Lufthansa (ETR:LHAG) Group (LHA.DE) has announced its second-quarter results for 2024, revealing a mixed performance amid a slower-than-expected recovery. The company faced headwinds from strikes, delivery difficulties, and certification delays, which impacted its operations. Despite these challenges, Lufthansa Group reported a 7% increase in revenues due to higher capacity and strong demand for premium cabins.
However, operating expenses rose by 10%, leading to a decreased operating result compared to the previous year. The sale of AirPlus is expected to contribute €0.5 billion to the company's earnings, and Lufthansa Group forecasts an adjusted EBIT of €1.4 billion to €1.8 billion for the full year.
Key Takeaways
- Slower-than-expected recovery due to operational challenges.
- High interest in travel and demand for premium cabins.
- 7% revenue increase with an 11% capacity increase in Q2.
- Operating expenses up by 10%, affecting operating results.
- Sale of AirPlus expected to bring in €0.5 billion.
- Adjusted EBIT forecast for the full year between €1.4 billion and €1.8 billion.
- Lufthansa Airlines to undergo turnaround program to address unit revenue decline and inefficiencies.
- Lufthansa Technik reports record results; Lufthansa Cargo's profit remains stable.
- Plans for fleet modernization and optimization of operations.
Company Outlook
- Lufthansa Group anticipates a positive result for the full year, driven by sustained demand in premium classes and Lufthansa Technik's strong performance.
- The company is aiming for an 8% margin and plans to modernize its fleet and optimize its operations.
- The proceeds from the sale of AirPlus will be used for strategic investments, focusing on core business investments and IT upgrades.
Bearish Highlights
- The company experienced delivery delays of 787 aircraft, affecting fleet modernization plans.
- Lufthansa faces challenges in recruiting qualified employees and navigating supply chain bottlenecks.
Bullish Highlights
- Lufthansa Technik achieved record results with significant revenue increases in the first two quarters.
- Free cash flow was better than expected, and available liquidity is above target at €10.6 billion.
- Lufthansa expects a significant increase in revenues in the Logistics segment for the full year.
Misses
- The company reported a decline in unit revenues and operational inefficiencies, particularly in Lufthansa Airlines.
- A book gain of €130 million will not be included in the adjusted EBIT guidance for the full year.
Q&A Highlights
- CEO Carsten Spohr clarified that the company has completed restructuring and is now focusing on modernization and optimization.
- Lufthansa aims to reach 100% of 2019 capacity levels, but winter growth may be reduced.
- The company is not planning redundancies or restructuring, but rather reallocating growth and potentially shrinking the short-haul market.
- Discussions with unions and social partners are ongoing to manage cost pressures and capacity optimization.
- Investor Relations will maintain communication throughout the quarter.
Full transcript - Lufthansa (LHAG) Q2 2024:
Operator: Ladies and gentlemen, welcome to the Q2 2024 Results Analyst Conference Call and Live Webcast. I'm Mohit [ph], the Chorus call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's a pleasure to hand over to Marc-Dominic Nettesheim, Head of Investor Relations. Please go ahead.
Marc-Dominic Nettesheim: Yes. Good morning here from Frankfurt. Welcome to all of you. Thanks for the interest. We'll give you an update on our Q2 results on strategic outlook and milestones and on the business going forward for the rest of the year. Sitting with me today are our CEO, Carsten Spohr; and our Board Member, Michael Niggemann who is also Acting CFO. And as always, after the presentation, you have the chance to ask questions. But also, as always, we ask you to limit your questions to two, so that everybody can participate. And with that, I hand over to you, Carsten.
Carsten Spohr: Yes. Thank you very much, Marc, and warm welcome on my behalf as well. Ladies and gentleman -- some of you I met many times before, and you know I have said before that the pace of change in our industry is further accelerating. And you only have to look at the last months to get a sense of the pace of economic change in. In March this year, we were enjoying the third best financial guide in our company's history, and just one month later, we need to adjust our full-year guidance due to the significant impact of the strike, especially Lufthansa Airlines. And then two weeks ago, we provided a top update on the quarter's key figures and again adjust our outlook and this time, not for strikes, but for commercial reasons. And I don't want to sugarcoat this in any way. The first half of the year did not go as expected, as you well know, for the entire industry, and that surely includes us with the numbers we are presenting year-to-date. But let me allow to begin by highlighting some positive aspects. There is a continued high level of interest in travel and demand for tickets of airlines around the world in all our markets. And that obviously shows that the most important trend for our industry after COVID does remain intact. And especially important for us at the Lufthansa Group is that this is more than true for the premium cabins in long range, which, of course, are the core of our commercial business model. In the first half of the year, our alliance was over 60 million passenger safety to the destinations that represents a 10% increase compared to the previous year. This figure is very much in line with our capacity expansion of 11% in the first half of the year. At the end of June, this brought us back to nearly 93% ASKs compared, of course, as always, to the reference year 2019. This growth in capacity both for us and obviously for our competitors increases supply in the market, which in turn puts some pressure on prices. And although these are still well above pre-crisis levels yields are somewhat normalizing across the world. And this obviously is felt by airlines around the world. And this is -- by the way, while we have decided to reduce our planned capacity growth for the coming winter by a certain degree, we come to that later on. Moreover, also no secret that some Asian markets and business travel in general continues to recover more slowly than planned, different parts of the world, but in general. And in addition to these market-wide, industry-wide organizational, the first half of the year did see some several special onetime effect for us in the Lufthansa Group. Both of all, of course, the strikes in the first quarter which had an adverse effect on our financial performance, performance more or less up to €0.5 billion. Second, the ongoing delivery difficulties of basically all aircraft and engine manufacturers are affecting us at Lufthansa Group somewhat more than others because we are right in the critical phase of the largest fleet modernization in our history. And to illustrate this year alone, '24, we wanted to put 15, 15 new 787 into service. In the end, none of them will enter service in '24. Thirdly, the certification process for new seats, for new cabin interiors is taking significantly longer than it did before the pandemic. This is also unfortunate timing for us as this coincidizes with the launch of our new [indiscernible] next year, Swiss census cabin reconfiguration that timing we get. And these circumstances combined with in these complex collective margin and operational regulations, we have the main line are leading to additional inefficiencies, especially in the Mainland itself and the Lufthansa City line feeding our hubs in Frankfurt. On top here in Germany, our most important home market, we are affected by significant increases in taxes and fees. And all that combined these aforementioned factors means that the consolidated results for the first half of the year fell below our own expectations of last year, and now we expect an adjusted EBIT of between €1.4 billion and €1.8 billion for the full-year. This outlook is largely dependent on the traditionally important fourth quarter in Lufthansa Cargo and the earnings performance at Lufthansa Airlines and to achieve a balanced result from Lufthansa Airlines for the full-year, at least, hopefully, and to accelerate the overall modernization of Lufthansa Airlines, a comprehensive turnaround program has been launched. Michael will go into some more detail on this in a moment. But let's look at the results of the whole group in the second quarter for a moment. We increased the number of available seat kilometers by 9% compared to the previous year. Lufthansa Group reached €10 billion [ph] by the way, for the first time in the second quarter, which represents a 7% increase compared to the previous year, and we were able to keep unit costs at a constant level, which was obviously at least the achievement. We have a little bit product because at the same time, with unit revenue is falling about 5% compared to the previous year. This alone resulted in a €300 million earnings impact. The whole group achieved an adjusted EBIT of €700 million for the second quarter, as you know. And it's pleasing that a part of Lufthansa Airlines, which I already referred to or the other passenger airlines in the group, are more or less developing in line with the market development in this very challenging environment. And the same applies to Lufthansa Cargo, Lufthansa Technik, I would like to say that we probably outperformed expectations and of course, for at least -- they were achieving another record result in the first half of the year. I think it's worth to say they will be finishing this in a very positive way this year '24 as well. Nevertheless, it's evident that our combined half year results are below expectations. However, you manage our group, as you well know, the long-term perspective rather than focusing on one quarter after the other. Therefore, let me spend a few minutes on the extremely important fact that we achieved four significant strategic milestones in this second quarter alone. First, Allegris, the premium business, especially on long hauler is doing extremely well, as I already mentioned, this key for us. Therefore, in April, we were finally able to present the first Airbus 350 with the new Allegris cabin, we'll now add one each funds until the end of the year, including introducing our new first class. And starting next year, we even add two aircraft per month, one from Airbus or Boeing (NYSE:BA) and one, including first. We have had now a triple number of flights with more than 50,000 guests, and I'm delighted to say that the feedback from the guest is even above the quite optimistic expectations we have had and again, I mentioned for the third time, this is key for our business, therefore, so important also that our crews come back with very positive feedback. So that makes me quite optimistic on going the right path here for years to come, as you know. By the end of the year already, we will expand the network to six destinations. It's Vancouver, Toronto, Montreal, Chicago, San Francisco and Shanghai. In more important that Allegris will be stored of more than 100 aircraft in Lufthansa and also the reduction of Swiss sensors, which is how we call the similar product in Swiss will start next year. Second, strategic milestone is that we continue our internationalization to be less dependent on the German market. And this is obviously demonstrated by our investment into ITA after the United States, Italy is our second most important market outside our home markets. And with ITA we're not just acquiring a company with a quite positive growth perspective being based on the start-up culture and cost structure is they have been able to achieve, but we are also further developing this very important Italian market for us, as I just mentioned and last but not least, I think this is sometimes getting lost in the discussion. We are getting access to adding on [indiscernible] hub #6 to our multi-hub network. It's next to Munich, the only other five Star hub, the European continent, both will be part of our system. And last but not least, it's one of the few hubs in Europe, which has room for extension, which might not be important for the next one, two or three years, but surely, for the strategic outlook, which is provisional for this transaction. Our customers will have access to more destinations, more connections, especially to Southern destinations. Think about Latin America, North Africa, the Middle East, and only today, 90% of our connecting passengers have the option to use at least one alternative hub in our network. That number by mass will increase with an acquisition of the 6 Hub and 10% of our customers today can reach their connecting destination by using all of the Lufthansa Group hubs, also that, of course is the logic, which another hub will further enhance. So that brings me to the third strategic milestone, the launch of Lufthansa City Airlines, which is our very cost-efficient answer to the need to feed our growth on long range, which we have decided to invest in as being based on rather small European catchments compared to London and Paris, you all well know, for us it is even more important than for many of our competitors. Therefore, cost efficiency is key. We will lose the option to do that with City line, and we will continue even in an enhanced way to do that in Lufthansa City Airlines and the first airplane is flying while we speak. And last but not least, we announced to our shareholders and the public some time ago that we want to focus more on the core of our business, which is the airline business and Lufthansa Technik after selling our catering business last year, we're happy to announce that we'll be closing the sale of AirPlus, actually a mid, tonight and we'll have not only €0.5 billion earnings coming from that, but also we'll be able to focus even more what we believe is the strategic core of Lufthansa. And I will now hand over to Michael for some more details on our key financial figures and some details on the mentioned turnaround program of Lufthansa Airlines. Michael, over to you.
Michael Niggemann: Thank you, Carsten. The warm welcome to all of you also from my side. Let me come straight to the half year. I'm pleased to report that our revenues in the second quarter have exceeded €10 billion, showing a 7% increase compared to the prior year. This growth was driven by a strong capacity increase of 11%. On the other hand, operating expenses increased by 10% due to the higher level of production and general cost inflation. Hence, our operating result stands at €686 million, which is a decrease of €400 million compared to the prior year. Looking at the reasons approximately €300 million, thereof can be explained by a decrease in unit revenues, including approximately €100 million strike impact. Looking at our different business units. The decrease is mainly driven by the passenger airlines, particularly by Lufthansa Airlines. Hence, the results confirm what we had foreshadowed in our profit warning earlier this month, a market-driven decline in unit revenues and inefficiencies in our core business as affecting us and has affected us in the past quarter. Let me give you an insight into these two effects and how we intend to address them in the future. Let's discuss the macro level first. One can observe a tremendous capacity increase in all traffic regions, leading to an overall capacity growth of 12% in the second quarter. But our own capacity grew by 11% compared to the prior year. We now stated 92% of offer capacity in terms of 2019 levels, while many of our competitors have already surpassed pre-crisis levels. For us, this growth has two positive implications. Number one, the market is still growing. The demand for air travel is still strong. Number two, even in spite of a strong 11% capacity growth, we managed our revenues well and could avoid an overall excessive yield decrease. However, additional capacity supply has, of course an impact on ticket prices. Although our yields have been resilient to a certain extent, there was a year-on-year decline of almost 4%. This decline varies significantly between the traffic regions. In Asia, we have seen the highest industry capacity growth with almost 28%, driven by the big Chinese carriers. Our yields to Asia have dropped almost 10%. Another region to Highland in North America, where we deployed 27% of our capacity. In the second quarter, we were able to grow our capacity over the North Atlantic by more than 15% while yields were relatively stable is minus 2.6% compared to last year. Apart from the supply side, also the demand structure has changed over the past years. The Leisure segment has recovered faster than corporate travel. According to YATRA [ph] Forecast, corporate travel will not fully recover to pre-crisis level within the next years whereas private travel has already crossed this threshold this year. After talking about the market environment, let's now have a closer look at our Passenger Airlines segment. The operating results amounted to €581 million compared to €965 million last year. A large part of this, the decrease relates to 5.3% lower unit revenue. The RASK decline was larger than the yield decline since the sector was around 1 percentage point lower than last year. Total expenses have been buoyed by personnel cost increases and cost inflation of spare parts and increase in total by 10% on a year-on-year basis. On the other hand, total income grew by 5% and was less outweighted by the increased expenses. Thanks to the strong capacity increase of 11% and unit cost remained flat. In terms of capacity ramp-up, the passenger airlines in total were in line with expectations. The adjusted EBIT margin of the whole Passenger Airlines segment was at 7.2% in the second quarter and therefore, more than 5 percentage points below previous year. When analyzing the figures more in this, next to the broader strike impact and the overall RASK decline, one main driver for the downward trend cannot be overlooked. Lufthansa Airlines is clearly falling behind. Despite an 11% capacity increase in the 5% revenue increase, we have not been able to utilize a fixed cost leverage and CASK was up by 3%. In the second quarter, Lufthansa Airlines has achieved less than half of its adjusted EBIT compared to last year, and the Passenger Airlines EBIT margin of over 7% compared to only 4.7% at Lufthansa Airlines. In order to effectively fight the reasons for this shortfall, the prefund turnaround program was initiated. Given the structural changes, we need to reposition Lufthansa Airlines for long-term success in a competitive market environment, which is not an easy task but a short-term task. Compared to other airlines in our portfolio, Lufthansa Airlines has been most exposed to current market difficulties. And apart from the market challenges, the cost structure leads to be analyzed as well. In particular, due to the delayed aircraft delivery, productivity is the lowest within our Passenger Airlines segment. We will come to the multiple effects of the delayed aircraft deliveries in more detail later, but there are also inefficiencies and such as buffers and reserves in the system. Recently, the disproportionately high location costs in Germany in Frankfurt and Munich, particularly and collective wage agreements have a negative impact on earnings. These findings in mind, Lufthansa Airlines still has high call it, productivity and efficiency reserves at its disposal. The identified modernization initiatives within the Lufthansa Airlines turnaround program seek to realize this potential. First of all, we want to increase revenue quality by consistently implementing the premium promise we stand for. Next, the further optimization of the network will make increased seasonality of demand more manageable. And most importantly, productivity enhancement, for example, by optimizing crew planning, will bring an upstock. Bear in mind that our personnel cost for Lufthansa Airlines amounts to approximately €3 billion each year, and we still have a productivity gap of more than 15% compared to pre-COVID levels, so there's a lot of potential to be realized. Alongside that, we are striving for the full potential of our leisure carrier discover airlines and the new carrier for feeder traffic, Lufthansa City Airlines is utilized to further expand their services at our hubs and transit in Munich with more competitive cost basis. Besides the shift of A330 aircraft from the Lufthansa Classic airline to Discover Airlines, also the 320 fleet of Discover Airlines and City Airlines will grow while the A320 fleet of Lufthansa Classic will shrink. Partnerships with these partners will also be beneficial in this regard, in particular to reflect the increased seasonalization. And last but not least, fleet harmonization will be key in reducing complexity, reducing the number of long-haul aircraft types and thus phasing out the Airbus with 3300 with 4300, 4600 and Boeing 747-400 in total four sub fleets with around 50 aircraft, by 2028, the latest will bring our productivity to a new level. [Indiscernible] these efficiency measures, we will review all other opportunities to strengthen our business model and create value for shareholders. This includes also our current cooperation with our competitor, Condor and the corporation agreements, which they have with us. We terminated this agreement already in 2020. However, the termination became not effective due to a decision of the authorities. Consequently, we welcome the recent decision of the Dusseldorf Higher Regional Court which confirms that we are no longer obliged to grant Condor special conditions in the form of discounted feeder flights. While we agreed with Condor on an interim period until the end of the current summer flight schedule, the termination of 2020 becomes effective at the end of October. We will need to see whether we find common commercial grounds with Condor on a potential cooperation beyond that point in time. As you can see, we take a look at all mid- and long-term leaders at Lufthansa Airlines. The turnaround program at Lufthansa Airlines also comprises immediate actions which will have a short-term effect on our results, such as immediate variable cost reductions and admin hiring fees. Other measures include capacity reduction in the winter compared with originally envisaged growth. Among all the challenges, we have identified the one main pain point can easily be singled out our fleet. Right now, our fleet is heterogenous and outdated with different aircraft types, ages, sizes and capabilities. Needless to say that this causes significant inefficiencies across the entire system, like higher fuel consumption, unreliable operations, increased maintenance efforts, operational flexibility and the multitude of different necessary crude train. To give you a concrete example, let's talk about comparing old and new technology long-haul aircraft, operating one more than aircraft like 777-9 or 787-9 instead of old aircraft like 747-400 or A340-300 would produce a double-digit million euro amount of higher profit each year. Where does it come from? Let's start with the product, a modern aircraft with a more sophisticated board offers a clearly higher potential for generating ancillary revenues and revenues as such. Then think about the belly. Bear in mind that the belly capacity of most new aircraft is significantly larger and higher cargo revenues can be achieved. Now let's discuss the cost side. New aircraft means less maintenance, which is a significant item in our P&L. Finally, the clearly biggest difference is fuel consumption. New technology aircraft have a 20% to 30% higher fuel efficiency than old aircrafts. Across the entire portfolio of missing long-haul aircraft, this adds up to a three-digit million earnings impact each year just because the aircraft which we order do not arrive on time. At this figure, even though already big, represents only a fraction of that, since they are further much more difficult to quantify effect. Think about an increased aircraft reserve for the higher irregularity cost was the need to provide our customers with a state-of-the-art premium offer, which are all directly linked to the age of the fleet and delivery. Apart from that, the record postponement in delivery schedules leads to a mismatch in the training status of our crews. We currently have more than 100 pilots trained on 787s cannot be deployed as we have not received a single 787 at Lufthansa Airlines this year. Now we have covered our airlines extensive team. I would like to turn your attention to two other equally important areas: Lufthansa Technik and Lufthansa Cargo. Lufthansa Technik has achieved record results, affirming a strong demand in the company's outstanding market position in the MRO sector. The 15% revenue increase that's seen in the first quarter continued with another 16% in the second quarter, driven by the airport aircraft component services and the Engine Services segment. Results of Lufthansa Technik is facing continuing challenges like the recruiting of qualified employees or bottlenecks in the supply chain, the company achieved an adjusted EBIT plus last year's results. For 2024, in total, we expect an adjusted EBIT at previous year's level since inflation is a counter effect to the continued growth of the MRO market. Our cargo profit has remained on par with the prior year, reflecting the expected normalization in the aircraft. Year three remained extremely high compared to pre-crisis times and volumes picking up again, thanks to the eventual global destocking. For the full-year 2024, we expect a significant increase in revenues in the Logistics segment. Based on our assumption that inflation-related cost increases are likely to be partially offset by structural savings and efficiency improvements. We therefore forecast the adjusted EBIT of Lufthansa Cargo to be roughly a previous year's level. Let's look at the group as a whole again. In the first half of this year, generation of free cash flow was significantly better than the operating results suggested, driven by a robust booking intake for the summer season. Other working capital items remained flat despite the still significant year-on-year growth. Again, the majority of the investments related to fleet modernization and the roll-off of new seats. However, the shift of CapEx due to delayed aircraft deliveries supported the free cash flow. Available liquidity is still above our target range with €10.6 billion, supported by strong adjusted free cash flow, which was also positively affected by capital expenditure shifts. Compared to the beginning of the year, net debt declined slightly because of the generation of free cash flow and also the net pension liability decreased due to a 0.2 percentage points higher discount rate. These reductions have severely impacted our leverage ratio, which was kept at the level of 2.0, including pensions. In order to protect ourselves against fluctuations in our pension obligations and thus the net debt, we have been implemented a liability-driven investment strategy, so-called LDI, to the allocation of pension assets. Our fuel cost expectations remain roughly unchanged. The slight decrease in the price of Brent in the past couple of weeks leads to an expected tailwind of €200 million regarding our fuel bill in 2024. The hedge ratio of 82% for 2024 and about 60% for 2025 with a bit more than half of the hedges relating to jet fuel and the rest of crude oil, we are well protected against risk of rising prices, including the effects of possible escalation of conflicts in the Middle East and its possible impact on the oil prices. Coming to the outlook. For the full-year, we expect an adjusted EBIT of €1.4 billion to €1.8 billion. If you compare the midpoint of this range to our previous guidance of €2.2 billion, this implies the RASK development, which is a low-single-digit figure lower than originally expected. As for capacity, we stick to our full-year outlook of 92% relative to 2019, 96% in the third quarter. This implies that capacity stays at a similar level also in the fourth quarter. The delivery schedule of Boeing does not impact our capacity planning in 2024 since we did not assume to operationally deploy any of the Dreamliners this year. Unit revenues were expected to decline in the low to single -- to mid-single-digit percentage range for the full-year and low-single-digit in the third quarter. This reflects the somewhat weaker market environment compared to last year. In this context, we might have a further look at capacity planning throughout the rest of the year in order to support the yield development. RASK is expected to increase in the low single-digit percentage range next quarter, primarily due to ongoing cost inflation. Forecast guidance for the full-year is unchanged. We believe in a set CASK, excluding strike effects and the low single-digit increase when including strike effects. Given the reduced adjusted EBIT guidance, our adjusted free cash flow for the full-year is expected to be significantly below €1 billion, dependent on aircraft deliveries and capital inflows from sales and leaseback. To achieve those targets, the most important thing is, of course, is satisfied customer. To dig deeper into this topic, I hand over to you, Carsten, again.
Carsten Spohr: Michael, thanks. And next to be mentioned strategic milestones, which we believe are foundation for future success. Indeed improved customer focus which the whole industry, I think, is trying to get back to after COVID is the other element of success. And therefore, I think it's worth to say that Allegris is surely one key part, but only one part of our large-scale premium offensive. This goes from intercontinental catering and business class to more staff at the airports to improve digital services, we are constantly working to provide our guests with a significantly enhanced travel experience along whole journey. Compared to last year, for example, we have increased the number of our own staff at our hub airports by more than 10%. To further improve service quality, we have done intensive trainings of our more than 3,000 service center, call center agents and we will also obviously becoming more and more in our industry continue to improve our app, which by the way was just recently nominated at the World Aviation Festival as the best airline app of the year. In June this year, it was used by an average of almost 600,000 guests per day, which is more than per day, an increase of more than 40% over the previous year. And as much as difficult to calculate, we are more or less generating approximately €1 billion in annual revenue through the app by now. Key to the end users is, of course, to have it able to serve in the case of irregularity, which unfortunately for our industry are not completely avoidable, but nowadays to more than half or more or less half of our refunds via the app, we do up to 80,000 rebooking every month and I think there's no end in sight to improve the service element the app provides for the overall customer experience. From B2C business with customers, let's spend a few minutes on our B2B business, and there, let's focus on Lufthansa Technik. I think it's worth to say that Technik remains to be a jewel in our portfolio. The company remains on a successful course and we are very convinced that we will continue to expand its leading global position with a growth program Vision 2030. The program provides for extensive investments in the expansion of the core business of the Technik and in locations in Europe, the Americas and Asia. For example, we are planning to build additional repair facility for engines and aircraft components in Portugal very soon, alternatively another location in Southwest Europe, to expand our own production capacities and of course, to crude digital specialists where in the German market is more and more difficult to make that happen. The expansion of the digital business will be another important focus. Lufthansa Technik will also make for sure, an even greater contribution to security and defense in Europe with additional partnerships and activities in the defense sector. And in that regard, we would like to take this opportunity today to draw your attention to our Capital Markets Day for Lufthansa Technik towards the end of the year, as soon as my new colleague, Stryker (NYSE:SYK) [ph] is on board, the two of us, however with the management of Technik, we'll prepare that for you and looking forward to host those of you who are interested to join us. Ladies and gentlemen, there is no question that the first half of the year was not as financially successful as we would have liked. However, I mean, hopefully, you could feel and feel that we are optimistic about the future. We expect a positive result for the year as a whole, driven by sustained demand, especially in the premium classes and the mentioned continued strong performance of Lufthansa Technik. Passenger airline multi-brand strategy is unique, the way we optimize this in the future, six hubs. It remains our key formula for the success and obviously will evolve further with the integration of [indiscernible]. And therefore, we are confident that by continuing this strategy being implemented, we will further consolidate and also expand our position in Europe's most successful airline group. Thank you very much for the attention so far. And now, Michael and I and Marc look forward to your questions and providing you the best answers as we can. Thank you.
Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. One moment for first question please. And the first question comes from Alex Irving from Bernstein. Please go ahead.
Alex Irving: Hi, good morning, two for me, please. First, on your transformation plan. Do you have any financial targets that come with this? You talk about an 8% margin. Is that still the goal? And second, very good performance in Technik this quarter, really impressive. I think it's the first time of more than €200 million EBIT. But are you overearning here, especially given the GTF problems and delivery delays at the major OEMs? And where should we think about earnings normalizing for Technik, please?
Michael Niggemann: Alex, thank you for the question and good morning. Mike speaking, 8% is the margin we are aiming for, let's say, the overall target. And we think that a number we have to achieve to have a viable financial status also in the future. However, we can only say as soon as possible. So there's a delay, no doubt about that, where we are right now. With respect to LHT, we are benefiting from the market, no doubt about that. There are also some headwinds like finding the right people. So it's a dry labor market in Germany, we have to use many suppliers. Hence this first half year result was also a bit fueled by one-time effect out of older contracts. So it's not meant that we are overshooting last year in our overall result of Lufthansa Technik.
Operator: So then the next question comes from Jarrod Castle from UBS. Please go ahead.
Jarrod Castle: Good morning. And maybe just a follow-on to Alex's question. I mean what are the costs of restructuring and the profile in terms of getting the restructuring done? I mean, is it [indiscernible] and how should we think about that ramp-up? And then secondly, good to see AirPlus kind of being getting the proceeds, I guess. Any plans for that €0.5 billion that you care to share with us? Thanks.
Carsten Spohr: This is Carsten, Jarrod. I think it's important we don't talk about a restructuring. We have done restructuring, so we know what the restructuring needs. But here, I think we really talked about the modernization and we shouldn't -- I think we have pointed that out. There are some onetime struggles we have, which will be overcome latest by '26, thinking about the airplane delays, think about delays in the cabin configuration, think about Pratt & Whitney and so on. And then there are some structural elements which we want to optimize. Think about Lufthansa City Airlines for the feed. Think about Discover, which is a successful answer to this growth in leisure traffic, think about termination finally allowed of our main competitor in Frankfurt in providing him with feed. So these things, of course, will have effect and that, I think is a better in my view, English term for what we are planning to do with Lufthansa Airlines and restructuring. Second question, timeline, well, I think, two years, taking us into '26 will give us the answers or will give us the results of most of the topics we are describing today. But also, as Michael pointed out for the last let's call it, old generation airplane to leave. We're probably looking at the end of '27 or the winter '27, '28. But I would think this turnaround program to be described in terms of the modernization, I just drafted. It's a two year program taking us into the summer of '26.
Jarrod Castle: Right. Thanks. And the AirPlus proceeds?
Carsten Spohr: Like to light over the timeline and maybe the quality of [indiscernible] profit. We are planning to close midnight profit of €450 million.
Jarrod Castle: And sorry, any plans for that money, except just to kind of reduce the net debt or...
Carsten Spohr: A book gain of €130 million. And you know our investment plans for aircraft. So I promise you we have placed a good money. We will not -- it won't be sitting around, but I think it's more a strategic move then it's about the €130 million booking why we have done this. We want to focus on our core business. And there are major investments needed on the IT AirPlus with the new owner will be happy to do, in our case, would have been distracting from the key investments we want to do for our passengers and Lufthansa Technik in airplanes facilities for [indiscernible].
Jarrod Castle: All right. Thanks very much.
Operator: And the next question comes from Stephen Furlong from Davy. Please go ahead.
Stephen Furlong: Yes. Good morning, Carsten, Michael and Marc. Yes, two for me. You mentioned about maybe too much capacity. Are you surprised with the kind of supply chain issues that the level of capacity that have come back in markets this year? That's the first one. And then I was just wondering about Asia with kind of competitor kind of growth plans and stuff like that. Do you think that Asia for the Lufthansa Group is going to be as big a business proportionally as it has been pre-COVID or could it be smaller? I mean, for example, the Americas is a very important part of the group as well. Just was wondering about that? Thank you.
Carsten Spohr: Yes, Stephen, thanks. You and I had this conversation before. [Indiscernible] I never meant this to be a short-term view. You know my long-term view that those airplanes, Airbus and Boeing are not producing. Will never be made up for. Like the German car industry, when they have to cancel the shift, be it strike or some parts missing, we do extra shifts at night or in the weekend and the cars are coming back. In aircraft, we all know that doesn't have. So this aircraft will be missing in the integral of supply of the industry, let's say, forever. So I do still stick with my view that these reduction of capacity or production capacity both in Seattle and Solus [ph] and other facilities will have a positive impact on the industry going forward for years. Is that now applying to this summer of '24 in the same, we were thinking, no, but this is not what I said, but the effect is more long term. Asia, we were number one out of European competitors to Asia in the times before COVID. We're only at 57% capacity currently for what we use supply to China and German investments in China are the record high. So I think our weakness in Asia, which we presented today in yield is not coming from the economic opportunities comes from the overcapacity provided by Chinese carriers we're going in the triple-digit regions, including flying through the Russian air space, which we don't do. So I would call this an abnormal situation for the Asian market. Also there, mid- and long term, Asia with a huge growth potential will be with our also further northern hub structure, leaving room out for a second, the key pillar of our success also in the future. Right now, obviously, the money rather comes from the west, but not net pessimistic for Asia in the midterm for sure.
Stephen Furlong: Got it, Carsten. Thanks for your time.
Operator: And the next question comes from Muneeba Kayani from Bank of America (NYSE:BAC). Please go ahead.
Muneeba Kayani: Good morning. So you talked earlier about the fact that your capacity ramp-up has lagged peers. Just kind of how are you thinking about them capacity into 2025. Are you still targeting to get to 100% of 2019 levels? And as you think about that capacity ramp up, how are you thinking about the trade-off between kind of the unit cost benefit versus kind of yield maybe headwinds as you add capacity similar to what you saw this year? And then secondly, just in terms of dividends for this year, I know it's just not 1H result. But just -- what are you your thinking right now with profitability down year-on-year? Should we be thinking about a payout ratio increasing to keep the absolute dividend flat or kind of the dividend coming down with profitability? Thank you.
Carsten Spohr: Well, first of all, profitability coming down year-over-year is not what I'm paid for and my new CFO leader. So we have explained what the challenges are in the year '24, hopefully, in a transparent way, but our path leads us to 8%. That's a clear conviction of this management, led by me, and we will get there probably one or two years later than we were hoping. Sure, but it's not talking about profitability going down. We're doing huge, as you know, activities, investments, some of them described today, which will bring us there. Capacity ramp-up for next year. I don't think we'll be heading at 100%. I mentioned the winter, we are currently discussing to reduce our planned growth for the winter. That, of course has a mathematical effect for the full-year. So I don't think we'll see €100 million next year will be somewhere between €95 million, €96 million, €97 million, €98 million, we'll see. For us, yield is more important than growth. especially to bring up our profitability as I answered to your other question just a second ago. And that, I think, is what in that regard also the structure of fleet aircraft coming in with many aircraft, we are able to take out. That's the advantage of taking quite a few share of owned aircraft. We're very flexible to adapt our growth even though we have a record number of airplanes coming in. Unit cost benefits were as headwinds, unit costs will keep flat. We will, as I said before, quite proud to keep them flat this first half, which probably were too many other competitors did. And if you take the strike effect out, we are also optimistic to keep you in costs flat for the whole year. And that, again, shows our focus on costs, and we will continue to do that. On dividend, we have this clear policy of 20% to 40% of our net income. There is no reason to touch that. Obviously, with the new CFO coming in, I will discuss that, but I would be surprised to see a radical change on that. So we are, as you know, the long term investment hopefully for all of you being a trust working partner. So no sharp edges in Lufthansa in those topics.
Muneeba Kayani: If I can clarify on the dividend then, would you look to move then pay out at the higher end to maintain the absolute dividend?
Carsten Spohr: No answer to that yet. So this will decide that every year in the guidance as I'll give you. And when time will come, I'm promised I'll tell you first.
Muneeba Kayani: Thank you.
Operator: And the next question comes from Sathish Sivakumar from Citi. Please go ahead.
Sathish Sivakumar: Yes, thank you. I've got two questions here. So first, on the booking commentary that you said in the press release were you said up until the end of October, it's up 10% versus last year. Can you share some color like where is the strength is coming from, like based on point of sale? And then what is the pricing that this is coming at? Are you still seeing prices being down in line with your guidance? Or is it slightly coming in slightly better? And then the second one is around your 8% EBIT margin target. So if I had to understand the building blocks, right, how much of it would come from the modernization/terminal program that you launched today versus a capacity ramp-up versus pricing? Thank you.
Carsten Spohr: On the bookings, I think we gave you a little charge just a few minutes ago, which shows our growth in the various parts of the world and how they use reacted to that growth. Again, Asia probably being the most problematic. But if you look at U.S., we outgrew the market on the North Atlantic and only lost 2.3% on yields. So we were able to sell that additional capacity at very good prices. By the way, with a shift of point of sales somewhat from the U.S. to Europe, which last year was extremely towards U.S. now we have a more balanced approach on that. EBIT margin, the Lufthansa Airline, I think in a normalized way is more or less half of our business less. So I expect all my business units to be part of the 8% target. So the turnaround is a big part of reaching 8% and there is no bypassing of their success to reach the 8%. This is what Michael pointed out, while we are so focused on the turnaround program. Some of the issues solving themselves and some will be solved by answers from management, which we have given some indications today.
Sathish Sivakumar: So like the 8% bridge, like say versus somewhere around 4%, 5% this year, how much of it would be driven by this modernization program?
Carsten Spohr: I'll do the math now, assuming Lufthansa Airlines would be 8%, we will be there. If you look at our margins in the other business, they're already. So it's Lufthansa Airline, which is lagging behind due to its size that has a significant impact, and we will need to fix that. I think that was no biggest part of today's presentation by my colleague, Michael Niggemann, already reached the double-digit taking is about 8%. So it is basically the missing key element is from Lufthansa Airlines, and we will get there with the measures mentioned today.
Sathish Sivakumar: Got it. Thank you.
Carsten Spohr: Let's also be honest, there is a market out there. So I think the fact that all airlines disappointed a little bit this year, we are not an exception of there. They probably on the positive side of lowering market expectations. But there, of course, in our industry is always a question of market demand towards market supply. And there I come back to my answer to Steve a few minutes ago. I believe the next few years with the lack of airplane production capabilities, we probably see rather better years than worse.
Sathish Sivakumar: Got it. Thank you. Just a quick clarification. You said that point of sale has shifted more towards Europe as you go into quarter three. Yes?
Carsten Spohr: Well, I mentioned '24 compared to '23. '23 was a very strong year of [indiscernible] in U.S. It'll be somehow balance that better or more this year '24. That was not season-by-season it was '24 to '23.
Sathish Sivakumar: Okay. Got it. Thank you.
Operator: And the next question comes from Conor Dwyer from Morgan Stanley (NYSE:MS). Please go ahead.
Conor Dwyer: Hi, good morning guys. Two question areas. First one, just around the regional performance. The Middle East development looks very weak unit revenues owning up better percent on 8% capacity reduction. But wondering why your capacity growth is so much different here to the market and you think the actual market rate of revenue growth is positive here. And then on the Atlantic, is the pricing weakness here just a result of elevated capacity growth? Or are you seeing any weakness in demand in any passenger segments such as economy? And then second question is thinking about your unit cost development in the next few years. Obviously, you've locked in pay deals at mid-single digit inflation. So I'm wondering how predicated offsetting this is on aircraft gauge, so the aircraft coming in? Or are there more other meaningful productivity gains to pursue for staff? Thank you very much.
Carsten Spohr: Now regional performance is obviously that we have a change on the Middle East as we speak. Development are evolving so that could have been difficult now with various crises over the last months, we have suspended to [indiscernible] and so on. On the North Atlantic, we don't see weakness in demand at all, especially on the premium side, things are very strong, which again, is a very big part of our business, as you know, there has been overall quite some capacity growth, which may be was the reason why yields came down a little bit on the North Atlantic, but it was always key between [indiscernible] and us that we want to maintain our leading position on the North Atlantic and only losing 2.6%. I think I said, 2.3% before it's 2.6% in Q2 with growth, which I just showed you with more than 10% on the North Atlantic is, I think, showing the strength of the market and the strength of our market position in the market. Unit cost developments. I mean we always have to take, I think, inflation on both sides of the equation that inflation of all cost elements in the world, was the racial in our industry there's inflation elements on ticket prices. I just came back from an IATA Board meeting more or less the last year's, ticket prices have developed in line with inflation, nothing we should expect that to go on with keep myself a rather positive switch by the fact that supply will be restricted the next year, which gives me confidence that we manage maybe cost better than revenues and increase profitability for the next years. Was that your question, more or less I hope.
Conor Dwyer: Pretty much, but basically, just in terms of the unit cost improvements, is it more going to be basically driven by the new aircraft coming in, the benefits of gauge? Or are there other things that can be done with staff such as basically working more efficiently? Anything specifically on that?
Carsten Spohr: I think Michael pointed out, we are now currently at 15% efficiency behind our efficiency of 2019 due to the reasons mentioned aircraft staff, but not available aircraft on the ground blah, blah, blah. So beyond the efficiency of the aircraft itself replace in all the aircraft, we see a 15% efficiency gap, which of course, our teams are now working on to recover with higher crude productivity, tax productivity, you name it. So we see quite some room for improvement there due to the unique situation, which I tried to describe today.
Michael Niggemann: And part of it, and maybe just to add. Don't forget, there was a pretty steep ramp up. It's pretty steep growth and capacity. So then to make it and be as productive as we should be it's more difficult, particularly in Lufthansa Airlines, for various reasons. So they still really kind of a buffer or I call it [indiscernible] system, which we are keen now to release.
Conor Dwyer: All right. Thank you very much.
Operator: And the next question comes from Ruairi Cullinane from RBC (TSX:RY) Capitals. Please go ahead.
Ruairi Cullinane: Hi, good morning. And the first question, a follow-up on the Asian routes. So I understand you're optimistic about the opportunity longer-term. But I was wondering if you had any more immediate plans to amend capacity plans in response to the yield decline there? And then secondly, just sort of comment that ex fuel unit cost could be flat without strikes, implied moderation in ex-fuel unit cost inflation in Q4? Thank you.
Michael Niggemann: Ruairi, maybe just once again a remark regarding Asia Pacific. First of all, it's a huge region. And so India is clearly different than China or Japan. And given our China and I think there's the biggest deviation from our plans. On a full-year basis, we are aiming to almost grow by 7%. However, the Chinese carriers, the other airlines are growing over 80% due to our numbers. And so there was such a deep growth on those routes. And we have, of course, a disadvantage that we have to fly around Russia, that that was over proportionately hit by the market, and we have seen those RASK effects there. But like in many regions of the world, it's also important to be there long-term. And for that reason, we are looking into the capacity, future capacity that's right. But we have to bear in mind that there will also be a kind of a normalization, we will not see such a growth, what we have seen this quarter also in the future. And with respect to CASK, I think you mentioned the strike for the fourth quarter, we are assuming a decline.
Ruairi Cullinane: Thank you.
Operator: And the next question comes from Ruxandra Haradau-Doser from HSBC. Please go ahead.
Ruxandra Haradau-Doser: Yes. Hello, good afternoon. First, you mentioned the one-off in the MRO business in H1. Could you please quantify this one-off? And was it in Q1 or Q2? And how should we expect the Q3 and Q4 performance in MRO relative to Q2? Second, considering your year-to-date performance in the Q3 guidance. I conclude, you need an improvement in Q4 adjusted EBIT to reach at least a midpoint of your full-year adjusted EBIT guidance range. Considering current trends, do you think an improvement in Q4 adjusted EBIT is likely? And is it fair to assume the midpoint of your full-year adjusted EBIT guidance as a base case? Third, do you see potential to receive compensation from Boeing for the delays of the 787? And finally, some European Airlines announced that they expect to receive only 40% to 50% of the scheduled Airbus airplanes next year. What is the feedback you currently receive from Airbus on deliveries next year? Thanks.
Carsten Spohr: Maybe just starting with the question regarding the one-offs in MRO. We are talking about some old customer contracts and some really a couple of one-offs, which had a positive effect there. So in a two digit million range. When you said do we expect an adjusted EBIT improvement in the fourth quarter and whether or not it will be better than last year, we have one key driver. That's a Lufthansa Cargo business, where we think this will make quite a difference, while on the negative side, Lufthansa Airlines is maybe the most difficult business unit to predict. And for that reason, we have given the range and we have asked whether we should go to mid of the range. We really mean it that range and very much dependent on those two elements carved on the fourth quarter and Lufthansa Airlines recovery turnaround already this year to make at least the black view we are aiming for. And then you asked for the deliveries of the Airbus aircraft as well as for the Boeing aircraft, we are not commenting our compensation for the delays. And we are in constant exchange with both Airbus and Boeing and discussing when aircraft will be delivered. Unfortunately, this year, almost new aircraft was precisely delivered in time. For that reason, it's very hard to give a clear answer to that question.
Ruxandra Haradau-Doser: Thank you very much. Thanks.
Operator: And the next question comes from Johannes Braun from Stifel. Please go ahead.
Johannes Braun: Yes. Hello, thanks for taking my question. The first one would be another one on the capacity growth. Can you quantify the reduction for the winter season. And also in relation to that, why are you actually compensating the 787 delays by operating less efficient A340s for longer when there is overcapacity anyway? So why not just reducing capacity even more and phasing out the A340 as initially planned to the benefit of yields and efficiency? And then secondly, just a clarification, this book gain for A plus of €130 million that you mentioned. Will that be included in your EBIT guidance for the full-year?
Carsten Spohr: Capacity growth, we are in the process of doing that. I would, at this point, estimate that we go from easily down 4% points for the winter comparing to our trends, which is in our view, not only reaction to the market relatives, but also answers part your second question. This will allow us to put some 380s on the ground for the key part of the winter, where they are should be oversized part of our fleet. And that also as on the third part of your question, the 343 we meet them in the summer until we are sure that the 787 is there and can be replaced and also in the winter, I rather operate in 343 with a lower efficiency than the 380 went full, but better yields because I can rather fill the 343, then I'll fill it 380 in the winter. So it's not just the efficiency only is also the size of the aircraft, which drives our optimization. Put on top of that, maintenance schedules and requirements that is why we also announced, for example last week, a significant reduction of capacity in Munich, where we are taking down capacity for the winter, including shutting down Munich, Hong Kong, for example, and others where we take down certain frequencies during the week to react to the market requirement. But we cannot live without the 343, for example, complete yet for the summer of '25, and that's why the aircraft, again, it's not only maintain, also operated in the winter rather than having the ultra large aircraft in service and goods. AirPlus goes back to my CFO colleague.
Michael Niggemann: With respect to the effect of the book gain that will be adjusted, so you won't see it in the adjusted EBIT guidance. You won't see it in the adjusted EBIT at all.
Johannes Braun: Okay. Thank you.
Operator: And the next question comes from Andrew Lobbenberg from Barclays (LON:BARC). Please go ahead.
Andrew Lobbenberg: Hi. Can I ask simple one first on the ETA process. When do you expect to have news about defining the remedy takers, which I think is a necessary condition for the deal to complete? And then the second one would be more about the Lufthansa Passenger turnaround program. If I'm looking at Page 9 of the slide deck and looking at the modernization initiative, I'm not actually seeing anything that is new there. You were working towards being premium? You are working towards harmonizing the fleet? You are working towards growing the efficient AOCs? So what is there that's actually new that's coming in the turnaround program, the modernization program for Lufti [ph]? Because I'm not seeing anything new on this slide at the moment. And I guess the other sort of question I would pose is that Michael explained very well, look, the key challenge for Lufthansa Passenger at the moment comes from fleet that's the biggest problem. And you articulate that very eloquently, but fixing it is not in your control. It's completely out of your control. So what are you doing that you can control to try and improve Lufti [indiscernible]? Sorry, it's a bit of a wide question. But anyway, what can you do with there?
Carsten Spohr: Well, Andrew, we maintain our optimism that we can close in Q4. So if we now will take one or two weeks more or less to agree with the potential remedy taker and then move that forward to Brussels for approval that it's premature, but everybody in the process, including by the way the remedy take us wants to be fast, take advantage of the new situation as quickly as we can. So let's focus on Q4, still being our target quarter for closing. What we truly did on the turnaround today, the management team of the Lufthansa Airlines announced to the staff while we speak, number of airplanes to be moved, target numbers of feet, not being done by the Lufthansa Airline itself anymore, but by partners, which we have not been given to them to the public so far. And I think, as always, this will now be the process of also talking to our partners. Thanks for the Munich as we both know key hubs now reduced growth. So I think we're going to have some communication with them on where our optimization of the cost structure in Frankfurt while there is Munich to make sure that we allocate the remaining growth in the right way. As you know, has been in the process we've been doing for some time. And also, of course, with our unions and social partners, we need to act into discussions all the management of the Lufthansa Airlines, though how do we manage the cost pressures and the capacity optimization tools we now have the best way for everybody. The cost units would rather see more jobs in the core of the airline. Cost structure drives us in a different direction right now. So I think we're going to have constructive dialogue on that, where is the optimal of that process. In our control, think about, of course, CLAs, which we have in our control, the overall estimates in our industry, 30% is few, 30% is charges, 40% is in our control. I think we pointed at some level stay which are significant. So think about the tools we have in optimization of our fleet, which airplane will stay in the main airline, which will go to discover. We are in the process of deciding if also new technology aircraft will go to discover, which either could be 787s or 350s. So mainly we have quite a variety of tools to optimize our Frankfurt and hub, Munich hub system, which we now apply. But I can tell you not happy with them, but maybe I misunderstand your question. What else would you have in your hands in any airline, but the things we have in our hands. I think we are rather wide area of tools related to us the current situation at than less. Due to income and airplanes, due to creating Lufthansa City Airlines, due to the successful launch of Discover. We -- as you all know, I've talked with [indiscernible] about the long-term rate agreement. So I think compared to the years before. We've been doing this some time. As you know, I think the variety of options is rather increasing currently then decreasing.
Andrew Lobbenberg: Okay. That -- if you're moving aircraft out of mainline, will you have to have redundance as potentially Lufthansa Passenger?
Carsten Spohr: No, no, no. That's why I didn't like the term restructuring. We are still on a growth path of our hub system, Frankfurt and Munich is more about allocating the growth or maybe shrinking the short haul, as we already mentioned, but the long-haul growth, which is where the Lufthansa Airline mainly will continue to grow at will not require us to redundancies and restructuring. We do have a hiring fees on admin. For sure, we do that already for the whole airline and also for the overhead in the Lufthansa Group, but we still need pilots, flight attendants for sure in the next couple of years in most platforms, which we operate. So we are talking about the restructuring. That's why I kind of sort against that term.
Andrew Lobbenberg: Fair enough. Thanks so much, Carsten.
Marc-Dominic Nettesheim: I think this was the last question. Thanks to all of you for your interest. Thanks to you, Carsten, Michael for your answers. We from Investor Relations, will, of course, continue the dial up of all of you throughout this quarter. Looking forward to this, and I had to close this call on a few [indiscernible]. We'll talk to you very soon.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.