Operational risks

[ ] _{MTU sells most of its pro-}

ducts under risk- and revenue- sharing arrangements

Development risk

In the commercial and military engine business, MTU undertakes to perform development work during which unplanned delays and additional costs may arise. The company nevertheless ensures strict adherence to time schedules and budgets by permanently monitoring project management and applying appropriate corrective measures where necessary. Furthermore, through its involvement in collaborative ventures, it works in partnerships that extend beyond corporate boundaries and thus spreads the risk. MTU products are subject to extremely stringent safety requirements. The company requires numerous official certifications, particularly from the German Federal Office of Civil Aviation (LBA) and the U.S. Federal Aviation Administration (FAA), in order to carry out its activities. These certifications are valid for limited periods; they can only be renewed after further tests have been carried out. The production and repair processes are documented in detail to ensure compliance with all regulations.

As a general rule, MTU’s business plans for new engines are drawn up to cover a long period. They tend to assume long repayment terms, with the result that the investments in the development phase and the production run-up are only gradually amortized over a long period of time. Due to the long period under consideration, the actual conditions may deviate from the technical, economic and market-related assumptions on which the calculations were based, thus also affecting the attainable return on investment.

Procurement and purchasing risks

For some raw materials, individual parts and components and for the provision of specific services, MTU Overall, from the present point of view, there are no identifiable market risks to the substance of MTU. Risk diversification

across programs MTU engine portfolio by life cycle (illustration)

Year 1 Year 5 Breakeven after

approx. 15 years Series produc- tion Spare parts No revenue No revenue Year 20 x Roll-out of a successor model High volume of spare parts Year 30 x No revenue Decline in volume of spare parts Initial/increasing orders No revenue Stable order position Revenues generated from spare parts

Decline in orders High volume of spare parts Cumulat ed cash flow Commercial engine programs Military engine programs

[ ] _{Cooperative ties further}

collaboration as partners and

– +

Program risk

Besides the general business risks, MTU has specifically identified risks in the TP400-D6 engine program for the new Airbus military transporter A400M. MTU is a member of a consortium comprising four European companies. Each partner initially finances unexpected additional development and manufactu- ring costs using its own resources, in proportion to its share in the program. A provision has been allocated for anticipated contractual obligations to cover part of this possible future expense.

MTU has taken precautions to a greater extent than previously due to the additional requirements which have arisen in recent months, in particular regarding the software, and the termination of the South Africa export contract. Thus, all previous expenses of the program and the provision for possible ob- ligations have already been taken into account in the 2009 financial statements. It is not possible to take account of effects arising from potential changes to contracts.

MTU has drawn up guidelines and a code of conduct that are valid for all of its employees throughout the world, by means of which the company strives to establish binding rules for internal and external communication. Employees who are entrusted with confidential or insider information make a solemn commitment to abide by the applicable regulations, such as those laid down in the German Investor Protection Improvement Act (AnSVG), and to exercise the appropriate integrity when handling such information.

The commitment, motivation and skills of the company’s employees are major contributory factors to its business performance. There is considerable rivalry in the recruitment market for the aerospace sector, as companies compete to find the best-qualified employees to work on the development, manufacture and maintenance of cutting-edge technical products. This is associated with a corresponding fluctuation risk. MTU minimizes the associated risks by means of fast-track professional training and development programs, performance-related compensation, mentoring schemes and early preparation for promotion. One of the main elements of succession planning is the Campus Potential & Succession personnel development process, in the course of which employees with potential in the long term are identified for filling key positions in the future and their potential deployments are regularly assessed and discussed by managers and the human resources department.

The new engine programs will require the requisite development capacity in the coming years. MTU is meeting this challenge by setting up new development centers in Munich and at its new site in Poland, and by collaborating with universities.

In contrast, the slight decline in business volume following the economic crisis is presenting MTU with the challenge of managing capacities appropriately. The company has responded by flexibly deploying and training employees in other business units; but MTU is also taking advantage of natural fluctuation rates and the flexible working hours by having employees reduce their flexitime credit.

Insurance policies are in place to limit potential liability risks that might be caused by individuals employed by the company. The overall level of personnel risk is estimated to be low.