LufthansaFlyer

Just rec'd in the inbox. Looks like SCORE initiative exceeding savings expectations, but still looks like headwinds ahead thanks to the fuel bill.....



PRESS RELEASE:




Frankfurt, 14 March 2013

Lufthansa on course with its SCORE programme

• The Lufthansa Group increases revenue by 4.9 per cent to EUR 30.1bn in 2012
• SCORE delivers earnings contribution of EUR 618m in its first year
• Operating profit falls to EUR 524m (-36.1 per cent) due to higher fuel prices
• The Lufthansa Group expects to make further progress with SCORE and to improve its operating result in 2013

The Lufthansa Group increased its revenue by 4.9 per cent to EUR 30.1bn in the past financial year. At EUR 524m, the Group’s operating result was down 36.1 per cent on the figure for the previous year. The net result for the period went up from EUR -13m in the previous year to EUR 990m, primarily as a result of non-recurring effects from the disposal of shares in Amadeus IT Holding, S.A. and the sale of the loss-making British Midland Ltd.

“With our SCORE programme, we have launched a comprehensive, if not one of the largest, process of change ever seen in the history of Lufthansa. In addition to measures concerning costs and income, we have set up a number of major strategic projects, such as the new Germanwings, the turnaround of Austrian Airlines and the pooling of administrative activities in the areas of HR, purchasing and finance,” said Christoph Franz, Chairman of the Executive Board and CEO of Deutsche Lufthansa AG during the presentation of the earnings figures for the 2012 financial year in Frankfurt. “With SCORE, we are creating the financial basis for our extensive investment plans. Our aim: we will make Lufthansa strong. We want to expand our position as Europe’s leading aviation group and considerably boost our profitability in every business segment.”

As part of SCORE, the Group implemented around 800 measures in 2012 to improve earnings and cut costs. As a result, the Company was able to achieve a structural earnings improvement of EUR 618m in the first year of the programme, around EUR 300m more than originally planned. Making better use of synergies in purchasing, coordinating flight plans being between airlines, adjusting capacities and lowering staff costs through more efficient processes in administrative areas have all played a role here, as have numerous measures which had been initiated before the official launch of SCORE, but whose positive effects on earnings were only felt in 2012. One example of this is the closure of Lufthansa Italia.

Simone Menne, Chief Financial Officer and responsible for Aviation Services at Deutsche Lufthansa AG, emphasised: “The Lufthansa Group has achieved a solid result in a difficult market environment. The SCORE programme delivered an earnings contribution of EUR 618m in its first year. However, the operating result fell sharply compared with the previous year. For this reason, we will continue to press ahead with SCORE in 2013 and boost our operating profit.”

The primary cause of the fall in Group profits was the price of fuel, which was EUR 1.1bn higher than in the previous year. The airlines suffered as a result: the Passenger Airline Group segment generated an operating profit of EUR 258m, which was 26.1 per cent lower compared with the previous year. The largest single company, Lufthansa German Airlines, reported an operating loss of EUR 45m, which represents a decline of EUR 161m on the previous year. SWISS posted an operating result of EUR 191m. Profit fell by EUR 68m year on year. Austrian Airlines’ operating result of EUR 65m was an improvement of EUR 127m, mainly thanks to the transfer of operations to the cheaper Tyrolean Airways platform.

In the Logistics segment, the Group reported a profit of EUR 104m, down EUR 145m.

Christoph Franz said: “SCORE strengthens our core business segment and makes us less susceptible to external factors. Initial measures were implemented in 2012, with more being prepared and vigorously promoted. This includes modernising our fleet with 236 new, modern aircraft which are currently on our order list. In this year alone, we will bring 34 new, fuel-efficient and low-noise aircraft into service, which will replace older models. The major part of the operating result for the year will be generated by the passenger and cargo airlines of the Lufthansa Group in 2013.”

The broad strategic formation of the Lufthansa Group had a positive effect on the result. All the service segments increased their operating result compared with the previous year. Lufthansa Technik, LSG SkyChefs and Lufthansa Systems generated higher year-on-year profit contributions of EUR 318m (+23.7 per cent), EUR 97m (+14.1 per cent) and EUR 21m (+10.5 per cent), respectively.

“In the current year, our main focus will be on ensuring the successful implementation of individual projects and measures. 2013 will be a particularly challenging year for the companies and their employees,” emphasised Christoph Franz. According to him, restructuring and project costs will have a negative impact on earnings in the current year. At the same time, the oil price is expected to remain high and the underlying economic conditions for air traffic challenging. Global economic performance is fraught with great uncertainty and the crisis in Europe has not yet been overcome, he continued. Nevertheless, the Lufthansa Group expects to achieve an operating profit in 2013 which is higher than that of the previous year. “SCORE gained considerable momentum during the past year. Early successes are already visible and can be measured. Our goal remains the same: with an operating profit of at least EUR 2.3bn which we intend to achieve with SCORE, we will actively promote and shape the process of change in the European airline industry,” underlined Franz.

2012 in figures

Revenue for the Lufthansa Group in the financial year 2012 came to EUR 30.1bn – an increase of 4.9 per cent on the previous year. Traffic revenue improved by 4.3 per cent to EUR 24.8bn. Overall, the Group’s operating income went up to EUR 33.0bn in the reporting period, an increase of 5.9 per cent.

Operating expenses rose by 4.3 per cent in the previous year to EUR 31.7bn. One of the main reasons was the EUR 1.1bn rise in fuel costs, which came to EUR 7.4bn in total. This represents an increase of 17.8 per cent. Included in this amount is a positive contribution of EUR 128m from fuel hedging. Government-imposed fees and charges rose by 3.3 per cent on the previous year, despite a lower number of flights operated.

The Lufthansa Group generated an operating result of EUR 524m in 2012, down by EUR 296m compared with the previous year. The net profit for the period was EUR 990m, an increase of more than EUR 1bn. Earnings per share improved to EUR 2.16. The disposal of shares in Amadeus IT Holding, S.A. made a very positive contribution to the net profit for the period, with book gains of EUR 623m. In addition to this, the previous year’s result was affected by a EUR 285m loss from British Midland Ltd., which has since been sold.

Lufthansa invested EUR 2.4bn in the reporting period. Of this sum, EUR 2bn went on modernising the fleet. Cash flow from operating activities came to EUR 2.8bn and free cash flow (cash flow from operating activities less net capital expenditure) to EUR 1.4bn. For the year 2012, the Group has net debt of EUR 2.0bn. Its equity ratio is 29.2 per cent.

Lufthansa Group January–December
2012 2011 Change

Total revenue in €m 30,135 28,734 1,401
of which traffic revenue in €m 24,793 23,779 1,014
Result from operating
activities in €m 1,311 773 538
Operating result in €m 524 820 -296
Adjusted operating
margin* in % 2.3 3.4 -1.1 pp
Net profit for the period in €m 990 -13 1,003
Capital expenditure in €m 2,359 2,566 -207
Cash flow from operating activities in €m 2,842 2,356 486
Employees as of 31.12. 116,957 120,055 -3,098
Earnings per share € 2.16 -0.03 2.19
*) Operating result plus write-backs of provisions, divided by revenue

The 2012 annual report is available for download on the internet at www.lufthansagroup.com/investor-relations. Photo material can be downloaded from www.lufthansagroup.com/presse. The press conference to present our financial statements will be broadcast live on the internet from 10.00 a.m. at www.lufthansagroup.com.

Deutsche Lufthansa AG
Media Relations Lufthansa Group
Claudia Lange
Tel.: +49 69 696 67338 or 2999
Fax: +49 69 696 95428
www.lufthansagroup.com/media

oliver2002

Reading the slides of the upcoming speech... http://investor-relations.lufthansag...ranz-Menne.pdf

Nice to see OS rebound so nicely. LX seems to have stabilised at a good level, but no further boost in the future... I guess all the new aircraft coming in will change the fixed costs?

Weird to see that Cargo is doing to so well with a positive outlook (if you compare it to what others have been reporting), the same goes for catering.

Interesting to that they continue to mint money on the Americas, even AsiaPac came out positive, one would think that the (as previously announced in 2010) competition hit them over the head in Oz, SEA and India.

Am I getting senile, but when did the LHI, bmi and Jade exit become part of SCORE? (slide 19)

Premium Y is part of SCORE? (slide 21)

Quadruple the operating profit to 2.3 billion by 2015 (slide 25)

The weak Euro in a few months in (Q3?) 2012 contributed heavily to the decent result (slide 27), I guess some people are happy about Cyprus and Italy currently pushing the euro below 1.30US$

N1003U

Thanks for the link. These slides seem hot off the press--the oil price (Slide 13) is quoted as of yesterday.

It seems that the current financial trend at LH is not a good one, and something needs to change...but I wonder if the correct things are being changed...

The plan seems to include significant defensive retreat/retrenchment. Slides 19 (burial of some old mistakes), 23 (ceding of market growth to the competition), 24 (fleet growth below market growth, and possibly well below (note especially trend in fleet size when one excludes non-firm orders)...@:-)

I would like to see the slide that shows how much the arrogant (maybe even ignorant) decision to pursue a strategy of rapid growth and dominance (mergers/acquisitions/network growth)--the same strategy from which LH Group is now retreating as rapidly as they can--has cost LH investors over the past decade...

When you look at cargo carriers, their results are highly correlated with fuel costs. Cargo customers are good at negotiating stable prices so that they can plan for shipping costs. If I remember correctly, Cargo took a pretty big hit last year as well, so the negative trend is a continuation from last year. Nevertheless, cargo seems to typically bring a small but steady contribution to the Group result.

Sometimes one has to have something new to say... :-)

Good luck with that, given the entire improvement is supposed to come from SCORE (amount of cost savings expected), the competitive trends (ability to increase revenue/ticket prices), and the projected size of the fleet (LH is certainly not going to carry a whole lot more passengers over the next couple of years)...

Unless I am missing something obvious, this seems really difficult to achieve.

Interesting, as the Euro (at least vs. the US dollar) was on a general downward trend the first half of the year and then firmed up a bit the last half. A weak euro certainly does not help with fuel and other commodity purchases that are traded in dollars.

oliver2002

It seems LHs intake is split about 60/40 in €/$, plus they buy fuel, finance aircraft, pay fees etc in $.

LufthansaFlyer

Looking at the fine print of the balance sheets, LH seems to be doing everything possible to create a 'fortress' balance sheet.

in other news....

OS released a separate Fiscal report for their own operations and they seem to feel that this year they will finally operate in the 'black'. What a great turn around story that would be.

LX announces 777 order for 6 aircraft to replace A340? interesting shift in loyalty but then again does airbus offer a suitable alternative??

LufthansaFlyer

The little hairs on the back of my neck think that Fuel prices are going to be a bigger problem than they're forecasting so we'll see the strength of their hedges....tiny little thing called inflation may rage into an infection across a lot of balance sheets with this theoretically new-found economic health that everyone is saying now exists....

Even clients are calling in asking for commodities in their portfolio.....which never happens. Its like wild animals fleeing before a storm.....

N1003U

The bigger versions of the A350 are probably competitive vs. the 777, but given the variables involved in ordering the A350, I suspect the decision was based on an earlier and more certain delivery time for 777s. Given trends in fuel costs, replacement of the older A340s is probably a priority.

I suspect also they can lease/sell the 777s if the A350 comes in earlier than expected.

Since the A350 offers similar technologies to the 787, another generation refined, I will be thoroughly amazed if the A350 becomes available on schedule, given recent history from both Boeing and Airbus with new product development...(though perhaps Airbus is in a good position to benefit from the pain Boeing is currently inflicting upon itself....)

oliver2002

The Q1 results came out today...

http://investor-relations.lufthansag...-mar-2013.html

holy moly, depending on how you read it they are at best even steven with 2012.

TRAVELSIG

Yes and "holy moly" is correct.

Rambuster

Load factor still only 76%!
What was the point in removing toilets and installing more NEK seats if you can't sell them?

N1003U

The first quarter "SCORE" does seem a bit below expectations...can LH get out of the death spiral of continued cost cutting (if they bring to successful completion the demotivation of their employees, they are dead) or it it time to find some creativity in the product and generate more well-paying customers?

The weak revenue numbers (compared to the industry overall) tell me that the product is not impressing anyone.

My personal spend on LH is up a bit this year, but only because I had an unusually large number of trips between DE/CH and the USA, and LH has the best route/schedule combination for me TATL. The LH share of my air travel dollars (percent-wise) is down significantly. My perceived premium for LH products is much lower than it used to be.

In this (personal and anecdotal) sense, the financial trends at LH do not surprise me.

I am not sure what the goal is, but LH is succeeding in turning me from a blind LH fanboy into a bargain hunter to/from FRA. That was not the case just a couple of years ago. I was fat, dumb, and happy with the predictable LH service, and excellent (for me) route network.

I think LH started pushing me away when they canned the CAN route a while back (for the life of me I can't understand why LH can't make money on that route at least three days a week), and they completed the job a couple months ago when they sold me a walk-up C fare from PHL-FRA for over 3.000€ and it booked into P (not that I could have attempted an upgrade anyway, because the equipment was a 2-class cabin configuration), and to add insult to injury, it earned me fewer award/status miles than a 1.700€ walk-up Y-fare on the same flight.

LH: Give your customers (even reasonable) value for money, and a revenue structure/loyalty program that is easy to understand, and your financial results will follow!

On the subject of cost saving, this little clip from the report caught my attention:

...Since the beginning of the year, the oil price has fallen slightly
from USD 111/barrel to USD 110/barrel as of 31 March 2013. In
the first quarter, the average price of around USD 113/barrel was
5 per cent lower than in the previous year. At the same time, the
jet fuel crack (price difference between crude oil and kerosene)
was around 16 per cent higher than last year...

I wonder how the idea of buying a refinery and making their own fuel (and selling the excess and by-products) is working out for DL...that struck me as an interesting counter-cultural move...to save money by vertically integrating...while the usual advice it to outsource "non-core" activities...

Does LH have the creativity to try creative things, or are they content with what Booz and BCG is telling them?

N1003U

Good point. When the load factor goes above 80% or so, it starts to get VERY crowded on board (with many SENs complaining about no seat-blocking...)

But at 76% there should still be enough space.

However, with more seats per plane, it is easier to cut the total number of flights and still offer the same number of seats, at a lower cost (i.e., shrink the size of the fleet), AND increase the load factor.

To me the question is: once you start down the road of minimizing passenger space and amenities, how long is it before the passengers ask why they should continue to pay a premium and instead fly U2 (or similar)?

Stated another way, what good is a high load factor if you can only sell tickets at a money-losing price?

I personally don't think that is a road LH wants to go down if they want to survive/thrive. IMHO LH can not and should not try to compete as a low-cost provider. They will lose. That does not mean they don't need to control costs, but it should not be the focus of their business--they should focus on adding value and increasing revenue more than costs. In this area LH has a chance.

oliver2002

They raised capacity by 3-5% this quarter... Note how the report mentions the seasonal high Y config on longhaul.@:-)

N1003U

Is that like a 2-class 343 with 11 rows of C and the rest Y? :-)

TPJ

Not even a word about SN? They are not of LH Group any longer