Lufthansa Group (LHA.DE) has reported a significant quarterly loss in the first quarter of 2024, largely attributed to the adverse effects of strike actions. The airline faced a loss of €849 million, which was higher than anticipated, as a result of strikes by its own staff and personnel of system partners. This disruption affected 6% of its flights, leading to a downward revision of its full-year forecast. Despite these setbacks, Lufthansa remains optimistic about the future, with strong demand for air travel and plans to enhance customer experience.
Key Takeaways
- Lufthansa Group reports a Q1 loss of €849 million, with strikes impacting 6% of flights.
- The company revises its full-year forecast, predicting additional losses in Q2.
- Measures to support earnings include reducing non-personnel costs and reassessing new projects.
- Bookings for summer travel show a 16% increase, with strong demand for intra-European and transatlantic routes.
- Lufthansa Technik benefits from growing demand for maintenance and repair services.
- The company is undergoing a transformation to become a global airline group.
Company Outlook
- Lufthansa anticipates stronger performance in intra-European and transatlantic travel during the summer.
- The Asia Pacific recovery is progressing slowly, with China lagging behind India and Japan.
- The company is committed to its transformation into a multi-hub, multi-airline, and multi-brand business model.
- Expectations for stable cargo yields and profit growth in the cargo division are positive.
- Lufthansa projects capacity growth, unit revenue improvements, and a positive adjusted free cash flow for the year.
Bearish Highlights
- Strikes have led to a significant number of flight cancellations and a disappointing experience for passengers.
- The company has faced booking losses in April and May, which they have not fully recovered from.
- Supply chain challenges have negatively impacted airline operations.
- The Asia Pacific region, particularly China, is experiencing a slower recovery, affecting revenue.
Bullish Highlights
- Demand for air travel is surpassing capacity growth in Lufthansa's home markets.
- The growth in maintenance, overhaul, and repair services is benefiting Lufthansa Technik.
- Lufthansa expects to see increased demand from Mainland China in the second half of the year.
- The airline has a solid financial position and plans for productivity improvements in Q4.
Misses
- Lufthansa's adjusted EBIT loss in Q1 was higher than expected.
- The airline has not yet reached an agreement on Pratt & Whitney compensation, with no compensation booked in Q1.
Q&A Highlights
- Compensation from Pratt & Whitney will be recorded in the P&L as costs are incurred over the next few quarters.
- CEO Carsten Spohr is optimistic about reaching an agreement with the EU Commission on the ITA deal.
- New aircraft and capacity growth are being carefully balanced with recent union agreements on staff costs.
- Corporate travel recovery status and the impact of the German aviation tax increase were discussed.
Lufthansa Group is navigating through a challenging period marked by strikes and operational disruptions. However, the company's strategic focus on expanding its global presence and improving customer service, along with the expected increase in demand for air travel, positions it for potential growth in the coming quarters. The airline's commitment to enhancing its fleet and service offerings, alongside its strong performance in the MRO sector, underscores its efforts to maintain a competitive edge in the global airline industry.
Full transcript - None (DLAKF) Q1 2024:
Operator: Good afternoon, ladies and gentlemen. Welcome to the Lufthansa Group Q1 2024 Results Analyst Conference Call. My name is Fransi, the Chorus Call operator. [Operator Instructions] At this time, it is my pleasure to turn the conference over to Dennis Weber, Head of Investor Relations. Please go ahead, sir.
Dennis Weber: Yes. Thank you very much, and good morning, ladies and gentlemen. Welcome to the presentation of our first quarter results 2024. With me on the call today are our CEO, Carsten Spohr; and our CFO, Remco Steenbergen, they will present you our results and discuss our commercial and strategic outlook for the year ahead. Afterwards, you’ll have the opportunity to ask your questions. And as just mentioned by the operator, and similar to prior quarters, I would like to ask you to limit your questions to two so that everybody has a chance to participate in the Q&A session. Thank you very much, and over to you, Carsten.
Carsten Spohr: Yes. Thank you, Dennis, and a warm welcome, everybody, from my side as well. As you all know, in our industry, the first quarter is the weakest due to seasonal factors, but nevertheless surprising, unfortunately, in a negative sense is the size of our quarterly loss this year, which though is mainly due to strike effects. But before Remco and I get into the details of our numbers, let me take a quick moment to broaden our perspective and look at the global aviation situation. Starting with geopolitical instability. Obviously, unfortunately, the war in Ukraine continues. The situation in the Middle East has recently even deteriorated to a certain degree. And that has not only led to repeated cancellations of flights into the region, but it has also driven up the price of oil. Second and unchanged though is people’s desire to travel the world. And the ongoing strength of demand, which I really think is impressive and an impressive proof of that change of behavior across the globe in various parts of society with a positive swing towards travel. However, also, as you all know, various bottlenecks continue to limit the supply side of our industry. Delayed aircraft, delayed seat, delayed engines, unplanned engine overhauls, ongoing training requirements, sometimes our bottleneck and still, in some cases, staff shortages at our system partners, mainly at the airports and ground handling companies. As a result, also our growth in the Lufthansa Group is lower than originally planned. We’ll come to that in a minute. Operations also continue to be not as efficient as planned. For example, because of the need to increase the number of reserve aircraft or cruise which cannot fly, for example, being trained for aircraft not yet delivered. In addition, our key hubs, especially in Germany, are suffering from significant cost increases, taxes, fees chargers in Germany, for example, have increased by more than 80% since 2019. And now as of tomorrow, the air traffic tax will go up again by another 20%. Added to this are the cost of EU regulations such as the sharp increase in expenses for emissions trading and from Jan 1, ‘25 on the cost of SaaS, sustainable aviation fuels in terms of the blending quota. At the same time, the necessary consolidation of our industry in Europe is being at least somewhat hampered by the demand for quite comprehensive remedies. In short, the environment in which we operate out of Europe is and remain challenging. With this, let’s now come to the actual purpose of our conference today and look at our results. The Lufthansa Group revenues reached €7.4 billion, an increase of 5% over the previous year. Demand for air travel as mentioned, remains strong. We welcomed 24 million guests on board, 12% more than the previous year. Adjusted free cash flow was lower than the first quarter of ‘23, but still clearly positive at €3 million or €5 million. Nevertheless, on April 15, we had to announce a higher tax – sorry, higher-than-expected quarterly loss of €849 million. €350 million of this was due to the direct and indirect effects from strikes, be it for our own staff or from personnel of our system partners, airport or security checks. In our group alone, the various calls by the unions added up to more than 550 hours of strike action. In addition, there were strike-related work stoppages by airport security personnel, as just mentioned. In total, 6% of all plane flights were affected, and we disappointed hundreds of thousands of passengers whom we have not been able to offer the reliability they expect and deserve from us. In addition, many customers were hesitant to book vacation trips, short notice because of the strikes and the uncertainty they created also going into the summer months. These are financial burdens and losses in demand that no company in our industry can simply compensate for. Accordingly, we had to adjust our full year forecast by the strike-related costs loss of €350 million in the first quarter and a further €100 million in the second quarter. Due to the losses of our core brand, Lufthansa German Airlines, has initiated measures to support earnings in the short term this year. Among other things, it is planned to reduce non-personnel costs, cancel new projects and we review the need to fill vacancies in the administrative area. We undoubtedly had a difficult quarter. However, the challenges we experienced did not stop us from pursuing ahead with our strategic priorities. The financially worst quarter of the year is behind us. This marks a turning point and we can look forward to the rest of the year with confidence. First, our investments in the offer are finally coming through the market, and we are greatly enhancing the experience for our customers. With the launch of Lufthansa City Airlines, we are improving the profitability of our short-haul feeder traffic. By securing long-term wage agreements, we have good visibility on key cost items and more stable operations, allowing us to take advantage of growth opportunities along the way. And in this context, we can exploit the regained strength of our home markets and very strong summer bookings. Ladies and gentlemen, last Thursday, we were finally able to present the first Airbus 350 with our new Allegris Cabin. Tomorrow, it will start its scheduled service initially from Munich to Vancouver. Second destination will be Toronto, followed by Chicago and Montreal. With Allegris at Lufthansa Airlines and SWISS Senses at Swiss whose product launch is scheduled for the second quarter of ‘25, we are once again setting premium standards in the industry because every guest has his or her own understanding of premium we very much focused on maximum individuality. With Allegris, our guests can choose from a dozen different C types across all classes. In total, we will install more than 31,000 new seats in our group’s long-haul aircraft. Every new intercontinental aircraft will be equipped with either Allegris or SWISS, X Factory and SWISS Senses at X Factory. And in our existing fleet, without Allegris cabins, aircraft, which are being phased out, except for the 380 and the 330, for which we are also refitting the cabins with new state-of-the-art all aisle access seats. The Boeing (NYSE:BA) 747-8 and the SWISS 777 will also be retrofitted with Allegris and SWISS Senses in all classes. By ‘28, Lufthansa and SWISS fleet will be equipped with a new product, basically across the whole fleet and that is either including Allegris or we mentioned all isle access, at least for business class. We’ll be investing around €4.5 billion in upgrading our offer this year. In addition to the modernization of our fleet and the renewal of our intercontinental cabins, we’re also focusing on upgrading customer communication. Let me give you some examples for this. Communication heavily affects customer satisfaction, especially when things do not go according to plan. That’s why we are expanding baggage tracking and enabling customers to rebook flights and request refunds themselves without the support of customer service personnel via our app. As part of the closer integration of our loyalty program into the offer, customers will be able to redeem points for award flights directly in the Lufthansa app going forward. These examples are only some of many other measures we are currently implementing using both the power of digital and the strength of our team. In network management, the launch of Lufthansa City Airlines marks a major step forward. Lufthansa City Airlines will start flying at the end of June. The airline will initially operate flights from Munich to domestic German and European destinations. In line with Lufthansa’s product offering, passengers onboard Lufthansa City Airlines can expect Lufthansa’s product range and customer experience for short and medium-haul flights. Lufthansa City Airlines will play an increasingly important role in the feeder network of our hubs. This will strengthen our short-haul network and with competitive feeder services secure our planned growth on the long-haul routes, which is obviously key to us. With the order of 14 Airbus 220-300 and a further 20 purchase options we have set a clear signal for the future of this new airline. The first 2 of our 4 Airbus 319, which will also be operated at Lufthansa City Airlines will be delivered this year and they already have been painted in the Lufthansa City Airlines delivery. In view of the innovative products and services that will be launched in the coming months, it’s good news that the risk of strike has decreased significantly. We were able to reach long-term wage agreements for both our ground staff and our colleagues in the Cabin and Cockpit of Lufthansa Airlines, giving our guests and ourselves planning security in this regard. We achieved now the same for the flying personnel at Austrian Airlines only last week. And only this morning, we concluded a new agreement for the pilots of Eurowings. As a result, most – by far, the most of our workforce is now covered by new long-lasting collective agreements. Our employees have achieved a great deal through the hard work in the recent years. We also want their salaries to develop appropriately and well. We offer them the best conditions in the industry and the agreements we have now reached, I think, our best proof of this. However, it is also clear that the high and now rising personnel costs represent a major economic challenge for us to which we must find answers. And this will not be possible without significant productivity gains in the coming years. Ladies and gentlemen, our capacity expansion in the second quarter is likely to be somewhat lower than originally planned, partly due to continued delays in delivery of new aircraft. For the full year, we have moderated our capacity plans to now 92%, which is 2 percentage points less than originally planned. Nevertheless, we are growing strongly. We are confident that we have another very good summer ahead of us. At this stage, bookings for the summer period are up another 16% on the previous already record year. So demand is outstripping our capacity growth. The drop in demand that we experienced during the strike has been overcome even if we cannot fully make up for the booking losses in April or for April and for May. Encouragingly, momentum in our home markets has picked up markedly in the past couple of months, catching up with the existing strength of the U.S. market which has been visible for quite some time. As a result, we expect both in summer, a strong – sorry, we expect both in summer, a strong performance in the intra-European travel as well as a continued strength on the transatlantic now driven by good demand from both ends. The recovery in Asia Pacific, however, is progressing a little bit more slowly at least when it comes to China. In comparison to China, India and Japan are doing much better related to, also contribute to the recovery of corporate travel, which continues to finally progress, especially on long-haul routes where again, the Transatlantic continues to be leading. Overall, we are pleased to see that demand remains solid and good, which also benefits Lufthansa Technik very much as a need for maintenance, overhaul and repair services around the world continues to grow. The disproportionately high growth on Asian routes and the increase in European demand will lead to some yield normalization. However, we continue to have good pricing power and to record double-digit growth in volumes even after a very strong year ‘23. Ladies and gentlemen, I’ll begin by talking about a turning point. Yes, the environment in our industry remains challenging, but we have every reason to be optimistic. First, as mentioned, Allegris is finally here. This year, we will receive a new long-haul aircraft with the new cabin every month. Next year, it will go up to 2 aircraft per month. We are constantly improving our product while modernizing our fleet. We have long-term agreements with our software partners. And we continue to recruit around 1,300 new colleagues every month for which we get 20 applications each. And then only do we have the best team in the industry, but we also have the right strategy to continue to be successful. We are accelerating our transformation from an aviation group to a global airline group with our multi-hub, multi-airline multi-brand business model at the very heart of our strategy. And on top of that, as you know, the world-leading MRO provider, Lufthansa Technik, among other companies. And this strategy is paying off by marking us – making us more international, more flexible, quite more resilient and surely more customer-focused. Thanks for your attention. I would now like to hand it over to Remco, who will take you, as always, through our financial highlights, to provide you with some more specific information on the financial outlook before we look forward to the Q&A session.
Remco Steenbergen: Thank you, Carsten, and a warm welcome to all of you. First quarter was marked by an adjusted EBIT loss of €849 million. Unfortunately, a consequence of the challenges we faced, including industrial action and a subdued cargo results. In an already seasonally weak quarter, the operating loss was higher than expected due to the various strikes, both in our own operations and at systems partners. The cargo result was down on the very tough comparison base from the previous year as the first quarter of 2023 was still characterized by exceptionally high demand in connection with the supply chain disruptions during the pandemic and constrained air freight capacity. In the first 3 months, the gross profit contribution from the expansion of life activities compared to the previous year was offset by mid- to high single-digit cost inflation. Personnel costs increased mainly because of a 6% increase in headcount and increasing wages. The inflation compensation premiums negotiated as part of the latest collective wage agreements had a one-off effect of €38 million on personnel expenses in the first quarter. Variable costs increased, especially in the areas of fee charges and maintenance, including the costs associated with the early maintenance required for the PW1100 engines. Focusing on our passenger airlines, the operating loss increased to €918 million compared to €512 million in the prior year. Approximately 3/4 of the increase that is around €300 million were related to strikes. EU261 compensation payments to customers nearly tripled year-on-year to almost €100 million with duty of care expenses increasing by half to €63 million in the quarter. However, the impact on revenue was even greater than that on costs due to a decline in the last minute bookings, as passengers were afraid of being stranded during their journey. In addition, many customers had to be rebooked because of flight cancellations. This absorbed capacity that was otherwise reserved for high-yield short-term bookings. Overall, the group airlines operated approximately 5 percentage points less capacity than planned relative to 2019 due to disruption from strikes and other events, including weather and AOGs, reflecting ongoing bottlenecks and availability of spare parts. Yields were down 2.5%, with around 2/3 of the year-on-year decline related to strikes and 1/3 of the off-peak nature of the first quarter, coupled with the market-wide increase in capacity. RASK was down 6.3% due to the yield decline and an additional impact from the decrease in cargo revenues and the higher customer compensation payments mentioned before, which are not included in the yield definition. Unit costs were still down 1.8% when excluding the impact of strikes despite the shortfall in capacity compared to initial expectations and cost inflation. On a reported basis, however, they increased 2.9%. As mentioned, our cargo division faced a tough comparison to the previous year, resulting in lower profits. However, it’s important to note that were it not for the strike effect, our cargo division would have achieved a breakeven result. Looking ahead, we are confident that cargo yields will remain stable year-on-year so that the business will return to profit growth on the back of increasing volumes. In this context, e-com related growth in China is driving performance, while the rest of the global air cargo market remains challenging. Lufthansa Technik, on the other hand, demonstrated resilient performance with a 4% increase in results, excluding strike impact, including the effect of the 3-day strike related to complete shutdown of operations in Hamburg. Lufthansa Technik adjusted EBIT fell to €260 million in the first quarter. We expect the business to be able to recoup this €24 million effect from strikes in the second quarter. The generation of free cash flow was significantly better than the operating results suggested, driven by robust booking intake for the summer season were down by around 10% compared to the prior year due to different phasing of investments. Again, the majority of investments related to fleet modernization and the rollout of new seats. Available liquidity increased to €10.8 billion, supported by the renewal and expansion of the existing revolving credit facility to €2.5 billion. This new RCF is more favorable than the prior 1 due to the improved rating of the group. Net debt declined because of the generation of free cash flow and also the net pension liability decreased due to a 0.1 percentage point higher discount rate. These reductions have favorably impacted our leverage ratio, which was down to 1.8%, including pensions at the end of March. Our solid financial position means that we are not just the only European network airline holding investment-grade ratings by all leading agencies, but that we’re also the first 1 to resume dividend payments after the crisis. The proposed dividend payment of €0.30 per share, which will be resolved at the upcoming AGM in a week from now is a clear indication of our financial health and our commitment to creating value for our shareholders. Our fuel cost expectation remains unchanged, in line with the guidance provided in March. The increase in the price of Brent in the past couple of weeks has been offset by a corresponding reduction in the jet crack supported by the expansion of refinery capacity in Europe. With a hedge ratio of 80% with half of the hedges related to jet fuel and the other half crude oil, we are well protected against the risk of rising prices, including the effects of a possible escalation of the conflict in the Middle East and its possible impact on the oil price. Looking ahead to the full year of 2024, we anticipate our CASK to remain flat, excluding the one-off impact of the Q1 strike. Including the latter, we forecast a low single-digit percentage rate increase. This outlook is grounded in our focus on operational efficiency and strict management of fixed costs to fully leverage the restoration of free crisis capacity this year and next year. Without question, the collective wage agreements just concluded a significant challenges for Lufthansa Airlines, in particular, where structural improvements in network profitability and cost efficiency required to achieve better margins, as Carsten emphasized already. Overall, however, the latest wage settlements and a slight reduction in capacity compared to original expectations do not change our unit cost forecast for the year as a whole were it not for the effects of the strikes in the first and, to a lesser extent, the second quarter. For the year as a whole, we project capacity of 92% relative to 2019, 2 percentage points less compared to our original guidance given in March. This reduction reflects the lower level of capacity operated in the first quarter as well as some trimming of schedules for the second quarter. The latter was done to support the stability of operations in combination with the delay in new aircraft deliveries. In this context, let me emphasize that we do not assume that we will be able to deploy a significant number of additional Dreamliners in 2024, although we still expect to take delivery of some of them from Boeing before year-end. In the second quarter, we expect to operate at approximately 92% of our 2019 capacity. Unit revenues are expected to decline in the low single-digit percentage range, partly because customers who are reluctant to make short-term bookings for April and to a lesser extent, May, while the labor disputes were being resolved. CASK is expected to increase in the low single-digit percentage range in the second quarter. Adjusted EBIT in the second quarter will therefore be below that of the previous year. In the third quarter, capacity expected to increase further to over 95% of the pre-crisis level. Based on current bookings, we expect unit revenues to exceed the prior year level in the peak summer quarter. We are hence confident that operating profit will increase year-on-year again in the second half of the year, supporting our outlook for adjusted EBIT to be around €2.2 billion in 2024. Adjusted free cash flow is expected to be at least €1 billion. This assumes net capital expenditure of between €2.5 billion and €3 billion with higher growth investments, partly offset by sale and leaseback transactions in the second half of the year. And with this, Carsten and I are looking forward to your questions now.
Operator: [Operator Instructions] And our first question today comes from James Hollins from BNP. Please go ahead.
James Hollins: Hi, thanks very much. Two questions. I was just wondering, I think you mentioned that Remco, good by, by the way, I know it’s a bit early last time. And to you Dennis. Anyway, I think you mentioned Pratt & Whitney compensation. I was wondering if you could – I apologize if I missed it, maybe sort of quantify if you booked some compensation in Q1, maybe your expectations for the full year? And also how it will be booked whether you’re doing a wiz and taking a net negative cost storage looking more at the balance sheet? And then secondly, probably for Carsten on ITA, I imagine you’re very bored of talking about this, but tough. I was just wondering if you could sort of run us through some of this latest news. It seems to be very much focused on just really looking at remedies at Linate and whether that might enough? So any comments would be useful. Thank you.
Remco Steenbergen: James, good. That’s just good afternoon. Let me take the first question. In Pratt & Whitney, we have not yet come to an agreement. So there’s nothing booked in Q1. And on your related question that once we will come to agreement, how we record it in the P&L as it stands now, but of course, it depends also on the construction of the deal. Actually, the compensation will be paid out as we incur also the cost over the coming years. So there’s a slight true-up over the last quarters. But in principle, it would match the cost over the coming quarters and probably through next year. I couldn’t hear you 100%, but I assume this answers your question. Perhaps, Carsten, you want to take the question on ITA?
Carsten Spohr: Yes, absolutely, James. Before I come to the challenges, maybe what’s feeding my optimism. You all know our rationale with the Italian market playing a huge role for Lufthansa and all that. I don’t think I need to go through that again. But I think all and more people also understand this deal is the right thing for the future of ITA. I think now Italy being the third largest economy in the EU needs direct access to global markets out of Italy and only in ITA, part of a bigger group can she achieve that sustainably. And last but not least, I think it’s also we have surfaced more and more that the Italian consumer is very much faced or facing a 40% dominance of one of the low-cost carriers on the one hand. And on the other hand, ITA to being able to provide an European offer on the long range towards the big players on the other side of the long-range route will require some group membership. And that is now coming also to the challenges we still have to constructively take away with the EU Commission. How do we entangle the dominant situation of Lufthansa Group plus ITA in [indiscernible], where obviously, the answer can only be that we give up a certain amount of slots. How do we ensure competition on those routes where currently only Lufthansa and ITA operate, which I think is a fairly normal challenge in those – these discussions. And last but not least, how – and I think the EU Commission and we are aligned here in our interest to ensure long-term long-range viability of a European carrier out of Rome, which obviously is ITA. Thinking about the U.S. against those three mega carriers in the U.S., Delta, American and United. So that is the three elements of remedy discussions which we’re having. And these talks are constructive. I think it was between the three of us, the government of Italy, the EU commission and us agreed that we need a little bit more time, which is the recent news you received. But I think also everybody understood that Lufthansa needs to create value for its shareholders by this transaction. So of course, we cannot just move along with anything. And that, I think, limits the solution space and I’m still optimistic we find something within that solution space for the summer.
James Hollins: Perfect. I mean is that extension, I mean, logically, it’s human nature ever on a court would suggest that means you’re quite close to an agreement? Or am I reading that wrong?
Carsten Spohr: Well, it’s not up to us. It’s between the three of us. Yes, I am optimistic that these constructive clocks, which we now need to extend will end up in agreement, yes.
James Hollins: Okay, cool. Thanks a lot.
Operator: The next question is from Jaime Rowbotham from Deutsche Bank. Please go ahead.
Jaime Rowbotham: Good morning, gentlemen. Two questions from me. First, could you talk a bit about the interplay between new aircraft and capacity growth? You showed a slide at the full year results Slide 7, I think it was with over 30 new planes expected this year, including over 13 Dreamliners. But in those closing comments, Remco, I think you said that to deliver the new 10% capacity growth this year you now don’t need any Dreamliners. Is that correctly understood? And perhaps alongside that, you could comment on Airbus deliveries, the narrow-bodies and the A350s? Second, you’ve talked about what sounds like emergency measures to strengthen the results at the Lufthansa mainline reducing operating costs, stopping new projects. Could you expand a bit on what’s happening here? What projects are being stopped? Why the actions are suddenly being necessary? And if you don’t mind why they weren’t being taken anyway? Thanks very much.
Remco Steenbergen: Jamie, Remco here. Good afternoon. Yes. With the reduction of the capacity from 94 to 92, correct? We assume a lower level of Dreamliners to come in. So about half of the 15 we originally planned. In the original planning, the 15 were always faced in the second half of the year. This remaining seven would come in Q4. If they wouldn’t come at all, it would have a bit of impact still on the 92, but not a material number overall. So already in the 94%, we had assumed a little bit of delay later in the year, and this is now a bit lower. But it’s part of the 94 going down to 92. And therefore, we don’t expect if this further delays any impact for this year. On the Airbus 350, as you currently stand, we expect one per month eight total between now and the end of the year. So that is on track. The 320s are also still coming this year. There are plans also in the course mostly, I think, mid this year. It’s delayed from the original planning, but we don’t see much risk remaining here. So therefore, the capacity growth and the new planes, it’s in an acceptable range as currently stand. Notwithstanding the fact, of course, that all these delays have an impact on the efficiency of the – particularly the main airline because the training of pilots and crews and the hiring, of course, touch much, much, much earlier. And that, of course, causes a bottleneck where the efficiency is a bit impacted. At the main airline, correct, yes, of course, actions are taken also considering the current results and the efficiency to talk now certainly as a course correction from left to right with emergency actions, that is also not correct. There’s a very clear action in terms of the growth, the new planes coming in, the movement in efficiency, which is a bit delayed in the main learn, and that’s impacting us. But of course, you continuously look at actions. But with the results a bit lower this year. Of course, you have to look again. Are there certain projects, you cannot or you have to delay a bit to find a little bit better balance, but don’t take it as a black and white. We’re going left to right with the steering wheel. That would, of course, be stupid.
Jaime Rowbotham: Understood. Thanks a lot, Remco.
Operator: The next question comes from Alex Irving from Bernstein. Please go ahead.
Alex Irving: Hi, gentlemen. Hope all is well. Two for me, please. First on your recent agreements with unions, great to see these deals signed. Following these, how do you expect staff costs to evolve on a unit and on an absolute basis? And then my second question is for an update on corporate travel, please. Some of your U.S. peers have been quite vocal about a real recovery in the first half of 2024. Where are you now back to on a revenue and volume basis versus 2019, please?
Remco Steenbergen: Alex, Remco here again with the agreements with the unions, as you have read as well, for most unions, we have come now to two agreements, which gives clearly some stability in the system for the coming years, which we’re very happy with. With regards to the cost, there is some work to do on our end to deal with this. If you look at the cost increases for this year, it’s around 7 percentage, which we also assumed originally. So therefore, in the guidance of the CASK, you don’t see much difference. If you look at ‘25 and ‘26, what has been agreed, it’s somewhere between 3.5% and 5%. Next year, probably more in the 5% of what is agreed for ‘26 goes down to a low single-digit number. With the increase of capacity over these years as well, we think we can offset that again with the efficiency in both the increase in capacity and the leverage of the fixed cost. Notwithstanding that, it’s quite an increase overall. And it requires work on our end to make it all work. It also comes back to the whole strategic discussion on the other airlines other than the main airline, Lufthansa, correct? And how are we going to divide the pie in terms of where the flying is going to happen. We’ve chosen there a strategic direction, and we will stick to that correct to make sure that we deleverage the different airlines we have. On the corporate travel we ended in Q1 at around 65%, a similar level as Q4. We still expect that corporate travel towards the end of the year to still move to a level of around 70%. We have to see how that moves with the bookings. So, nothing different than what we originally told you early March. I hope that answers your question, Alex.
Alex Irving: Absolutely does. Thank you very much.
Operator: The next question comes from Stephen Furlong from Davy. Please go ahead.
Stephen Furlong: Afternoon, gentlemen. I was wondering, I know at the end of last year or at the start of this year, you did expect unit cost in place in maybe mid-single-digit type of rate. So with the later deals and general tax increases, etcetera, I mean, does the 8% margin plan just have a different shape that require more better unit revenues or just as I said, a different shape on the kind of mitigation measures on the cost side. So it’s just another way of asking the previous questions. And then the second thing, maybe just talk about the MRO business. The general supply chain challenges, would you see that as a positive for the MRO business segment. Obviously, it helps you have that in the context of Pratt & Whitney issues. So just maybe talk about the interplay of MRO with the airline and the external airlines that you have, that would be great. Thanks a lot.
Remco Steenbergen: Stephen, Remco here. I will take the question on the unit cost, correct? Yes, we said indeed mid-single-digit increase, right? You have also to see that in the context of all the discussions we have with the unions, right? What does this mean towards the 8%, correct? So it means, on one end, a further growth of capacity so we can leverage the fixed cost in the right way and keeping the fixed cost in terms of people stable. It means too, that the efficiency or the inefficiency we currently have in the system is disappearing out correct of the system. And of course, that the yields correct are at least staying on a stable level or have a slight increase over the years to come. Then the 8% is possible. That’s currently in our plan. We see strategically also know logic why that wouldn’t happen. It’s too early to comment whether that is in ‘25 or in ‘26, correct? That has to be seen as well, particularly how quickly efficiency can be put in, and that depends again then on the new airplanes coming into the fleet and how that can be organized, but there is no deviation from the 8% margin goal from the company.
Carsten Spohr: Stephen this is Carsten. Sorry, Stephen, it’s Carsten. On the supply chain question, also in regard to Lufthansa Technik and MRO, I think we see three effects here, one negative, two positive. On Lufthansa Technik, surely, the effect is positive because margins are going up. Nevertheless, even in Technik, we have volume restrictions. There are certain demands from the market customer inquiries, we cannot satisfy just to the lack of parts and partly labor. But those jobs we accept, those contracts we signed really show some very nice margins. So I definitely see a positive element here. Operationally, on the airline, obviously, there’s a negative impact, which requires us to fly ally aircraft longer, as Remco was referring is even having Whitney’s deals, which we wouldn’t need otherwise if we had enough supply for our own aircraft. But the third element and maybe the most positive is the strategic impact on the industry. Different to other industries, the lack of the supply chain over years cannot be compensated within a few years. So if a car company lacks production of cars, they can make it up in double shifts, night shifts, weekend shifts. That will not work neither in [indiscernible]. So these airplanes not being produced right now will be lacking for many years in the industry. And in my view, will have a very healthy impact on the number one formula of success for our industry, which is demand versus supply. And I just met with my counterpart from United a few days ago, we fully aligned here the positive element impact of this development for the airline industry will be positive for many years, and that even leaving Lufthansa Technik aside. But again, Lufthansa Technik offers additional opportunities for a group like Lufthansa. As a matter of fact, we are looking for a new facility in Europe, where we maybe are able to close a little bit more next week at our AGM, which will allow us to tap even more this very healthy market from the MRO side, adding to the positive effects I just mentioned on supply and demand. Nevertheless, not ignoring, of course, operational challenges we have short-term.
Stephen Furlong: That’s very clear. Thanks, Carsten. Thanks for your help Remco. Best of luck and also Dennis Weber.
Operator: The next question comes from Ruxandra Haradau-Doser from HSBC. Please go ahead.
Ruxandra Haradau-Doser: Yes. Good afternoon. Thank you for taking my questions. Remco and Dennis, congratulations on the performance over the last year. Thank you very much for your help. It has been a big pleasure, and I wish you all the best for the future. Two questions, please. First, you highlighted the strong balance sheet, investment-grade rating you have a high liquidity. Remco, you mentioned during the last conference call that you considered the valuation of the stock cheap. So why don’t you consider share buybacks? And second, you mentioned that China is not performing well. And will this have some consequences on capacities to China over the next quarters? Thank you very much.
Remco Steenbergen: Hello, Ruxandra, Remco here. Thank you for your question. Yes, I still think that the share price is very cheap, correct. The market cap is below our equity, correct. So if you, in any way, look at this, I find it personally very, very disappointing that I have not been able to help the company with a better share price than it currently has. I don’t think the company deserves that. With regard to the balance sheet, I’m a very strong believer that you need to have a very strong fundamental when you’re in a company, particularly when it’s an airline. So to have a healthy balance sheet is essential. At this point in time, to start with share buybacks, while the company is in full need actually to renew its fleet in order to be also successful for the next decade. This requires a lot of money to invest. And I think actually that’s a much better investment as it stands also vis-a-vis the current status of the balance sheet. And I hope that the investors accept and respect that decision. Carsten, would you want to say something on China?
Carsten Spohr: I’m thinking about some private share buybacks, but my wife limits the volumes here. So the financial markets might not feel it. On China, we have some optimism because a little bit, I think under the surface of the daily media, the investments of German companies into China have reached a record high in ‘23. And put all politics aside, companies are investing. And of course, investment means travel means cargo moving both ways. Especially cargo ex China is feeding our optimism for Lufthansa Cargo, e-commerce being very strong and that, of course, very much fat by China. When it comes to Mainland China and passenger traffic, I think we see some bright spots, which is Shanghai and Hong Kong, which are very strong. the smaller cities that we all know small in China means whatever, €20 million and below. The smaller places we have been flying to for many years are definitely coming back more slowly. And also demand out of China is recovering on our airplanes a little bit slower than we thought because with 2 hours less flying times going through Russian aerospace, some local Chinese prefer the Chinese carriers whereas Western passengers prefer to stay out of Russian airspace and actually like our product, which we see in some nice yields. Nevertheless, we see additional recovery coming for the second half of the year out of Mainland China, and we will we already have reached our number one as of Europe, our European operators to and from China and we’re looking at adapting to the increasing demand over the course of the year. But it truly is more slower than we all expected.
Ruxandra Haradau-Doser: Thank you very much. Thanks.
Operator: The next question comes from Ruairi Cullinane from RBC. Please go ahead.
Dennis Weber: Ruairi, we can’t hear you.
Ruairi Cullinane: Hi. Is that better?
Dennis Weber: Yes, it is.
Ruairi Cullinane: Yes. Okay. Thank you. Yes, so quite notable, the 13.8% decline on – in RASK on Asia Pacific groups. We have discussed China weakness. Is there anything else worth highlighting there? And then secondly, a question on MRO, even strike adjusted MRO margins, the decline in Q1, should we just think of 2023 margins in this business? Is that the sort of upper end of what we can reasonably expect going forward? Thank you.
Remco Steenbergen: Yes, Remco here. On the APAC situation, I think everything in Asia is moving as originally planned, except China. So, there is nothing else. I think we additionally, I have to say what Carsten already mentioned before. On the MRO for the full year EBIT margin, we expect a flat margin and perhaps a slight decline of the margin. That’s yet unclear where it ends. Last year, we had a very good year. Of course, we hope that the margin stays at the current level, but we can’t confirm that yet, it might also be a slight decline. Overall, of course, Technik is, as you see on the top line, it’s well performing, it’s growing. So, the absolute amount will certainly move up. So, we are in a very good place with Technik.
Operator: Going to the next question which is from Jarrod Castle from UBS. Please go ahead.
Jarrod Castle: Thank you. Good morning everyone and as others have stated, thanks Remco and Dennis for all the help. Just sticking on CFO, just be interested anyway, getting some thoughts on update in terms of a permanent position for CFO, both either internal or external. And then I guess it’s coming up to a year ago where Ryanair won the case in terms of state aid being unlawful for Lufthansa. Since then, it’s had a bit of a mixed result for certain other companies, I think, wasn’t ruled against Brussels, but they did get a ruling against Air France. So, has anything transpired in a year, just because they won, has anything changed, or is it a mute point now? Thanks.
Carsten Spohr: Jarrod, it’s Carsten. Yes, so we don’t take applications for the CFO anymore because we are very close to an announcement as we have made our choice or made our decision. And indeed, we will, as indicated by our Chairman, go for an external expert. And again, we will be giving out more details soon. On the state aid case, I think it really much turns into an academic question. As you all know, we not only have paid back all the money was not state aid. In the first case, it was just credit lines to the German Government with a significant profit for the German tax payer. And therefore, I think it’s more for academics in the legal world to now deal with this challenge of the European Court decision. So, I think between the Court, the EU Commission, the German Government and ourselves, lawyers are indeed debating details, but it will not have an impact on our business, again, since the money is paid back and nobody expects that. Is that your question or answering your question?
Jarrod Castle: Yes. Perfect. Okay. Thanks a lot.
Carsten Spohr: So, yes, again. Yes.
Operator: The next question comes from Sathish Sivakumar from Citi. Please go ahead.
Sathish Sivakumar: I got two questions here. So, first is around the CASK assumption. In your CASK guidance, do you actually factor in productivity compensation? And yes, if you could just help us understand that. And then as part of the CASK assumption, what are the productivity arrangements that you – as part of the wage deal that you are factoring in as we go into quarter two, quarter three and quarter four? And the second one is around the infrastructure bottleneck, right? So, obviously, the disruptions are one or two related to labor agreements, but the other one is the bottlenecks at the – your three key hubs, right, Frankfurt, Munich and Zurich. How should we think about going forward in terms of capacity allocation? And where are you seeing, like if you have to ramp these three hubs which has actually – which are the hubs that have seen a significant improvement in terms of service reliability. And also, what’s your expectation on tariff at these three hubs? Thank you.
Remco Steenbergen: Sathish, Remco here, very detailed question, but let me try to answer them as good as I can. For the CASK for the remaining part of the year, of course, we expect that there is some Pratt & Whitney compensation coming here to offset the remaining part of the cost, correct. We hope to come to an agreement in Q2. And with that also that the additional costs we have in Q2, Q3 and Q4 they will be offset, right. And I think Pratt & Whitney should also do that. And I think we have to come to a conclusion here. Productivity improvements, we do not expect many productivity improvements yet in Q2. As I said before, there is still quite a ramp-up which needs to take place also towards the high season, which will be similar in Q3, unfortunately. As of Q4, we hope that they become a bit more material change. It doesn’t mean that in Q2 and Q3, we don’t do anything, correct, there is a lot of work in the background to stabilize to make sure for our customer all the stability in the system is in a much better place, and that is the priority. In the meanwhile, we do a lot of work in the background. And hopefully, as of Q4, the productivity improvements can then take place. Also linked to your last question and the bottlenecks in the hub, right. We still – if you grow still around 10%, it means also in all the hubs and all the related activities also need to grow with 10%. Of course, we would come much better in organizing ourselves together with the hubs and of course, the related airports and catering and everyone else involved to get in a better place. That clearly is our focus and also the answer before, it’s not productivity in Q2 and Q3. It’s really making sure that we get the whole system working well. We think we are ready for the summer to get that in the right place. Some airports are better prepared than others, but we count only that the airports do the utmost to make sure that the customer has a really, really good flight experience with us this summer.
Carsten Spohr: So, was that your question, or is the question more to what’s the strategic long-term growth plans?
Sathish Sivakumar: Yes, these three hubs like in terms of this – considering the bottlenecks that you are facing at these hubs?
Carsten Spohr: Okay. So, the question is answered, good.
Sathish Sivakumar: Yes. Thank you. Again thanks and all the best and thanks Dennis as well. Thank you. Thanks Carsten.
Operator: The next question comes from Harry Gowers from JPMorgan. Please go ahead.
Harry Gowers: Hi gents. Thanks for taking the time. First question, just on the ex fuel guide for Q2 on the CASK, which is now up a few percent. I mean your ex strike CASK in Q1 was down 2%, I think and presumably a lot of that disruption cost falls away. So, maybe you could give us a little bit of extra color on the Q2 ex fuel guide and the moving parts or the pressure there? Remco, I think you just mentioned on the productivity point. And then second question, the full year outlook to your EBIT guide means you are seeing a stronger profit performance in H2, and you mentioned on the slide that’s based on higher capacity and strong bookings. I guess the capacity you can have reasonably good line of sight on all there or there might be some more delivery delays in the system. But how much visibility or confidence do you have on the bookings across H2 right now? Thank you.
Remco Steenbergen: Harry, good afternoon. I think the overall clear target we have is to keep the CASK flat for the full year, excluding, say, that the one-off strike costs we have in Q1. That in Q1, we ended then on a slight decline in Q2 and a slight plus also with some of the seasonal patterns to do in the Q2 part of the ramp-up. We keep our eye really on the full year altogether. And if it’s 1%, 2% down, 1%, 2% up from one quarter to the other quarter, I wouldn’t pay too much attention to it because there are also seasonal patterns which influence it. For the full year on the CASK flat with the capacity and the cost and the agreements on the unions, there is a good visibility to come to this number. Of course, it’s not a guaranteed outcome, but there is a good visibility on it. On the second half of the year, correct, we have good visibility on the bookings for what we can see versus historical pattern. But as you know, there is still a significant part open for July, August or September, which we still have to work on in the coming months to organize. But as it currently stands, we see for Q3, a flattish kind of yield, perhaps a little bit up, around 40% is booked, so 60% still has to come for Q3. But if we compare it to what we have historically seen, you can hear about the optimism which we have so far.
Harry Gowers: Thank you very much. Remco and Dennis, best of luck for the new roles. Thank you.
Operator: Next question comes from Conor Dwyer from Morgan Stanley. Please go ahead.
Conor Dwyer: Hi guys. Thanks. Hi guys. Thanks very much. Most of my questions have been answered. So, I just had the one. It’s around the strike. Obviously, quite a substantial cost and now the pay deals are done and that should ease operations over the next year, year to 2 years. But I am just wondering what is to kind of prevent say, in 2 years to 3 years, staff are potentially then unhappy you will pay again, what’s to prevent substantial strike action again? Are there any measures that can be taken to kind of limit the level of cost that’s been seen in the kind of four months early this year? Thanks.
Carsten Spohr: Yes. Conor, Carsten, I think this recent strike action, not only in Lufthansa, but to be honest, across the German infrastructure industry was very much fueled by the very specific situation of high inflation and full employment. As we all learned in University, that usually doesn’t go together, but we experienced that. I think there was a window for unions, which they took advantage of or tried to take advantage of. So, I don’t think we will see the same thing in 3 years on that macroeconomic environment. When it comes to Lufthansa in general, as you probably know, we are growing our young airlines at lower HR or lower labor costs. Think about Discover, think about Lufthansa City Airlines. So, I think there will be a different mix of AOCs 3 years down the road than what we have been through now, which might also have an impact on strike activity. But I think it’s mainly the macroeconomic environment, which was very unique. And for German standards, we haven’t seen strike like this. I think in decades, think about the German rail system. Think about Lufthansa, unfortunately, you think about the German airports. This was a very unique situation. I think we see reappearing in 3 years or, hopefully, ever.
Conor Dwyer: Very good. Thank you very much.
Operator: Next question comes from Andrew Lobbenberg from Barclays. Please go ahead.
Andrew Lobbenberg: Hi there. Can I just follow-up on that last answer from Carsten about the importance of the younger AOCs of your Discover and City? As you see these large pay increases at the additional airlines, to what extent are you confident that you can keep a big take-up to these other airlines, because I don’t think you have got settled and they need to be negotiated. So, to what extent you are confident that you can keep that major cost gap to these? What extent are they going to have their pay terms dragged up by the higher market rate sales were? And then separately, just on the balance between the hubs between Frankfurt and Munich, there is obviously a big delivery problems with the 78s, the 350s are coming through more reliably. Does that not mean that we end up with more capacity in Munich rather than Frankfurt, or are you finding some way to balance out and putting other long-haul machines to Frankfurt to fill out the missing 78s? Thanks. Oh, for the second time, yes, Dennis and Remco, we will really miss you. Thank you. Maybe we should all turn out the AGM so you do it three times.
Carsten Spohr: They are both smiling, Andrew. Thanks for your kind words to them. Whenever I leave, I want to hear the same from you, please. No, more serious everyone on the first question. I think we proved that just this very morning, we signed with Eurowings on a 42-month deal for the pilots exactly in the same pay increases as we signed basically with all the other unions, 7% this year, 5% next year, 5% the year after. So, I think the theories [ph] very much move in parallel. Of course, we have increases also at the lower-cost AOCs, but we don’t see a closing of the gap, which I think is your main question. Because let’s not forget, both for cabin crew and even more for pilots, the number of aircraft in an AOC is driving career. So, there is an individual interest of the unions, of the workers’ council and also of individual staff members to keep the perspective of the respective AOC, and that kind of keeps the balance, which allows us to move at least this time, as you can see in parallel. At Munich, Frankfurt, we use the Airbus 346 to solve that problem. The Airbus 346 is a wide body which operates at both hubs, Frankfurt and Munich, and we are now shifting more towards Frankfurt to close the gap of the 787 deliveries there. And we will partly allow that by operating with 380s throughout the winter at a higher productivity and flight numbers per week than we were planning to because partly because the depreciated 380 is not the perfect aircraft in the winter. We were thinking about putting them on the ground some of them for some time. Now, moving the 346 to Frankfurt, we will need to continue to lose the 380 also in the winter, at least most part of the winter in Munich. So, in short, it’s Airbus 346 fleet, which we move around to balance.
Andrew Lobbenberg: Makes sense. Thank you.
Operator: The next question comes from Johannes Braun from Stifel. Please go ahead.
Johannes Braun: Yes. Thanks for taking my questions. So, then first one will be on the German aviation tax, which obviously is increasing from tomorrow onwards by, I think 20% or so. Question would be how you would deal with that? I read that Ryanair apparently is asking passengers to have a pay-up even for already booked flights to compensate for the tax increase. I don’t think you will do that. But are you confident to pass that impact on in the future to your passengers? And then secondly, just on the MRO segment, I was wondering if you could share some more insights into your kind of mid-term ambitions there. I think last year, when you took the decision to not sell the minority, you said that you intend to double the EBIT of that segment by 2030. So, I was wondering if you can share some more details where you stand there, will it be back-end loaded, front-end loaded? And how do you think about the relation between those strong top line trends on the one side, but also the strong cost inflation regarding spare parts and surround in that industry. And of course, Remco and Dennis, all the best.
Carsten Spohr: Johannes, on the aviation tax, obviously, we don’t follow the example of one of the low-cost carriers, and we estimate the impact to be around €20 million that we now need to bear the additional tax for those tickets we already sold. That was your question. So, that’s what I am going to call it the financial way to deal with this. But of course, it’s a much bigger impact for German aviation in general. I think German aviation is lagging behind in growth, as you well know, we are below 90% versus 2019 in German to and from in domestic traffic. Company like Lufthansa can compensate by flying more internationally, but for some parts of Germany, this means decreased connectivity. So, I would think the German Government has woken up, understanding there is additional burdens coming next year with the airport security charge and also with staff blending mandates in ‘25. So, I would hope that we also see a turning point of putting additional burdens on German aviation, not so much to the interest of Lufthansa, but due to, again, parts of the German non-hub airports being either cut off completely like with this half [ph] or at least with reduced connectivity. On MRO, we stick to our targets, doubling revenue and doubling the absolute adjusted EBIT. I would think with the recent development in MRO that becomes – I wouldn’t call it easy, but it comes more likely even than it was before because the MRO industry does very much turn to our favor as the largest MRO provider of the world, adding another European facility will help us to tap also European markets at lower cost than operating in Germany. We are also looking at growing our business in the U.S. where we see very strong demand for our Puerto Rico facility, which basically reaches its limits. So, our optimism on Lufthansa Technik, I think rather increased again after we last talked to you then decreased. And let’s not forget, even though it’s unfortunate, the Ukraine situation very much changed the view of the German Government on the defense business in aviation and there is more and more help needed also on defense contracts for airplanes of the German Air Force or air forces of befriended countries. So, we will see also more business coming down that end.
Johannes Braun: Okay. Thank you.
Operator: Ladies and gentlemen, that was the last question, and I would like to hand back to Dennis Weber for closing comments.
Dennis Weber: Yes. Thank you very much for listening to the call today. Let me also take this opportunity to say goodbye. Thank you for the great cooperation in the last few years. I truly enjoyed working with you. I guess I will still have some of you on the call on the phone later today, looking forward to that, and having said that, over to Remco for a few words as well.
Remco Steenbergen: Thank you all very much as well for the cooperation over the last 3.5 years. It was quite a ride to go through. If I have one wish, correct to convey, correct to help, Carsten and the new CFO to at least come to a better share price. I think if there is one thing I am not very proud over the last 3.5 years that we ended on the current share price. I think it’s always a great opportunity from here to move on. But your help for the investor community to better understand what Lufthansa is also on the consistency, I really hope you would have Carsten and the new CFO to guide Lufthansa to a better share price level. With that, thank you very much.
Carsten Spohr: We will be working for a rich company in the future and pharmaceuticals maybe you can do some investments in aviation. So, I will be there, Remco. Now, it was a pleasure to work with them both, but their final appearance on stage will be our AGM next week. So, if you want to see him once again live, please dial in. And on that, thanks to you for the good years, both of you, but thanks for dialing in today and your good questions, listening and see you soon. Thank you.
Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.