Ladies and gentlemen,
I also would like to kindly welcome you to the presentation of our nine months figures. After you got the overview from Christoph and as he mentioned in the beginning, I would like to present the financials now in more detail.
2 They can be summarized as follows:
Revenue developed positively. However, costs went up even more.
Therefore, our operating result was down on last year!
Our financial profile nevertheless remains solid – and that is how we want to keep it. Let me put figures behind this:
Traffic revenue was increased by 5.4 per cent versus previous year, which also caused Group revenue to increase by 6.1 per cent. Compared with the first half year the growth rates have hardly changed.
With 628 million Euros after nine months the operating profit has improved versus the first half year by 648 million Euros. However, it did not reach last year’s level. Included in this result is the significant impact of 33 million Euros caused by the cabin crew’s strike at Lufthansa Passenger Airlines.
The adjusted operating margin came to 3.1 per cent, 0.7 percentage points down on the previous year – which is still a long way from our target of a healthy and sufficient margin.
I will provide a more detailed view of the contributions from the individual companies later on. But for now I can already say: Without our service companies we would not even have reached this earnings level.
EBIT and EBITDA were almost unchanged compared with last year. Following the sale of bmi, net profit for the period now improved to 474 million Euros.
Thanks to higher cash flow from operating activities of 2.4 billion Euros we were able to generate strong free cash flow, despite gross capital expenditure of 1.9 billion Euros.
Net debt reduced to 2.0 billion Euros compared with year-end 2011. The equity ratio im-proved slightly to 28.8 per cent. Our market value recovered substantially by 15.2 per cent. Nevertheless, the market capitalisation remains on a low level. Therefore, we feel even more pleased that we can still call ourselves a DAX 30 company after the last Deutsche Börse index review in September.
4 Let’s have a look at the revenue development: Traffic revenue accounted for almost 75 per cent of the revenue increase. Higher passenger numbers contributed 351 million Euros to this. As you can see exchange rate movements had a markedly stronger impact with 558 million Euros. The price effect was almost negligible with 59 million Euros. And this despite the fact that the fuel surcharges through which we try to compensate parts of the signifi-cantly higher fuel costs are included.
The other 25 per cent of the revenue increase came from other revenue, which is mainly revenue of the segments MRO, IT Services and Catering. It improved by 9.3 per cent to 4.0 billion Euros.
Above that, the total Group income also includes other operating income, which is not shown separately on the presentation slide. It fell by 257 million Euros to 1.4 billion. This was largely due to lower exchange rate gains compared to previous year and positive one-off factors last year.
If you add other operating income to Group revenue of 22.8 billion Euros, total Group in-come was 24.4 billion Euros. It was therefore 4.7 per cent higher than last year.
In the first nine months we continued to have good control of the manageable costs. De-spite revenue growth of 6.1 per cent, costs excluding fuel went up by only 1.5 per cent and a large part out of this were fees and charges. However, including fuel, the operating ex-penses rose by 5.6 per cent.
Accordingly the costs of materials show the strongest change versus previous year. It climbed by 1.2 billion Euros or 9.3 per cent year on year, of which fuel costs alone account-ed for 972 million Euros. I will provide a more detailaccount-ed breakdown of this in a few moments.
Staff costs went up by 3.3 per cent to 5.1 billion Euros. At the same time, the number of employees rose by 2.3 per cent to 117,554. Pay rises and exchange rate effects also led to the increase. A decreasing effect, however, came as a result of the transfer of operations from Austrian Airlines to Tyrolean Airways as we had already shown during the H1 results. The transfer reduced future pension benefit obligations sharply and lowers staff costs sus-tainably in the future.
As in prior quarters the fleet modernisation resulted in higher depreciation and amortisation. D&A grew by 8.3 per cent or 103 million Euros to 1.3 billion Euros. Due to the lower capaci-ty growth and consequently early decommissioning of aircraft, impairments accounted for 63 million Euros out of this.
6 Other operating expenses fell by 4.4 per cent - especially due to lower exchange rate loss-es.
Good management of the manageable costs was also visible in the development of the Passenger Airline Group unit costs. Excluding fuel they fell by 1.2 per cent. However, if you add back fuel they rose by 4.2 per cent. This clearly shows the effect fuel has on profitabil-ity.
The increase of 972 million Euros in fuel costs that I mentioned was driven solely by a higher price and FX effects.
The average market price for Brent in US dollars was only slightly higher than in the same period last year. However, this price was further driven up by 455 million Euros due to the Euro’s weakness against the US dollar.
Furthermore, in 2011 we had benefitted stronger from our fuel hedges. As we continue to apply our rolling hedge system this means, that its effect diminishes over time if oil prices remain on a high level. In the first nine months of 2012 our hedges only shortened fuel costs by 154 million Euros. This is only a quarter of the hedging result we recorded a year ago. If you look at it for a second time, you will notice that this number is exactly the same as the figure I gave you for the first half-year. Unfortunately this is not a bug. The number is correct and means that in the third quarter we did not save money at all with our hedges.
On the other hand it needs to be mentioned that our capacity management had a positive impact. By flying larger aircraft we were able to cut the number of flights while the number of available seats even went up slightly. This combined with the phase-in of more modern aircraft reduced kerosene consumption and saved EUR 49m of fuel costs.
8 As a result of the additional costs the profit from operating activities was down year on year by 19.1 per cent to 640 million Euros. In the first three quarters, the reconciliation with the operating result that we use for controlling and reporting purposes does not feature any ma-jor adjustments as you can see on the chart. Net, only 12 million Euros were eliminated. The operating profit came to 628 million Euros – 96 million Euros less than last year.
This result equals an adjusted operating margin of 3.1 per cent. Again here, the perfor-mance worsened 0.7 percentage points compared to last year. This margin might be better than what many of our competitors can show you at the moment. However, we cannot be satisfied with this level of earnings.
EBIT was only slightly down on the previous year at 697 million Euros. The decline in the profit from operating activities was offset mainly by a positive development in the other fi-nancial items. In 2011 these were severely depressed by lower time values of hedging transactions.
On net profit level, we can also report an improvement compared with last year. Net profit was 474 million Euros, which represents earnings per share of one Euro and 4 cents, and this is 41 cents more than a year ago.
This positive development is mainly due to the sale of bmi. Last year’s earnings were still burdened with a loss of 143 million Euros from these discontinued operations. In this report-ing period, the bmi sale resulted in earnreport-ings of 36 million Euros, mostly as a result of valua-tion effects.
If we have a look at the result from continuing operations, this means the Group in its cur-rent formation, it amounted to 448 million Euros, roughly the same as last year.
10 As you can see in the cash flow statement you can see that so far we have again generated free cash flow in 2012. In the first three quarters it came to 975 million Euros. In view of the on-going investment programme, we however keep monitoring this indicator very closely.
Net capex of 1.5 billion Euros was covered by an operating cash flow of 2.4 billion Euros. The figure was 82 million Euros lower due to bmi, but this will no longer apply next year.
Our liquidity remains solid, as our banking partners and the rating agencies expect of us. The Group’s liquidity was 4.9 billion Euros.
After this overview of the Group figures, now I would like to take a look at how the individual segments have developed over the first nine months. As we will examine the airlines in more detail later, let me start with the service segments.
The MRO segment reached revenues of 3.0 billion Euros. This was in the region of last year’s good figure. Lufthansa Technik increased its operating profit by 14.6 per cent to 227 million Euros. Last year, Lufthansa Technik’s earnings were depressed by provisions on long-term contracts, but this year the earnings capacity of Lufthansa Technik is clearly visi-ble again. For the full financial year 2012 we are expecting a similar picture, with revenue on par with last year and an operating profit that will be higher than a year ago.
IT Services increased its revenue by 2.8 per cent to 448 million Euros. This performance was largely driven by external business. The operating profit improved by 1 million Euros to 13 million Euros. The return to profitable growth was primarily caused by the successful restructuring of the segment in 2011. This positive trend will continue, so for the full year we are also anticipating moderate revenue growth and positive earnings performance.
The Catering segment has presented a very positive development in the third quarter. Again here, the restructuring efforts but also exchange rate movements helped, as the strong US dollar had a positive effect on earnings. Revenue was up by 10.9 per cent. The
12 operating profit was even 30.4 per cent up on last year. Also for the full year LSG Sky Chefs is expecting higher revenue and we can also be more optimistic about the operating result again. We are now expecting the full year profit to be higher than last year.
In our Logistics segment the focus remained on flexible capacity management in recent months - in order to prepare the company for the continuing weak demand in the cargo business. Here, Lufthansa Cargo was very successful. Despite the shrinking volumes they achieved an operating profit in the third quarter. In the reporting period they generated rev-enue of 2.0 billion Euros, which was 9.7 per cent below last year. In this trading environ-ment, the operating result could not match last year’s high figure of 173 million Euros. With 66 million Euros we however see Lufthansa Cargo on the right track for reaching a low three-figure million profit for the full year, despite all the challenges. However, we no longer expect demand on the air cargo market to recover before mid-2013.
Let’s continue with the passenger airlines. The Passenger Airline Group recorded a reve-nue increase of 7.0 per cent in the last nine months but the operating result of 345 million Euros was slightly down year on year. For the financial year 2012 we are still anticipating higher revenue and a modest operating profit. The absolute level will largely depend on ex-ternal factors which, however, remain volatile. But let us look at the airlines individually.
Lufthansa Passenger Airlines generated revenue of 13.1 billion Euros in the reporting peri-od. This was 6.8 per cent above last year’s. The increase in revenue was not nearly enough to make up for the rise in expenses – especially for fuel. And so our largest single company only earned an operating profit of 64 million Euros. This is less than half of last year’s al-ready meagre figure of 138 million Euros. The trend is particularly worrying because this company, which is so vital for the entire Group, only reached break-even in September to-wards the end of the peak season.
Now the winter season is upon us, with high fuel costs and a weakened outlook for book-ings, which I will come back to in more detail later. On this basis we have had to abandon our target of an operating profit for the full year and are now expecting a noticeable operat-ing loss. As a consequence, Lufthansa Passage Airlines besides pursuoperat-ing their strict capac-ity management, are additionally working on further measures within and beyond the
SWISS also saw earnings fall, despite increasing revenue to 3.2 billion Euros. However, they still managed an operating profit of 163 million Euros. Here, additionally to fuel costs, the strong Swiss franc had an adverse effect. SWISS is not expecting this operating envi-ronment to improve in the remainder of 2012 and still assumes that revenue grows but op-erating profit will not match the previous year’s figure.
Austrian Airlines benefited from its restructuring endeavours: the transfer of flight operations to Tyrolean Airways caused no disruptions to passengers. Altogether Austrian Airlines re-ported revenue of 1.6 billion Euros, which was therefore 6.4 per cent higher than last year. The operating profit of 73 million Euros beats last year’s by 107 million Euros. This came largely from the positive one-off effect of the operating transfer. But even adjusted for this positive one-off effect Austrian Airlines achieved an operating profit of 5 million Euros. As a result of this and the actions taken under the restructuring programme, Austrian Airlines is still expecting an operating profit for 2012 as a whole.
14
As already explained, revenue in all passenger airlines developed well. Let us take a look at the different traffic regions. Basically, we improved sales, load factors and average yields everywhere. However, the drivers differed from region to region.
In Europe, the largest traffic region, we reported a solid rise in traffic revenue. It went up by 7.3 per cent, driven equally by sales growth, improved load factors and higher average yields.
On long-haul routes, the Americas traffic region repeated its outstanding performance of the first half-year, with growth of 11.2 per cent. With capacity stable, the load factor increased. This was particularly visible in the sharp increase in average yields.
Asia/Pacific was not able to match this performance. Traffic revenue nonetheless rose by 4.1 per cent. Over the course of the year we have sharpened our focus on load factors and average yields. I can therefore report at least moderate improvements in all performance indicators for this region as well.
The results of the active capacity management can also be seen in the Mid-East/Africa traf-fic region. Capacity was slightly lower than last year, which helped load factor and average yields to perform well. Traffic revenue grew by a total of 4.9 per cent.
But increasing uncertainty about the economic prospects has now also hit our traffic figures. Our main indicator for premium traffic, First and Business Class revenue as a share of Lufthansa Passenger Airlines’ long-haul revenue, was stable year on year in the reporting period. This figure of nearly 50 per cent was certainly still high. And it also means that the front of the cabin has made up for the disproportionate capacity increase in the Economy Class resulting from the fleet renewal. However, there is a slight decline compared with the first and second quarter, which we will continue to track closely.
16 And this brings me to a growing challenge: forward bookings. They have become less pre-dictable. Customers, in particular business travellers, are booking their trips at much shorter notice than just a year ago. This makes comparisons with the same season of the previous year more difficult and increases the degree of uncertainty in the forecast.
The traffic figures in our passenger business for October, which ends today, look pretty sol-id. However, with the picture we have today, we have to assume that bookings for the up-coming winter months will go down. We have already prepared for this by adjusting our ca-pacity further. The pricing situation is therefore still generally positive. But caca-pacity man-agement will remain a hot topic in future.
Since our last update in August, our capacity plans for the winter flight timetable have been reduced again slightly to minus 3 per cent. As part of the review of further SCORE activities mentioned earlier, Lufthansa Passenger Airlines is analysing scenarios, which could lead to a significant rescaling of their route network.
In the freight business there seems to be hardly a chance for a recovery in the short term. Business remains subdued, with sales still down on last year. At the moment we are not expecting demand to pick up before the middle of 2013. But bookings in the cargo business are traditionally made at very short notice. Lufthansa Cargo will therefore pursue its course of tight and flexible capacity adjustments, which has proven so successful to date. The
steps already taken and those planned should give us a capacity for the current financial year which is 7.5 per cent lower than last year’s. This corresponds to the capacity of about two cargo aircraft.
And the focus of adjustments will continue to be on the freighters. You can see how dynam-ic this segment is by the fact that in August we forecasted reducing capacity by 4 per cent, which has now been overtaken by action. The flexibility we still need to achieve in the pas-senger business has already been implemented successfully here.
18 Given the fact that forward bookings have weakened, we have to expect that the already unsatisfactory profit situation at Lufthansa Passenger Airlines will become even worse. Al-ready today, their margin is well below of those in the other Group companies.
If we take a look at the business segments again, we can see that Lufthansa Technik achieved a margin of 8 per cent and was highly profitable in the last three quarters. Among the airlines SWISS and Austrian Airlines came in at about 5 per cent, Austrian’s margin was of course helped by the positive one-off – but even without it they improved their margin. Lufthansa Passenger Airlines could not reach such levels and was right at the low end of the Group’s profitability scale with a margin of 0.8 per cent.
Let me say quite clearly, that we cannot tolerate this earnings level on a sustainable basis. It is the core segment for which most of our capital is being spent. And yes, we can see the improvements in the fleet’s efficiency and in customer satisfaction. However, a margin - as low as this - is certainly not enough to finance the investments sustainably.
We draw up on our own resources. The solid capital base that we are so proud of is the reason why we can afford the massive investments we are currently making. But it needs a higher profitability to secure this capital base.
Therefore we will need to judge carefully how we can position Lufthansa Passenger Airlines in the future to reach higher profit levels. And we also want to become more independent from the external factors that continue to depress our results year by year.
We can only reach this by taking actions that go beyond of those already planned under the SCORE programme.
As a first action – and in order to prevent the addition of further staff capacities in the cabin crew – we have decided to stop training additional pilots in our Pilot School in Bremen be-yond the existing classes at least in 2013. We are preparing for a sustainable period without capacity growth at Lufthansa Passage Airlines.
We cannot present you further details today. However, be assured that the Executive
Boards of the Group and Lufthansa Passenger Airlines are currently evaluating a number of such measures that will be implemented continuously over the coming months.
20 There is unfortunately also no relief in sight for our number one cost driver, fuel. Fuel re-mains volatile on a high level. The way the market is behaving, anything is possible of course, but at the moment we cannot assume that prices will fall in the near future. Our pro-jected fuel costs have fluctuated over recent months between 7.4 and 7.6 billion Euros. Currently, that is per mid-October, they stand at 7.4 billion Euros for the full year. However, this still represents additional expenses of 1.1 billion Euros compared with last year. We have to make up for this fuel budget, which has been rising for years, with other operational cost savings. I explained earlier that this cannot be achieved solely by means of hedging and fuel surcharges.
In the chart on the left you can see clearly that at current prices, our hedging has little or no effect. We therefore feel the direct impact of absolute market prices and their fluctuations in our cost base. A hedging effect will only cut in if prices start to rise again.
I can only say again: Anyone who wants to survive this phase of high, volatile fuel prices and to perform well, has no alternative but to adapt their structures to these new cost levels. Then the fluctuations in kerosene prices will still give a headache, but they won’t break one’s neck. That is another reason why we need SCORE.
So, let me put the outlook for the next months in a nutshell:
we see no recovery in demand for freight,
we have indications that bookings will weaken, at the very least the uncertainty in the passenger business will grow, and
we have to assume that the cost pressure from kerosene will continue.
But there is good news as well. And that is not just the stabilising effect of our service seg-ments, but rather the experience of all business segments on how to deal successfully with such challenges.
For the full year 2012 our assumption is still that Group revenue will increase and the oper-ating profit will be in the mid-three-digit million Euro range. Unfortunately the on-going vola-tility in the market makes it impossible to give a more precise forecast for the absolute level of profit. The earnings forecast is still to be seen before restructuring costs expected from our SCORE programme.
As consultations with the local employee councils took longer than we had originally ex-pected, we were only able to start actions with a certain delay. The financial statements for the third quarter therefore do not include any restructuring costs in connection with SCORE. For the full year 2012 we are now assuming restructuring expenses of no more than 100
22 million Euros, and not 100 to 200 million Euros as we expected in August. The remainder will be postponed into next year.
But we really need to get a move on here. With the earnings outlook for the current year we are drifting further away from the earnings level that is we required structurally.
Christoph has already given you a detailed overview of the many relevant SCORE
measures that we are pursuing at the moment. Therefore, I do not want to spend too much time on it again. But I believe it is helpful to show you our current activities in the usual for-mat. We continue to implement the programme phase by phase, as this is the only way it can be done in such a large organisation as Lufthansa. Having said this, we will continue to regularly update you on the further progresses of this future programme.
SCORE is not a standard cost-cutting programme, it is also intended to bring structural change and new processes. And exactly these kind of structural changes have been initiat-ed over the course of the year. They affect administrative areas just as much as the operat-ing units. Programmes started in all subsidiaries.
As you know,
we sold bmi, the biggest loss-maker in the Group, at the beginning of the year. In July we took a great step with our turnaround project in Austria. By transferring
operations to Tyrolean, we improved the production structure there by 20 to 25 per cent.
And now we are tackling one of the key problems at Lufthansa Passenger Airlines by repositioning the European non-hub traffic.
24 We are doing this systematically and consequently ironing out the deficits in the passenger business.
The administrative units will have to come to terms with changes that are no less severe – but just as necessary.
The restructuring costs of up to EUR 100m we are expecting for this year represent con-crete measures to optimise headcount in the administrative functions. Now that the workers’ councils have largely given their approval, severance packages have been on the table for a number of weeks. The companies can make use of these to make specific staff reduc-tions.
Alongside these direct redundancies in existing functions, we redesign processes. One ma-terial redesign project is called GLOBE, which I would like to talk about more diligently now.
GLOBE stands for the group-wide pooling and centralisation of functions such as Finance, HR and procurement. Today these functions are mostly carried out individually and in-house by the various sub-groups and companies – and by a total of around 4,900 full-time equivalents.
Over the last few months we have been working on a concept how to bundle these activi-ties. The central idea is to build a global business services organisation which specialises in these tasks. It will be based on the existing service centres in Krakow, Mexico and Bang-kok.
Out of the 4,900 FTEs worldwide, 2,500 shall be located in such an organisation until 2015. Of them we have identified 700 jobs that could be transferred from Germany to such cen-tres if we make good use of those international platforms. Outside Germany there is poten-tial for another 400 jobs that could be migrated as well.
We are currently in talks with the employee representatives of the Group. As soon as the talks have finished, we will approach the employees affected by these measures and make more details available then. We should have made significant progress on this by the end of the year.
Having said this let me add as a closing remark that the pace at which we are redesigning Lufthansa will certainly not slow down.
