Thomas Cook's (TCKGF) CEO Peter Fankhauser on Half Year 2016 Results - Earnings Call Transcript

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Thomas Cook Group Plc. (OTC:TCKGF) Half Year 2016 Earnings Conference Call May 19, 2016 4:00 AM ET

Executives

Peter Fankhauser - Chief Executive Officer

Michael Healy - Chief Financial Officer

Christoph Debus - Chief Airlines & Hotels Officer

Analysts

Alex Brignall - Redburn

Tim Ramskill - Credit Suisse

Wyn Ellis - Numis Securities

James Ainley - Citi

Jamie Rollo - Morgan Stanley

Alexia Dogani - Goldman Sachs

Operator

Peter Fankhauser

Good morning and welcome, ladies and gentlemen; thank you very much for joining us this morning.

Thomas Cook is changing. Since I became CEO around 18 months ago, Michael, myself and the entire leadership team have been resolutely focused on making the changes needed to set Thomas Cook on the path of sustainable growth.

In spite of the tough markets we are in, and I know you have heard a lot from us, and our competitors about how tough the environment is right now, we have made a lot of progress.

We have a great hotel portfolio and offer better and better holidays. We are expanding our appeal to more and more customers. I will give you two great examples of this later.

We have a world class, award winning airline. In fact, according to the 2015 World Travel Awards, Thomas Cook is now the world's leading charter airline. We are absolutely focused on customer excellence, and the feedback from our customers is getting better at all the time.

We continue to improve the business focus and operation, through our new operating model. In the highlights of today's presentation, I'm going to briefly tell you about why I think our good progress continued in the first half.

Then Michael will talk you through our financial results, and update you on how we are trading at the moment, for the summer and on our outlook for the full year.

I will then return to talk in a bit more detail about the strategic progress we are making, before opening up for the Q&A.

For the Q&A, I would like to invite Christoph Debus, our Chief Airlines and Hotel Officer, to join Michael and me.

So, turning to the highlights and the progress we have made. Anticipating changes in customer demand, we began the re-planned capacity for 2016, as early as October last year. This allowed us to mitigate the shift in demand, away from Turkey and North Africa, towards Spain and long-haul destinations, in the first half.

The successful destination strategy, together with our new operating model, has helped to deliver a 5% improvement in our first half operating loss. Like-for-like revenues were slightly up from last year, despite the continued closure of Tunisia and Sharm el-Sheikh.

For the summer, bookings so far, remain behind last year, as a result of the disrupted trading environment. Demand for Turkey remains subdued, impacting Condor, our German airline, in particular, while the recent tragic events in Brussels have hit our Belgian business. In this context, we continue to maintain the focus on margins, rather than volume.

Over the last 12 months, I've introduced a far-reaching program of customer excellence in the organization. Ensuring our customers always have the best possible experience with us is critical to our future success.

I'm pleased to say that this is working. We now rigorously calculate and reward management on our net promoter score. This measures how likely our customers are to promote us to their friends, and has increased by 4 points, which is a substantial improvement.

In terms of our continuing transformation, we have progressed our new operating model, in line with our expectations. This has delivered EBIT benefit of £9 million in the first half. Together with our focus on customer excellence, this helps to lay the foundations for growth over the medium term.

Finally, I'm really pleased that Moody's have recently assigned a new B1 credit rating to Thomas Cook. This is one notch higher than our existing ratings, from Fitch and S&P. It represents a crucial step in our journey to reduce our interest costs and show growing confidence in what we do.

Now, let me hand over to Michael, to take you through our first half financial results. Michael?

Michael Healy

Thank you, Peter. Good morning, everyone. Slide 5 shows the financial overview of our results for the first half of 2016. As usual, I'll focus on the like-for-like changes, on the right-hand side of the chart.

Group revenue, at £2.7 billion has increased slightly, despite the challenging geopolitical conditions and weak consumer demand in some of our markets. At the same time, gross margin has improved by 10 basis points, as increased sales of higher quality holidays by our tour operating businesses have offset pricing pressures in Condor, our German airline.

Overall, our seasonal underlying EBIT loss for the first half, has improved by £8 million. Loss from operations has reduced by £11 million, or 5%, due to the improved underlying EBIT and slightly lower exceptional items. Net debt at March 31 was £50 million higher than last year, due to the timing of working capital changes, as a result of a later summer booking pattern.

Let's now have a look at revenue development in more detail; I showed a similar slide to this at our first quarter results presentation. It's worth reiterating the actions we have taken to rebalance our holiday program in anticipation of changing customer demand. We have successfully remixed our destination - capacity [Technical Difficulty]

This chart shows an encouraging gross margin performance from our tour operating businesses. The UK has improved its gross margin by 80 basis points, as it improved its winter sun proposition and expanded its long-haul program.

While Northern Europe has increased its margin by 290 basis points, albeit against the weak comparative last year, helped by strong demand for its market-leading holidays.

Margins in Continental Europe were 10 basis points below last year as some stability returned to our German tour operating business. This follows the actions we took to strengthen our management team, strengthen relationships with our distribution partners, and improve our web proposition.

Although consumer demand across Continental Europe remains weak, our tour operators have benefited from lower third-party flying costs, due to the over-capacity in the European short-haul flight sector.

However, margins for our German airline, Condor, have declined significantly, by 350 basis points. This is due to the same over-supply pressure in the short and medium-haul sector, and lower customer demand, especially to destinations such as Turkey, where Condor is a market leader.

Looking at our EBIT progression for each business. Our Northern Europe business continues to perform very strongly, with an increase in EBIT of £17 million, that's 70% up on last year.

In addition, we're pleased with the performance of our UK business, which continued the strong development of its winter sun offering, improved product quality, and online capabilities.

In Continental Europe we've seen a modest improvement in EBIT compared to last year, with positive performances from our German, French and Russian businesses. Our Belgian business performed broadly in line with last year, however, with the impact of the tragic incident in Brussels expected to be felt in the second half.

As I mentioned earlier, Condor's profitability has declined significantly in the first half of the year, mainly due to lower yields as a result of increased capacity in its principal markets, and lower customer demand.

Looking at EBIT by business. Slide 9 shows a continuing improvement in Group profitability, with the last 12 months EBIT margin now above 4% and, notably, the UK EBIT margin now about 5%.

As noted earlier, Northern Europe continues to perform well; Continental Europe is broadly stable; and our German airlines business has seen profits reduce, although we expect this to be temporary.

Let's now consider cash flow. Free cash flow for the first half of this year was an outflow of £650 million, £213 million higher than last year. As I mentioned in my overview, cash flow had been impacted by the timing of working capital changes as a result of the later summer booking profile. So far, customers are booking their summer holidays, on average, two weeks later than last year.

As you can see on the right-hand side of this slide, lower bookings at half year have reduced customer deposits by around GPB115 million. This impact is expected to reverse as the summer booking cycle progresses.

As I've explained in the past, while a later booking pattern can have a significant impact on our gross cash flows at a point in time, it does not materially impact net debt at the end of the cycle.

Working capital has also been impacted by the timing of payments around the financial yearend, as I explained at our 2015 full-year results presentation; and as well by change in German consumer law in April of last year, which reduced our ability to accept customer deposits for their holidays. The working capital impact of these changes was around £60 million each. Other cash flow items are broadly as expected.

CapEx of £81 million is in line with last year. We expect that expenditure for the full year will be around £200 million, in line with previous guidance. The cash cost of exceptional items was £35 million for the first half of the year. This is expected to continue at the same run rate for the full year.

Turning to net debt on the next slide. This slide shows the development of net debt over the past year. Closing net debt at March 31, 2016, was £825 million, £50 million higher than a year ago on a like-for-like basis. This increase in net debt is a direct result of the timing of working capital changes that I just described.

I expect the impact on working capital to normalize as the year progresses, and for the yearend net debt to be in the range of between £50 million and £125 million. I will now explain in more detail the news around our financing arrangements that we have announced today.

Firstly, as Peter said earlier, Moody's has recently assigned Thomas Cook a B1 credit rating. This is one notch higher than the ratings currently assigned by Standard & Poor's and Fitch, and represents a significant step in our journey towards lower interest costs and a more efficient balance sheet.

Secondly, we intend to shortly begin a program to buy-back up to £100 million-worth of our outstanding bonds. This is ahead of plan and in keeping with our commitment made in November to reduce our fixed term debt by £300 million by the end of 2018, and to reduce interest costs.

We're also pleased to announce that we have recently obtained a new bank facility that will provide up to £150 million of further liquidity over the next two years. This is in addition to our existing £800 million of facilities and will further improve our flexibility to refinance our bonds and reduce our interest costs.

I would remind you that the reduction of fixed-term debt remains our financial priority and we intend to continue to move towards a more efficient capital structure with reduced interest costs.

As we announced at our 2015 yearend results, it remains our intention to pay a dividend out of this year's profits, as we drive towards using our free cash flow to provide a return to shareholders. We will target a payout ratio of 20% to 30% of reported net profit and dividends will be funded out of positive free cash flow. We believe that these announcements represent a further significant step towards improving the financial strength of Thomas Cook over the medium term.

Let's now turn to current trading. Our bookings for the summer so far are down by 5% compared to last year, with pricing in line with last year. Our focus remains on driving margins rather than volume, so this 5% drop in volumes needs to be put into context against the 4% reduction in the capacity of our holiday program.

Outside of Turkey, we're trading well in most destinations and our overall booking position, excluding Turkey, is 6% higher than last year. However, bookings to Turkey, our second-largest destination country last year, remain significantly down. While we have seen demand for Turkey improve in recent weeks, this has not happened as quickly as we originally expected.

I said earlier, customers are booking later. On average, summer bookings have so far been made almost two weeks later than last year. This is also affecting our bookings position.

Looking briefly at each of our businesses. Northern Europe continues to trade well, with summer pricing up by 6% and higher margins. Bookings are down 2% reflecting higher volumes to Spain, offset by weakness to Turkey.

Pricing for holidays in our UK business is strong, up 3% compared to last year, reflecting more differentiated holidays. Overall bookings are 3% lower due to weaker demand for Turkey. However, our long-haul program is doing particularly well, with bookings up by 40%.

The trading environment in Continental Europe remains challenging, with bookings down 10% for summer. Despite this, we have kept pricing in line with last year. Within Continental Europe, our German business is outperforming a weak market. As Germany sources the majority of its flying from third parties, its margins are benefiting from cheaper flights available in the market.

Also, within Continental Europe, our Belgian business has seen a significant drop in bookings, following the terrorist attack in Brussels on March 22, with a high level of cancellations and disruption to our flying program. We estimate this is likely to impact Belgium's full-year EBIT by approximately £10 million compared to our previous expectations.

Condor is being particularly effective by reduced demand to Turkey, which has not improved as quickly as we had expected. This has led to a 4% overall bookings decline and lower prices than last year.

As a result, we expect Condor's full-year EBIT to be impacted by a further £20 million in the second half, with the third quarter particularly impacted by lower demand in the shoulder season.

However, we expect that this short-term impact on Condor's profitability will reverse next year through further rerouting of Turkey capacity and additional cost efficiencies.

Turning to the outlook for the full year. We expect the impacts I just described of £10 million for Belgium and £20 million for Condor, for these to be partially offset by foreign exchange translation gains.

If current exchange rates prevail for the rest of the year, these should be about £20 million, although I should point out that the actual gain or loss on foreign exchange is highly sensitive to the rates in July and August when we book most of our revenues.

As a result, we now expect our full-year underlying EBIT to be between £310 million and £335 million, supported by strong early trading for next winter, much better prospects for Condor and further new operating model benefits. Our growth expectations to 2018 remain unchanged.

Now, I'll hand back to Peter, who will cover the strategic progress that we're making at Thomas Cook.

Peter Fankhauser

Thank you, Michael. I will now update you on how we are continuing to build our business for growth. We are absolutely convinced that the actions we are taking are the right ones to make the business not just better, but sustainably better.

Driving customer excellence is one of my key priorities. Giving our customers the very best holiday experience leads customers to be more loyal and it leads them to recommend us to their friends and family. Crucially, this helps us to grow.

We have, therefore, continued to invest significantly in serving our customers better across all areas of our business. We have overhauled our customer training across the Group, including in our destinations where, so far this year, we have fully trained over 1,300 reps and managers.

We have also rolled out the new software to help our staff better serve customers in resort. Our 24 hour hotel satisfaction promise has been now launched in 1,500 differentiated hotels, reassuring customers that we are on hand to help fix problems within 24 hours. Customer feedback so far has been overwhelmingly positive and there is evidence that our customer initiatives are working.

We rigorously measure our Net Promoter Score in all our markets. In fact, we now reward management on it. As I mentioned earlier, our Group Net Promoter Score grew by 4 percentage points against last year and NPS grew in every one of our source markets, representing substantial progress in our approach to customer excellence.

Now, let's take a look at how we are doing with our new operating model. As I outlined last November, our new operating model includes four main strategic pillars. I'm pleased to say that we have made good progress in each of these areas over the last six months. I plan to discuss them in more detail over the next few slides, so I won't dwell on them too much here.

But, in total, we delivered £9 million of net EBIT benefits relating to the new operating model during the first half. We remain on track to deliver £100 million to £120 million of net EBIT benefits by 2018, as we said we would.

Our own-brand hotels enable us to offer customers a consistent high-quality, exclusive experience and to capture more margin. We have continued to develop our portfolio of own-brand hotels through various product quality initiatives.

As a result, the online review scores of these hotel, which we source from an aggregate of online reviews called Trust You, has improved over the last year from 82% to 85%. We are also focused on developing new high-quality hotels and new concepts that are capable of generating superior returns. Recent launches include the Ocean Beach Club by Sunwing in Gran Canaria and the new Casa Cook Hotel in Rhodes. Let's look at these in more detail.

Ocean Beach Club is a premium sub-brand of Sunwing. We already have a highly successful Ocean Beach Club in Crete, and so we launched a second one in Gran Canaria last December.

We purchased the hotel in April 2015 and then renovated it, as you can see from the pictures on this slide, developing it into a relaxed and elegant luxury hotel aimed at families with children.

The hotel offers premium beach-front accommodation with 137 rooms available all year round. It has been very well received since launch, with a satisfaction rating of 4.7 out of 5 based on surveys of over 3,000 guests.

As an own-brand hotel, exclusively sold by Thomas Cook, the property is already achieving superior financial return. Since the renovation, the hotel has achieved a margin premium of 6% above our portfolio average, representing an incremental margin of £60 per customer.

Let's look now at another good example of how we are developing our own-brand portfolio. Earlier this month, we have opened our newest and one of our very best hotels, Casa Cook, in Rhodes. Casa Cook is a lifestyle hotel with a unique design concept. It provides 93 new swim-up hotel rooms aimed at independent, modern travelers.

The idea behind the Casa Cook brand is to bring the concept of a stylish design hotel, typically found in our cities, to the beachfront. But instead of describing it in dry words, here is a video about it.

[Video Presentation]

Peter Fankhauser

See you in Rhodes. I still try to convince James that he is making an analyst event in this hotel, so that you can really see it, and not only on the video but in person. He's sometimes a little bit stubborn, but I will get there.

I hope that I gave you some idea of how we are improving our hotel offering and broadening our customer appeal.

Let's now turn to our airline. As Michael said earlier, 2016 is proving to be a difficult year for Condor, our German airline, as we manage the shift in customer demand patterns that we have seen this year. However, our airlines remain an integral part of our operations.

We continue to invest in our fleet of 93 aircraft. We took delivery of our final four brand new Airbus 321s just before Easter. Over the last three years, we have taken delivery of 25 new aircraft, which means that 95% of our fleet is either new or fully refurbished, leading to a more satisfied customer.

Growing our long-haul business has been a key focus for us. During the first half, we grew long-haul capacity by 14%, and for our summer season it is expected to grow by 26%, with various new destinations added, including Los Angeles, Boston, Rio de Janeiro and Cape Town.

As we have said before, a main focus over the past few years has been to better integrate our airlines into what we call our one-airline system. A good example of the benefits of this can be seen in our planning for next summer.

As we continue to rebalance capacity in line with changing customer demand, Condor and the UK will swap aircraft. Condor will provide three long-haul aircraft to our UK airline, receiving three medium-haul aircraft in return.

This will help Condor to reduce capacity in the short and medium haul and grow in higher-margin long haul; while the UK can serve existing medium-haul destinations with a more efficient flight schedule.

We believe that focusing on a differentiated holiday offering is key to driving higher margin. This includes holidays to our own brand hotels, and to a number of selected partner hotels. Differentiated holidays are those where Thomas Cook can really make a difference through high product quality and service levels. This, in turn, leads to happier customers, more repeat business, and higher average selling prices.

We are growing this area of the business. Sales of holidays to own-brand hotels increased by 21% in the first half. Sales for all differentiated holidays, excluding Turkey, Tunisia and Egypt, were up by 5%.

This is in line with our objective to grow the proportion of Group revenues from differentiated holidays to 66%; up from around 50% today. As well as growing overall differentiated sales, our strategy is to use our scale to increase the volume of our customers staying at a smaller number of differentiated hotels.

By doing this, we can improve hotel utilization; develop deeper relationships with the hoteliers; and agree on more exclusive terms. It also protects our revenues from competition.

Let me give you an example of how we continue to consolidate Group volumes. In summer 2014, we sold only just 7% of our differentiated hotels in more than one segment. For summer 2016, the figure has increased to 37% already.

On to the third pillar of our new operating model, which is to enhance our omni-channel proposition. Using digital technology through all our customer channels is a key objective.

Not in order to become a digital company per se, but purely in order to serve our customers better. As our recent investments pay off we are now starting to see a step change in web performance.

Online sales increased by double-digit percentages in the UK and Germany during the second quarter. Conversion across all devices is also up impressively.

In the UK, we were the first UK tour operator to introduce monthly direct debit as a payment option via the web. This is proving very popular with customers, as it allows them to easily spread the cost of paying of their holiday over time.

It also reduces our workload in terms of balance collection, and means we get cash earlier than we otherwise would. So far, almost 50% of our summer 2017 online bookings have been made using the direct debit.

At the same time, we are improving the way we offer ancillary products to our customers, for example, meals on flights; seat reservations; private transfers; travel insurance; and excursions. In the first half, we grew revenues from ancillaries by 10%, principally by making it easier to customers to access and book these products online.

Customers, clearly, like the way we present ourselves online. A recent independent survey, conducted by eDigitalReserach earlier this year and commissioned by Thomas Cook, showed that the UK Thomascook.com ranked first for usability among direct competitors. Something we are enormously proud of.

In order to help drive our digital strategy in this space, I am delighted to have appointed Gilles Despas, formerly CEO of HolidayCheck in Germany, and a successful digital transformation executive, to serve as our Chief Digital Officer.

Maintaining a low-cost operating structure allows us to provide better value for our customers. Customers don't pay for overheads. They pay for a great holiday experience.

In November, we described our One Tour Operator initiative, which was introduced to bring about less duplication and complexity across the group. As part of the initial stage of this, we've recently launched a major efficiencies program in Continental Europe. This program aims to streamline processes and remove duplication in order to significantly reduce operating costs from next year.

Initiatives include consolidating our tour operating activities, integrating our marketing and finance functions, and standardizing IT work across all source markets within Continental Europe.

Once the program is complete, the individual source markets will focus mainly on sales, trading and merchandising, while a segment-wide structure will exist to carry out centralized support activities.

The benefits we expect to deliver here are already included within our new operating model figures, as we set out last November. All in all, this shows you that for what we said we would do in November, the execution is now in full swing.

So turning to slide 25 to conclude our presentation. We are trading in a difficult environment. But, considering the continued market disruptions that we have faced, actually, I am delighted with our underlying progress over the last six months.

The fact that we have been able to slightly grow half-year 1 revenues against all of the geopolitical headwinds over the last six months is a testament to the team of people we have in place, and confirms that our strategy is the right one.

At the heart of our strategy is our customer. We are encouraged by the progress we have made during the period, including the launch of our 24-hour hotel promise.

We are also embedding a more customer-centric approach across the Firm, including a more comprehensive and new comprehensive training scheme for all customer-facing staff.

Demand for our differentiated holidays remains strong, and we are very excited about the launch of our Casa Cook brand, which has received some very positive early feedback.

As a result of our confidence in the business, as Michael said earlier, it remains our intention to declare a dividend at the full year.

In conclusion, I firmly believe we are doing all the right things to best position Thomas Cook for the future. All of our strategic initiatives are laying a solid foundation for growth, and I remain totally confident of our medium-term growth process.

What underpins this for me is our focus on better and better quality holidays; a wide choice of destinations; customer excellence; and execution of our new operating model.

Thank you very much, ladies and gentlemen. Michael, Christoph and I would now be delighted to take your questions.

Question-and-Answer Session

Operator

A - Peter Fankhauser

Alex, please?

Alex Brignall

Good morning. It’s Alex Brignall from Redburn. Three questions, if I may please. Nordics was much better in H1. I guess, could you just give us a little bit on that? It's certainly different to what TUI was seeing and what of that can continue into H2, please?

And then on Airlines Germany, I guess this is a question for the full year. It was down £19 million in H1 what confidence are you that you don't see that again in H2?

And then, simply because it hasn't been mentioned at all today. On Fosun, is there any update both on the hotel side and, also, on the China outbound? That would be great, thank you.

Peter Fankhauser

So I'm going to take one and three and then I hand over to - with Condor to Christoph. Nordics is much better, yes. Nordics is really pleasing and the reason why: Nordics has excellent brands; has an excellent focus on the business; has improved as well at the proposition, as I showed with the example in Gran Canaria with the Ocean Beach Club. Nordics is trading well throughout the whole year.

So it is really, the first half year, as Michael said, that was a weaker comparative to last year. But the second half year is as well is strong and is just based on branding focus of the business; focus on their own products, Sunwing and Sunprime, which we are going to roll out now into other source markets, and that is proving really, really great.

They have - still, they have a web penetration and the direct access to clients which is about 80%, and that is as well a big advantage. Fosun update we are very well underway with our joint venture. We have launched the first - or we have sold the first passengers to Thailand, where we have our first program too.

We have built up already an incoming department so we are receiving clients from outside; we could take somebody from our competitors. This is proving as well to have a good start and they are well supported by Fosun.

Now you question about the hotel front. Fosun is totally committed to give us the money. But given the fact that we have these changes in demand patterns and, therefore, an overwhelming demand to Spain, in Spain the hotels are at their peak.

So the hotel prices - the hotel for the real estate is at their peak. It is, for us, not the wisest thing to do to buy hotels at the peak. That's why we are, on mid-term, we are still totally committed to do that, but it is not for us to rush into something, which would not be commercially viable.

Condor, we are with the outlook for next year, with all the capacity shifts what we are going to do, with the planning what we have now already undertaken for next year, because the cycle for an airline is pretty much in advance, we are totally confident that we can come back to a performance of - of a normal performance of our Condor business. For that I give now to Christoph.

Christoph Debus

I think the question was how do we see it for the second half of the year, because we have seen minus £19 million in the first of the year. It's a very tough year for the reasons which Michael explained. At the moment, we expect basically the same amount for the second half of the year for Condor.

Peter Fankhauser

Tim, please?

Tim Ramskill

Good morning. Tim Ramskill from Credit Suisse. Three questions as well from me please. The first just in terms of, I suppose, your trading picture. So as you've mentioned overall bookings are down 5% versus capacity, planned capacity down 4%. But specifically for Turkey, can you share the shape of things. How much extra inventory do you potentially have to sell as you move into the late market?

And then two questions, one on hotels and one the airline. So in terms of the hotel strategy overall, notwithstanding the comments about the property fund. To what extent do you feel you need capital to deliver your plans, so just share some thoughts on the CapEx needs to continue to expand your own brand operations?

And then in terms of the airline. Maybe Christoph can comment on the on-time performance stats. So there's, as Michael mentioned, a lot of investment gone into the airline.

How is that actually translated into a changing experience for the customer please with some numbers around it? Thanks.

Peter Fankhauser

So, Turkey, we told that you we took about 30% of our seats, our own airline seats we took out of Turkey. We made a further refinement of about 150,000 seats then from March onwards, and this is now about the right size what we expect now for the late market.

But we don't expect. As we said earlier, it could - we are prepared to add capacity to Turkey, that is at the rate of Turkey recovering, not likely that we have to add capacity, so with the 33%, what is it now, we are okay and we are fine with the cuts.

We expect - if then Spain is filling up, then we expect the swap into Turkey again. This we see as well in the weeks, whereas Mallorca is full already, we see immediate the demand to Turkey and that is probably going to be the case then throughout the whole summer season and the late market.

What does that achieve? We don't need capital to expand our hotel strategy, but it would be - it would give us more control. That is why we were saying fund would be a very good vehicle for that.

It's not a matter of finding the money as I said, so the money is available. It's more finding the right properties at the right price. We can continue to add management contracts; we can continue to add franchising.

The earning potential for the long term would just be bigger if we have a fund and the fund management construction. As we envisage still, and where we have the commitment of Fosun, that when we bring the projects that they are supportive of us.

The on-time performance I can hand over to Christoph, especially where we have the biggest improvement on the three hours' delays, which is the most costly part of the delays, and there we have a good development. Christoph.

Christoph Debus

Yes. As Peter said, I think we measure our on-time performance with two KPIs: the one is the three-hour delays and the other one is the 50 minute departure delays. This is what is usually shown in the public statistics too.

I think the more important one from a customer perspective and also from a financial perspective are the three-hour delays. You might know that in Europe you have to pay EU 261 compensation for - if you delay a flight for more than three hours.

I think that has a big financial impact, so I think we have especially focused with our whole strategy on reducing this number. We have done a significant progress. I think last year we brought it down by more than 50% to a number, which was below 1% with 0.97%.

I think we do further progress, in this financial year; we want to bring it down to 0.75%. I think, at the moment, we are quite well on track. So I think this is really very, very nice from a customer perspective, but also for us to keep the EU 261 compensation down.

The 50-minute departure delay, we are working on that. We are basically on prior year's level. So I think throughout the winter we were close to 80%. The target for the full year is 82%.

This is looking at the complexity of our network and especially looking that we are quite heavily impacted by ATC, so Air Traffic Control, delays, especially in the Western Med and in the Greek area. I think that's basically also a quite good number, if we compare our self with direct competitors flying to those destinations.

I think the development, also the modernization of the fleet putting more emphasis on better maintenance, is really paying off.

Peter Fankhauser

You're the next.

Wyn Ellis

Thanks. Wyn Ellis from Numis. Two questions from me, please. First of all, you've talked about a later booking pattern. You said, on average, customers are booking about two weeks later. That presumably is across the Group. Do you see a different regional pattern? How is the UK, compared with that average across the group?

And then secondly, you've talked about the strong UK pricing, up 3%, due partly to differentiated holidays, etc. But overall pricings down 2%, because of the mix change with more UK seat-only.

Can you say what your package holiday bookings are doing? How much are they down in the UK, must be down a reasonable percentage, given that mix change, along with that, what is happening to your UK package holiday capacity for this summer?

Peter Fankhauser

The booking pattern is throughout the Continental Europe broadly the same. It is just, yes, the environment is all over the same. The volatility is, in the consumer conf, they wait longer until they decide and that is about two weeks in average.

The pricing is 3% up on the package holidays, and because we are growing very much the seat-only business, also to reduce the risk for the tour operator and to open up new sales channels for the airline, that is really - that was the strategy when we came to UK to really turn around this business, that is working very well.

And because we have about 650 average sales price on the package and we have a considerably lower average sales price on the seat-only, and that is distorting then the overall average. That's why we are bringing out the seat-only, the package holiday ASP as such, just to give you a sense that we are stronger in the pricing.

The bookings are down 3% and this is about, as well in line with the capacity we have for the tour operator.

The overall capacity for the UK market is not down; it's about flat, year on year, because we have more seat-only sales and this is balancing very well. We have a good consumer confidence in the UK.

Yes, it's now you, please.

James Ainley

Thanks. James Ainley from Citi. You talked about Majorca being full and Spain filling up; could you give us…

Peter Fankhauser

No, two weeks are full already, not the whole of Majorca.

James Ainley

Could you talk about how the remain - your remaining capacity is split between Spain and the Western Med and Turkey? So, how much of your remaining capacity is Turkey?

And then to what extent are you - have you assumed discounts in the Turkish markets?

Peter Fankhauser

The prices into Turkey are about 20% down, of the original prices, which we came out with at the beginning of the season. That is about the discount we have in Turkey. That is driven mainly by reduced hotel prices.

So that is not our discount, that is the market, who - and the hotels, who just wanted to generate demand, because they have, as well, no Russian demand into Turkey. So that is really a demand and supply question, and that's why the discounts are down.

In Spain we have about a 4% increase in supplier costs; 3% to 4% depending on the destination and that is principally a reasonable increase. So the capacity we have still to sell in Turkey is higher than what we have still left to sell in Spain.

Of course, because we expect end of June that more or less Spain is going to be full for July and August. So I don't expect any late sales in Canaries nor in Majorca. And then, as I said, and we see that already, especially to Greece and then later to Turkey, then those capacities are going to fill up as well.

As I said before, with 30%, 33% capacity cut into Turkey, we feel confident that this is the right cut to fill our capacity to Turkey. We are flying full. It is not the case that we have empty planes to Turkey. It is just the lower yield what is hurting us, as you have seen in Condor.

Jamie?

Jamie Rollo

Thank you. Jamie Rollo from Morgan Stanley. Three questions, please. First, just from a strategic point of view, as the business becomes or shifts more towards seat-only and becomes less integrated, does that make the airlines more exposed to country level overcapacity as you're seeing in Germany? And does that change the way you think about the level of integration in the business going forwards?

Secondly, and related to that, for Condor you said you're very confident of a more normal profitability next year. Are you considering more radical options as being some speculation over many years in the press about tie-ups?

And then the final question, as you look at - as you look into 2017 for Spain and the Western Med, I guess this year you've benefited a bit from fixing some of your pricing early through commitments.

Is there some risk of quite significant price increases next year as everyone tries to grab more capacity in Spain and as the hoteliers actually do pass on those price increases fully? Thank you.

Peter Fankhauser

I start, if you don't mind, with the last question on the price increase in Spain. So since the Arabian Spring we saw a not really natural shift into Spain and I expect it, no, let's put it the other way round.

I see that the rationale of Spanish hoteliers and their business behavior is reasonable. Of course, they take profit off the situation and, of course, they have no reason to lower the prices.

But this - what I want to say this is really a gradual increase what they have now done since the last five, six seasons, and this increase has been digested by our customers. I don't see any signs that all of a sudden they are now behaving unreasonable, because at the heart of their minds they know that is not really a natural demand.

As soon as the geopolitical situation is calming down, the demand is going back to Turkey, to Tunisia and Egypt, because they have good products, and those - the Spanish hoteliers, they know that.

Strategy more seat-only and is then the airline not an integral part of our Group? We intentionally did that to open up the seat-only channel and to make the airline not a bus company of the tour operator, because that was the recipe to really turn around the business in Germany at the time in 2003.

This was the recipe exactly the same to make here the real radical change in the approach in the UK, because the UK tour operator was just running behind the capacity commitments they had on their internal airline and by opening up sales channels for seat-only with GDS and with their own web channel, this took down the capacity risk for the tour operator and, at the same time, the airline could nicely grow.

This has nothing to do whether we are not fan of integration. We take a lot of good benefits by integrating the model and on that capacity piece, where we have the tour operator demand on the planes, we are working extremely well together.

So that has nothing to do with this integration. That is just a better and smarter way of having both airline and tour operator in the most efficient way as sister companies and working together.

The rumors, I don't comment what is in the press. What we have achieved with our airline system is remarkable. We are happy with what we have achieved in terms of efficiency. We are happy that we are considered as attractive, and obviously we are otherwise we would not be in the press.

What we are planning now for next summer and, as I said before, now you can answer the question, Christoph, what we are planning for next summer is really, and we are planning already the next summer, is really giving us all the confidence that the result of Condor is coming back at normal levels and as excellent levels as they were.

Christoph, please?

Christoph Debus

So I think we are very convinced that it's temporary and I think we see it across our overall airline system. Maybe one up-front remark, with the seat-only strategy I think we are really capable to achieve the same profits for the block capacity in the seat-only than we do on package. So I think there is no doubt about that.

For Germany, let's maybe have a look back. I think we have run this airline now for the last 11 years since the turnaround always on a very, very profitable level in an extremely competitive market and in market where we have seen massive disruption.

So I think what happens this year we don't think that this is really something temporary. I think it's really that a lot of external factors came at the same time. The huge exposure of the German airline to Turkey makes it maybe a little bit more vulnerable than maybe in the UK, where the exposure to Turkey is not that big.

So I think we are really very convinced that we will turn around this downside next year. I might maybe go just through the reasons that you know why we are so confident to do so.

In Germany we had to reduce the capacity to Turkey, now with the final changes, which we did in February and March, overall by 12% on a year-on-year basis. Some of that was done proactively at the beginning of the year, but then we had some scenarios in place when all these terror attacks in January, in February happened.

Then just to remind everyone, the Istanbul attack a lot of Germans were killed. So I think that had a bigger impact on Germany than here in the UK. So I think we have to take more capacity out.

At the moment, an airline management is a long-term planning. We are fully convinced that we will backfill this capacity. I think the reduction at the moment is 12%. Half of it will be backfilled by more long-haul capacity. This is the swap of long-haul aircraft or 767s from the UK, which fly in the UK on short and medium haul will fly next year in Germany long haul.

The rest, the other 6% of the capacity reduction will be filled by summer-only, that lease aircraft, which we took out proactively this year, because the Turkey demand wasn't there, but I think we will be able to backfill this year. I think that should, at least, have an effect of let's say £7 million to £9 million.

Then, because all these capacity changes came so massively and maybe there is a little bit less consumer confidence in Germany than we see in the UK. I think the overall impact that's also something that we see in tour ops.

I think you can only shift capacity to other destinations or to try to fill your planes if the customer demand is there after the terrorist attacks. So I think this was very, very challenging in Germany.

That's why also the low end of the season, so Q3, will be impacted this year. We don't think that that will happen again. That's something that we can, with the longer lead times, plan better. So I think there is another upside of £5 million to £6 million.

Then we will continue our underlying long-haul growth, which we had this year, and which we set up this summer and which worked quite well. We see also nice profitability there. So those growths which we had here this summer will be the year round next year. This is another upside of around £4 million.

Let's be honest, I think we will see a fuel benefit for the German airline of around about £35 million year on year, so I think lower costs. Of course, we have to pass some of the cost on. But I think this year there was a big gap between our hedging position and the market price.

I think next year, we will be for sure with our hedging position on market price level, maybe even above. So I think, as Michael said, there might be better pricing power. So we expect maybe £8 million to £10 million from that.

Then overall, we also expect that maybe Turkey will recover. So I think there's another upside from £5 million to £10 million. And then on top, we have all the synergies of our airline integration, which will cause some other benefits. So, therefore, we think it's temporary and we will be able to bounce back next year.

Peter Fankhauser

Thank you. Please?

Alexia Dogani

Thanks. This is Alexia Dogani form Goldman Sachs. Just a follow-up on your really comprehensive answer on the temporary effects, aren't you a little bit concerned by the fact that Ryanair is very aggressively targeting the German market and Lufthansa itself is trying to reposition by expanding Eurowings?

Do you think that has the potential to address your short-haul program on the reallocated capacity, but equally your move to long haul suddenly seeing more completion medium term? Thank you.

Peter Fankhauser

First of all, we already fly wing to wing with Ryanair on many routes here in the UK and also partially in Germany. I think due to our strong seat-only business, if we know that with the prices we are able to realize, we can fly profitably. So I think, and we know it, we can also compete with Ryanair, and this is something which we have done quite well in the last couple of years.

I think Ryanair, I think for the last 15 years, for which I have been in airline management, they have always announced to grow massively in Germany and, so far, they haven't really grown that massively in Germany. So I think let's see with how many aircraft they really will come and then we will take the competition as it is.

For the long haul, I think, first of all, we see it as a sign of strength or as a compliment from Lufthansa and from Germanwings that or Eurowings that they identify the long-haul business or the leisure long-haul business as an attractive market. So I think, because that's something in which we are very, very good in.

I think this winter, we had the first year where we had some really competition out of Cologne on our routes to the Dominican Republic and to Cuba. If we look at our results, I think we were able to keep more or less our profit level. So I think we are able to compete with Eurowings too.

I'm not so sure how profitable it is for them, but that's up to them to decide. So I think, therefore, we feel quite confident.

Peter Fankhauser

Okay, no more questions? Then thank you very much for coming and have a good day. Thank you.

Michael Healy

Thank you.

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