue performance? And then also, if you can really talk a bit more about what's happening in Europe and then North America, because I was under the impression those were the regions that sort of led you to revise your guidance in June? And then my final question is in terms of your comment that forward bookings remain weak, is it in a particular region out of those three that you're particularly seeing this weakness? Thank you.

Simone Menne

It is especially new destination of bigger capacity that we see on some roads. So it is not a general market trend. The general market trend on existing roads is continuing, and as we have seen in the first quarter, stable on a low level. But we also have new flights. One is Canada, and to take that up, and its absolutely in the development, we foresee a profitable route here. But to take it up with certain capacity must -- so that we have to provide a certain capacity by entering into that market. We, at the beginning, have weak yields there, and its similar things happening Bangkok, where we added something to the flight schedule.

So it is at certain points, and that should be overcome, when we have the implementation of that route. So in this quarter, the second quarter was suffering especially.

For Europe and North America, well we expect that in Europe and that is, as we announced, we have pressure on the hubs. So the trends for Europe is an issue, because we have more direct traffic there. For Austrian, see some impact in Russia and Ukraine, so this general trend, I also expect in the second quarter.

For North America, we foresee that there will be the pressure on the yields, especially on the East Coast and to Canda, because in Canada, we had the biggest expansion in capacity.

So for the last question, I do not fully get it, could you repeat that?

Alexia Dogani - Goldman Sachs

Yes. So my question was you make a comment in the statement that forward bookings remain weak, and I wonder if it was in a particular market they remain weak, i.e. is it Asia Pacific that you're seeing the pressure or is it Europe and North America?

Simone Menne

As I just mentioned, so that, I think was part of the answer. I think Asia-Pacific as we have there, the insight on special route. Less Europe and North America continuing on that level, hopefully recovering, because we have, in some areas, less capacity.

Alexia Dogani - Goldman Sachs

Okay. Perfect. And just so I can have it clear in my head, basically in Asia Pacific it's more driven by your own capacity growth on new routes rather than competition?

Simone Menne

Yeah. It’s the implementation of new routes or new flights, in specially Haneda and Bangkok, which has an impact here.

Alexia Dogani - Goldman Sachs

Perfect. Thank you very much. Appreciate it.

Andreas Hagenbring

Next question please. Operator, can we have the next question please?

Operator

The next question is coming from Mr. Jarrod Castle from UBS in London. Mr. Castle?

Jarrod Castle - UBS

Good morning. Just a number of questions. First of call, can you just give us an update in terms of, I guess its two or three weeks later, where the conversations versus the unions are in terms of the plan changes, and also, just in terms of resolution with pilots. I mean, do you have any timescale in mind when enough is enough in terms of just reaching some agreement, because it's been ongoing now for over two years, I guess? Then just also, in terms of coming back to the pension question, so I noticed in the balance sheet the pension liability has gone up by €1.4 billion. Can you just give a comment on what's been driving that, please? And maybe I'll come back with a third. Thanks.

Simone Menne

Okay. Good Jarrod. Let's start with the first two. You mentioned general, we are discussing the pension with all of them, and we just also published a timetable, how we continued the talks with the cabin crew union. So that is a longer period time table, because obviously it’s a complicated issue, but its constructed very well, planned ahead. So for the ground staff also, regarding the pension and moving into the deferred compensation, talks are going on. For the pilots, you're absolutely right, we have two years. Good part is we also have two years without an increase of pilot salaries, and we are in talks. We see that there is no limit in time, so there is no possibility that we said, okay, a target where we have to finalize the negotiations. That is not foreseen by law. So this regards, we do not see -- I cannot give you certain end here.

So we -- at the moment did not plan for additional strikes, you know that. So that -- should there be any that could have an impact, but on the other hand, we are in talks and we are in constructive talks, it would be very helpful, I totally agree. If we go ahead there fast.

For the pensions; we have an interest rate of 3.75% in 2013, and that was now reduced to 3.25% to the half year. So that has an immediate impact on the pensions in the balance sheet. And as we just mentioned, it has not an impact on profit and loss, and we have seen this volatility before. So that is just the reaction to the change in the interest rate.

Jarrod Castle - UBS

Okay. And maybe just one other question. Just in terms of the -- I have asked this before, but the restructuring costs and the project costs relating to 2015, any clarity on -- I guess when the new guidance will be given, or do you have a number in mind now, relative to the €2 billion clean guidance?

Simone Menne

Well we stick with the €2 billion. We are in the planning process for 2015. So at the moment, its just what we said before.

Jarrod Castle - UBS

Okay. Thanks.

Andreas Hagenbring

Thanks Jarrod. Next question please.

Operator

Mr. Oliver Sleath from Barclays London. You may ask your question please.

Oliver Sleath - Barclays Capital

Yes. Good morning Simone. Good morning Andreas. Thank you for taking my question. Three questions please. Firstly, with the capacity growth and the revisions that you've announced for the winter, could you give any sense by region of how you're thinking? I'm particularly interested to know what you're planning on the North Atlantic over this winter. And then my second question leading on from that is, on the Atlantic, how closely do you plan your schedules with United and Air Canada? Is it a case that you sit together in a room and you calculate what the JV is going to do as a whole, or are you ultimately relatively free to do whatever you decide is best for your individual businesses, and if there's any change to how closely you're planning to work with your partners?

And my third question is just around the CapEx guidance. I just wanted to check that CapEx is unchanged versus what you said, I think, a few conference calls ago. I just ask, because I know that Eurowings is planning to take a lot more A320s next year, and I wondered where they would all be sourced from, whether you'd be buying anymore from Airbus brand new? Thank you.

Simone Menne

Oliver, thank you very much. Well, we did not guide in the capacity cuts per region and north Atlantic will be impacted but not much. So as -- I think we just announced, that we will take out the LH44 to New York, so there will be some amendments, but I think -- don't expect that we take out 50% of our capacity to the North Atlantic. We will have a look into the routes of -- in Canada, because the growth there was quite big. And yes, first, the process is such that, first of all, Lufthansa Group here sits together, to discuss to who will grow how much in the North Atlantic, or who is taking out flights in the North Atlantic. So that result together goes into one room, with United and Air Canada, and then we harmonize the growth, and think about who shall grow. So that is actually fully harmonized planning process.

For the CapEx, yes, we -- at the moment we are planning the 2015 and the impact of the new projects so for the A320, at the moment, the thesis is that we get 13 from Munich and Frankfurt, and the 10 we may buy. But that is dependent of our budget planning and discussion with the supervisory board. So the details we are just putting together, and have a look into our CapEx plan. So that will be decided in our supervisory board meeting in September.

Oliver Sleath - Barclays Capital

Okay. Thank you very much, Simone. If I could just ask one follow-on, would I be right to assume a growth rate for next year, I know you haven't announced this yet, but an overall capacity growth for next year of somewhere in the region of 2% to 3%? Would that be sensible at the moment?

Simone Menne

Sensible to me.

Oliver Sleath - Barclays Capital

Thank you.

Andreas Hagenbring

Operator, this is what I have seen in terms of questions so far. Are there any additional questions.

Operator

(Operator Instructions). We got a follow-up question from Damian Brewer from RBC in Great Britain. Mr. Brewer, may we have your question please?

Damian Brewer - RBC

Yes, good morning again. Just wanted to follow-up this time on the MRO business. Could you tell us a little bit more about the drivers there and in particular the contract pipeline, how that's looking into the second half? And in particular, with the Air China JV, from memory I think there's also something there to do with working on setting up an MRO business. Could you tell us a bit more about that and the timing on that, please?

Simone Menne

Yes Damian. So for the Lufthansa Technik, we have new contracts, and the pipeline is well filled with a little bit of weakness in the VIP business, because obviously customers there wait for a newer aircraft, but for the rest we see, that we have a pipeline of new contracts filled. We have already, our maintenance business with Air China in [indiscernible]. So that is continuing, and there are plans to offline maintenance there, but that is in discussion with Air China how to proceed here. So I don't see that there will be a new foundation of MRO in China, because there is an existing one.

We have obviously, in China, also a Shenzhen factory, which is without the partnership of Air China. We are, as you may know, also building up a new facility in Puerto Rico, with Lufthansa Technik for the base maintenance, where we expect North Atlantic customers coming in, and for the rest, there is a development of the business as expected.

Damian Brewer - RBC

Thank you very much.

Operator

The next question is coming from Stephen Furlong from Davy in Dublin.

Stephen Furlong - Davy Research

Hi Simone, and hi, Andreas. Just a question on -- first of all on currency on the unit revenues. I see it had a negative effect of 1.7% in Q1 and -- or for the half year, 1.2% in Q2. Am I right in saying that alleviates as you go through the year? You might just talk about that. And then the other thing is just, are you assuming in your guidance that -- maybe that given your comment about Asia Pac and the overcapacities, that maybe there's a bit of alleviation in this, in Europe or the Americas as we go towards the winter? Thank you.

Simone Menne

Thank you very much. For the currency impact, well there is a very volatile area here, because we have all aspects. So when you just look in the development of the yen, you should expect sooner or later, year-on-year comparison should come to a level. On the other hand, we then have impact on other areas. So at the moment, we would say, currency impact in the following quarter should be around the same, and for the easier comparables in the first half year -- no, in the second half year. This is why we are confident to see a relative improvement.

Stephen Furlong - Davy Research

Okay.

Andreas Hagenbring

Does that answer your question Stephen?

Stephen Furlong - Davy Research

I guess. I mean, I am just struggling a bit, since you're warning -- now you've also highlighted Asia-Pac. So what maybe a slight improvement in the unit revenue in Europe, and in the Americas. Is that the areas where you think, as you go into the winter, maybe things are going to slightly relatively improve to offset the difficulties in Asia-Pac?

Simone Menne

Absolutely right. As I mentioned, Asia, specific routes.

Stephen Furlong - Davy Research

Okay, thanks. NO I got that. That's great. Thank you.

Operator

And your next question is coming from Gerald Khoo from Liberum in the U.K.

Gerald Khoo - Liberum

Morning everyone. Two quick questions. Firstly, on Venezuela and the bolivar, what's the remaining exposure? Presumably we're not quite at the worst case scenario yet. And secondly, on Austrian, you've taken the provision for the litigation. I'm not sure whether that indicates your confidence in the legal case, but what -- in the event that you were to lose the case, what's the exposure on an ongoing basis? I believe this relates to the movement of pilots into Tyrolean.

Simone Menne

So for Venezuela, actually I think we are in a quite good line. Should it be, that obviously there is no money coming at all, or the situation in Venezuela, further developing into the wrong direction, there is still an exposure. On the other hand, we got money for 2014, and also announcement for further months in 2014 to come. So its 2013 we are talking about, and therefore -- in constructive discussions I would say. But for a worst case scenario, yet there is still a mid-size -- a low three digit number, worst case scenario. So for Austrian, I think its not a question of confidence, because we are still very confident that we have a very good case. But we are, to a certain extent, obviously obliged by auditors to put provisions in there. It is the switch from pilot and cabin crews, from Austrian to Tyrolean, which is what it is all about, and at the moment now also, negotiations with the union and the task and target for both parties, is to have an agreement here, where at the end, the court judgment would not be the point anymore, but we have the agreement in negotiation process.

Gerald Khoo - Liberum

But does either losing the case or reaching a settlement with the unions imply -- does that have adverse implications for your cost base compared with where you're at, at the moment?

Simone Menne

Well, not to what we planned at the moment, but obviously it's very difficult to predict. But we have expected a certain -- or we have certain assumptions regarding the negotiations.

Gerald Khoo - Liberum

Okay.

Andreas Hagenbring

I think there is one final question. That's coming from Mr. Robin Byde from Cantor Fitzgerald in London. Your line is open up now Mr. Byde.

Robin Byde - Cantor Fitzgerald

Yes. Morning, guys. Just a quick follow-up on the pilot negotiations, on pay and benefits. Simone, I didn't hear you mention a milestone or any milestones. Is there an event coming up in the next quarter or so that we should be aware of on that, please? And then secondly, just more broadly, dividend policy. You've adjusted down your full-year guidance, trading and free cash are softer. Do you think you're going to be looking again at dividend policy? Thank you.

Simone Menne

Okay Robin. For the pilots, no negotiations. There are no milestones. It is continuous conversation with moderator -- not a mediator, but a moderator. So these talks are going on, and there is not foreseeing a certain date or a certain exam or a certain milestone I can give you now for the second quarter, where you should expect something.

For the dividend, well we still confirm that the dividend for us is a very important thing, and we feel committed to pay dividend to our investors. And as you know, we are working on our dividend policy, just to reflect the change in depreciation policy. But hat doesn't mean, we want to question at all, our dividend policy or our commitment to pay a dividend. So I don't see that we change anything there, and I expect -- and as before, a decision in the supervisory board in the second half of the year.

Robin Byde - Cantor Fitzgerald

That's clear. Thanks very much.

Andreas Hagenbring

That's it on the questions from analysts and investors from what I can see. Thank you very much, for your interest, I am now happy to hand things over to my colleague Barbara Schaedler and to take things from here. Thank you very much.

Barbara Schaedler

Thank you, Andreas. Hello everybody. So welcome to the Q&A for journalists now, and I want to offer you -- you can either ask your questions in English or in German, whatever you like to, be our guest.

Operator

(Operator Instructions). Victoria Bryan from Reuters in Berlin. You may ask your question please.

Victoria Bryan - Reuters

Thanks. I will ask in English. Three questions for me; Skylark says it won't be taking anymore, the A380s from Airbus. Would Lufthansa probably be interested in getting more A380s earlier, would you have the funds for that? Secondly, could you give us more quantification of what's happening with Austrian Airlines with Russia and Ukraine? How much is the effect from Russia? How important are flights to Russia and Ukraine for Austria, and have you had to cancel any services? And then thirdly, you said you expected yields to improve in the fourth quarter, but we've had comments from Ryan that's certainly saying, its going to increase capacity by 8% this winter, does that not give you pause for thought and make you may be more worried about yields, than you are at the minute? Thanks.

Simone Menne

Okay, Victoria. For the A380s, we would have the funds, but I don't want to order some. So we made a very clear decision last year, how many A380s we need. We need them on premium trunk routes, but not more. As we say, passengers are very much interested in high connectivity, in direct flights, more frequencies maybe then just in big flights. So we see the A380s necessary only on certain routes, and as you remember we cancelled two options we had, so we feel absolutely comfortable with the amount of A380s we have.

For Austrian, there is an impact, but I cannot give you a concrete number yet. So we see that car passengers are -- there is a weaker demand in premium, but we have no figure and cannot give you the concrete impact in figures here.

For Ryanair, well we have seen low cost carriers and announcement of growth from low cost carriers like Norwegian or Ryanair in the past. We know that these player are entering or trying to enter, and this is why we have the mid-term development announcement with our low cost platform? But at the moment, we do not see much overlap with Ryanair, so I am not concerned in that area.

Victoria Bryan - Reuters

Thank you.

Barbara Schaedler

Do we have other questions?

Operator

Yes. Heidi Rohde from Boersen-Zeitung in Frankfurt, may ask your question now.

Heidi Rohde - Boersen-Zeitung

[Foreign Language].

Simone Menne

[Foreign Language].

Operator

The next question we have got is coming from Natalia Drozdiak from Wall Street Journal/Dow Jones in Frankfurt.

Natalia Drozdiak - Wall Street Journal

You recently cut flights to Venezuela, and I was just wondering when do you expect to pick these up again?

Simone Menne

Well we are considering the situation in Venezuela, constantly depending very much from the talks and the development on the transfer side, and so we announced our capacity to three flights a week. We are considering, what we are doing in winter. Should there be an arrangement, where we get our money out of the country, then we would reconsider obviously to take up this capacity to seven frequencies up again. But I cannot give you a date here, its very much dependent from any guarantees or ideas or payment to get out of Venezuela.

Natalia Drozdiak - Wall Street Journal

Thank you.

Operator

Richard Weiss from Bloomberg News in Frankfurt.

Richard Weiss - Bloomberg News

[Foreign Language].

Simone Menne

[Foreign Language].

Operator

[Foreign Language].

Unidentified Analyst

[Foreign Language].

Simone Menne

[Foreign Language].

Operator

[Foreign Language].

Unidentified Analyst

[Foreign Language].

Simone Menne

[Foreign Language].

Operator

Victoria Bryan from Reuters in Berlin.

Victoria Bryan - Reuters

Hello. One final question in English again. I know this is more of a question for Brussels. But I am just wondering with the ebola outbreak, are you making any changes to any of your operations at all? Are you in talks with Brussels over any contingency measures that need to be made?

Simone Menne

Well I think its important for the whole Group, as we are always concerned and have to take precautions thinking in these cases. So also Lufthansa Group, including Brussels, in constant are monitoring the development of the ebola virus, and we are also cooperating with the authorities in this regard, just to make sure that there is no risk within the Lufthansa Group coming out of that. The situation is as is in the moment, and we don't see that there is a huge impact, but we are watching. So our information, during the slides, there is no risk for a passenger or for the passengers via the circulation in the air of an aircraft, because normally, the catchment comes via the exchange of liquids. But we are constantly in talks and watching, and that's not only concerning Brussels.

Victoria Bryan - Reuters

Okay. Thank you.

Barbara Schaedler

We got two other questions. And I beg your pardon, we need to then close the list. Next question please.

Operator

Okay. Next question is coming from Panagiotis Koutoumanos from Frankfurter Neue Presse in Frankfurt.

Panagiotis Koutoumanos - Frankfurter Neue Presse

[Foreign Language].

Simone Menne

[Foreign Language].

Operator

We have Stefan Weier from dpa-AFX.

Stefan Weier - dpa-AFX

[Foreign Language].

Simone Menne

[Foreign Language].

Barbara Schaedler

[Foreign Language].

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