Yeah. Thank you. Good morning, ladies and gentlemen. Welcome to the presentation of Lufthansa Group's third quarter 2019 results. My name is Dennis Weber. I head up Lufthansa's investor relations activities. In today's call, our CFO, Ulrik Svensson, will review the group's performance in the third quarter and discuss our financial outlook for the rest of the year. Afterwards, Carsten Spohr, our CEO, will present a number of strategic initiatives targeted at improving profitability in underperforming businesses and exploring further opportunities for profitable growth. He'll also start the call with a short introduction. Carsten?
Well, thank you very much, Dennis, and ladies and gentlemen, good morning, and thank you for joining us here from Frankfurt. As mentioned, the Lufthansa Group achieves an adjusted EBIT of EUR 1.3 billion in the third quarter of this year, something I wouldn't have expected myself just half a year ago. Indeed, despite the difficult market environment, our result is only slightly below that of the previous year. After two weaker quarters in the first half of the year, the trend is now pointing in the right direction again. Although we continue to face major challenges in the third quarter, we held our ground well. The headwind again came from, one, the downturn in the global economy, also in our domestic market, and the continued over capacities in the European market.
The result was massive price pressure that made it impossible for us to fully compensate the rising fuel cost with higher ticket prices. Profits have clearly stabilized compared to the first half year. This was a result of, A, reduced capacity growth compared to the original planning, B, the initial successes of the Eurowings turnaround plan with a 40% improvement in earnings, C, the unit cost reductions of more than 2% in the third quarter, 2.1% to be exact at the Network Airlines, and last but not least, we have improved our operational performance, which results in 21% reduction in the cost of flight irregularities. Based on this, we can confirm our financial guidance for the full year 2019. The economic environment will remain a challenging one. That is something that we cannot influence.
It is therefore all the more important that we do our homework and first, continue to improve our cost efficiency, secondly, improve our performance in those business segments that are currently not covering the cost of capital, and thirdly, seize growth opportunities in areas where we are still relatively small, for example, the touristic traffic. I will come back to the development of the individual business segments and the homework in the second part of my remarks. First, I will hand over to Ulrik, who will walk you through the financial results in more detail.
Thanks, Carsten. Let me start my financial review with the Network Airlines, where performance continues to differ by region. Europe continues to be the most challenging traffic region, especially in our home markets corporate demand is under pressure and very price sensitive. Despite lower growth compared to the previous winter season, market-wide over capacities remained also in summer. As a result of this and the economic slowdown, closing bookings were weak, continuing the trend we had witnessed over the course of the second quarter and flagged in July already. Performance in the Americas continued to be split. The Transatlantic business developed very positively, also in the third quarter. Volumes and yields continued to grow, driven by solid demand on both sides of the Atlantic, especially in non-premium.
In contrast to the north, South America continued to be burdened by high market-wide capacity growth and the political and economic situation in Brazil. In Asia, performance in the third quarter was not as strong as in the first half year. As expected and visible at the end of the second quarter already, China weakened due to a decline in group business, weaker corporate demand, and the political situation in Hong Kong. Other Asian markets remained strong, in particular India. The Middle East and Africa developed solidly in the third quarter, especially from a volume perspective. Overall, better long-haul performance only partly offset the pressure in short haul. Total Network Airlines RASK decreased 2.2% in the third quarter and 2.8% in the first nine months.
SWISS continued to be the best performing Network Airlines and kept unit revenue stable in the third quarter and year to date, while declines in their home markets affected Lufthansa and Austrian Airlines. Against this backdrop, we are focused even more on managing costs tightly. In the third quarter, we reduced the Network Airlines CASK by 2.1%, excluding fuel and currency effects. Lower personnel costs and the reduction of irregularity costs made an important contribution to this development. In addition, the negative impact from technical issues at various engine types deployed throughout our fleet was much smaller in the third quarter compared to the first half year. Fuel costs increased 16% or by around half a billion euro to EUR 4 billion in the first nine months.
The increase in the third quarter was higher compared to our expectations at the time of our half year reporting, largely because of the appreciation of the US dollar. Total adjusted EBIT of the Network Airlines declined by 23% to EUR 1.6 billion in the first nine months.
Reflecting a margin of 9%. In the third quarter, profits were only slightly below the previous year, largely because of better cost performance. SWISS even reported a profit increase in the third quarter, while Austrian Airlines continued to be challenged by the tough market situation in Vienna. At Eurowings, performance differed significantly between short haul and long haul. Yields in short haul remained under pressure, although the decline moderated to 2.6% in the third quarter after a 4% decrease in Q2 and an almost 9% deterioration in Q1. The domestic business continued to be a significant drag on unit revenues, primarily reflecting lower demand and high price sensitivity among corporate customers, which are disproportionately important on German trunk routes relative to the rest of the Eurowings business. Remember that Eurowings will focus on short-haul point-to-point traffic only as part of its turnaround.
The long-haul business will be managed separately, as Carsten will discuss in a minute. We will report it as part of Network Airlines from the first quarter of 2020 onwards. In the third quarter, performance in long haul improved from a low base, benefiting from the discontinuation of low yielding leisure routes, better performance on key North American routes operated out of Düsseldorf, and the shift of the first two long-haul aircraft to the Network Airlines. Just a few days ago, the Network Airlines organization took over commercial responsibility for another five Eurowings long-haul aircraft, so this quarter's trend will continue or even accelerate in the fourth quarter. As a result of the operational improvement in long haul, the shift of long-haul aircraft and high single-digit growth in ancillary revenue, the total Eurowings RASK increased 3.5% in the third quarter.
Just considering the short-haul business, the sole focus of Eurowings going forward, it was still down at a low single-digit rate. Unit costs in Eurowings' short-haul business declined at a mid-single-digit rate, driven by significant reduction of irregularity cost and first benefits from the implementation of the turnaround plan which we announced in June, especially in the areas of crew productivity and aircraft utilization. For the overall segment, however, unit costs were flat in the quarter. Negative mix effects from the shrinkage and shift of the long-haul business, which has lower unit cost relative to the short haul, had a negative impact. In addition, MRO and charter costs at Brussels Airlines increased because of technical issues in its long-haul fleet.
Factoring in a slight rise in fuel costs, Eurowings adjusted EBIT increased by 39% in the third quarter, a clear sign that execution of our turnaround plan is starting to show success. Year to date, adjusted EBIT decreased 6% to a negative EUR 104 million with around half of the loss relating to the long-haul business. Turning to the non-passenger business, the logistics business of Lufthansa Cargo continues to suffer from the ongoing decline of the air cargo market, especially on the routes between Europe and Asia. Despite further capacity cuts compared to original plans in the third quarter and substantially cost savings in operations and administration, adjusted EBIT amounted to a negative EUR 33 million in the first nine months. Lufthansa Technik recorded a 10% profit growth in the first nine months. The increase was largely due to the engine and aircraft systems divisions.
Profits of the catering business around LSG amounted to EUR 93 million in the first nine months. Profitable growth in international business, particularly in North America, was offset by effects from the ongoing transformation of the European business. Finally, adjusted EBIT of the other business and group functions declined by EUR 61 million year-over-year, mainly reflecting high and in central functions. In sum, the group's adjusted EBIT amounted to EUR 1.7 billion in the first nine months, 30% below the prior year level. The adjusted EBIT excludes extraordinary effects based on a clearly defined set of criteria. While the net effects of adjustments had been very small in the first half year, adjustments amounted to EUR 77 million in Q3. They are largely related to the impairment of a catering joint venture, primarily serving the Thomas Cook business and of long-term receivables.
Turning to the non-operational items, the group's financial result was increased by the reclassification of U.S. hedging instruments related to the change of fixed aircraft orders into options. This effect amounted to EUR 430 million. Provisions in an amount of almost EUR 350 million made for a tax risk in the second quarter, largely offset this effect. The overall impact these one-off items had on the nine months net profits were limited. Those effects will become cash effective in the fourth quarter. Turning to the cash flow statement and the balance sheet, investments were down slightly in the first nine months due to lower expenditure for new aircraft. Excluding prepayments for aircraft only to be delivered over the next few years, the decline would have been even larger.
Adjusted free cash flow, including the IFRS 16 related amortization of operating lease obligations shown in the financing cash flow, it decreased 42% to EUR 685 million. Operating cash flow was down 9%, impacted by the profit decline and tax payments made in the first half year. It was still related to 2017 and to a lesser extent 2018, when profits turned out to be much higher than reflected in the prepayments at the time to the tax authorities. Net debt increased to EUR 6.1 billion at the end of September. The increase was largely caused by the first time application of IFRS 16. Considering pension provisions as well, financial leverage increased by 1.2 points to 3.0 at the end of September. A third of the increase was due to IFRS 16, another 0.5 points related to significant increase of pension provisions.
Pension provisions reached EUR 7.9 billion at the end of the quarter. The increase was a consequence of the market-wide interest rate decline, which meant that the discount rate dropped from 2% at the end of 2018 to 1.1% at the end of September. Every half percentage point decline increases the pension obligation by around EUR 2 billion. However, plan assets showed a positive performance, limiting the provision increase. In this context, let me highlight two important points. First, we changed almost all pension system in the group to defined contribution plans in the last few years. The deficit will not grow structurally. Second, the growth of pension provision doesn't impact operating profit and cash flows as the year-to-date performance demonstrates.
Because of the absence of funding requirements, cash outflows will remain limited to payments to current retirees, as well as mandatory contribution to plan assets related to defined contribution plans. Service cost and contributions were even below the prior year level in the first nine months due to one-off effects in the prior years. Before concluding my remarks with our financial outlook, let me review our expectations for capacity growth in our relevant markets in the upcoming winter season. In European short haul, we expect capacity offered in our home markets to decline 1%. Market-wide seat growth in our key long haul markets will be very moderate too, although the flat outlook for the North American routes is partly driven by the retreat of the low cost competitors. Growth of the flag carriers on this route is projected to be around 4%.
Looking at our key hubs specifically, we are encouraged by the fact that the capacity of low cost competitors is set to shrink. In Frankfurt, we expect them to offer 31% less capacity compared to the prior winter season. Declines in Munich and Zurich will amount to 20% and 13% respectively. In Vienna, low cost capacity will continue to grow also in the winter, but at a far more moderate pace compared to previous seasons. This is proof of success of our strategy to offer high frequencies and attractive leading fares, especially on contested hub feed routes. We'll continue this strategy based on a route to route approach with adaptations possible on routes when competitors are retreating. The positive capacity trend support our confidence to achieve our full year targets despite the deterioration of economic conditions in our home markets.
We forecast the Group adjusted EBIT margin to reach 5.5%-6.5% in 2019, reflecting an absolute adjusted EBIT between EUR 2 billion and EUR 2.4 billion. For the Network Airlines, we expect the regional trends I discussed to continue also into the year-end. The outlook of a 7%-9% margin therefore remains. It remains unchanged despite the expectation of a slightly higher fuel cost increase compared to previous expectations. For the Group as a whole, we expect total fuel cost to increase by around EUR 650 million, including decline in logistics business, where fuel costs are not hedged and directly passed on to customers. We expect the Group's fuel cost to increase slightly also in the fourth quarter, primarily because of the strengthening of the U.S. dollar. In 2020, however, fuel cost will remain broadly unchanged to 2019 levels based on our current hedging position.
Keep in mind, however, that this expectation may change even though we have hedged more than 7% of our exposure. This is because our hedging strategy is based on options and not forwards. At Eurowings, we update the RASK and CASK outlook for the upcoming shift in the long haul business, which had not been reflected in the guidance for the segment yet. Unit revenues are forecasted to decline at a low single digit % rate in the full year now. Unit cost by 4%-5%. The outlook of a negative 4%-6% margin remains unchanged. We have lowered our expectations for the logistics business based on performance in the first nine months and the outlook for an ongoing challenge market environment. We expect the segment to achieve between 0%-2% operating margin based on a mid-single digit revenue decline.
Finally, we have updated the revenue outlook for the MRO and catering business for the appreciation of the US dollar. In both cases, the margin outlook remains unchanged. Investments are expected to amount around EUR 3.6 billion in 2019. Around 90% of total investments will relate to aircraft and engines. Given the long-term nature of aircraft orders, we are currently reviewing the phasing of future aircraft deliveries, considering the present outlook of more muted market growth compared to historical levels. With regard to the short-term investment outlook, we no longer expect to receive the four Boeing 777s scheduled for delivery next year on time. Investments will decline in 2020 compared to 2019 levels. With this, let me hand over to Carsten, who will update you on our strategy agenda. Carsten?
Thank you, Ulrik. I would like to continue on the financial outlook just presented by Ulrik. Let me start by telling you about our measures to strengthen the business segments, which have to improve their profitability. I would then like to talk about our strategy for the future development of the group. Finally conclude with a topic that has been top of mind for us for quite some time, the responsibility for our environment we are living in. Let me start with Eurowings. Their turnaround is showing first signs of success, particularly in this third quarter. Earnings are up nearly 40% compared to the third quarter of 2018. This shows that signs are moving in the right direction. Our operational performance is also at a consistently good level during the current financial year.
Eurowings is one of the most punctual and reliable airlines in Europe by all statistics available. The capacity discipline of Eurowings is set to continue. We will grow modestly during the next few years. The capacity in 2020 will even be below that of 2019. However, central to the Eurowings turnaround is the reduction of operational complexity and cost. The expansion course of the past years, and obviously the integration of parts of Air Berlin, has come at the expense of efficiency. Especially in Germany, we were, and to a certain degree, we still are too complex. In order to change that, the business model at Eurowings will focus on its core point-to-point traffic on the European short-haul routes. The commercial responsibility for the long-haul routes will be transferred in full to the Network Airlines at the turn of the year.
The discontinuation of unprofitable routes and the phase-out of older aircraft has allowed Eurowings to increase its productivity by 6%. In addition, we have also defined numerous measures to reduce fuel costs by 15% until 2022. We're already expecting a positive result for Eurowings by 2021, though. The long-term goal is and remains a profit margin of more than 7%. Ladies and gentlemen, in this context, let's take a look at our home markets. Germany and Austria, in particular, are currently the seat of a completely irrational price war. Competitors in the lower price segment are operating with irresponsible offers and losing many millions per aircraft in the process. I will say it again, tickets for EUR 10 turn our industry into a target for criticism, and that's rightly so. In addition, this artificially created demand blocks our airspace, which is already operating on its capacity restrictions.
Nevertheless, of course, we will not allow our competitors to force us out of our home markets. They may have succeeded with this tactic in other European countries with weaker home carriers, but they certainly will not succeed against us. The capacity reductions of our low-cost competitors at our hubs in Frankfurt, Munich, and Zurich for the current winter schedules show how successfully we are standing our ground. It is also in the interest of our shareholders that we strongly defend our home markets because they are among the strongest economies in Europe and the world. Our leading position in these markets is the basis for sustainable value creation of this company. Let's turn to Austrian Airlines, which is currently facing the toughest competition, with Vienna Airport fiercely contested. Next year, 32 low-cost aircraft will be flying out of Vienna in addition to our group airlines.
As in Frankfurt, this is partly also the result of fee initiatives of the local airport. As a result of this, Austrian Airlines and Eurowings are repositioning themselves in Austria and working together more closely. Their common goal is to strengthen the Vienna hub and expand the central traffic. Austrian Airlines will thereby assume the full commercial responsibility at Vienna Airport for all flights. The drive to '22, sorry, drive to 25 strategy program is being consistently implemented. This includes the start of the fleet restructuring process this year. The 18 turboprop Dash 8-400 aircraft will be replaced by 10 Airbus A320s by 2021. In addition, Austrian Airlines is working on significantly reducing costs in all areas. Further details will be announced today in Vienna. In total, as of 2021, the airline plans to save an additional EUR 90 million.
Let's turn to Brussels Airlines, which has grown by an average of 10% over the past four years. That indeed came at the expense of profitability. The company will now be restructured with the Reboot program. As of 2022, Brussels Airlines plans to achieve an adjusted EBIT margin of 8%. In order to accomplish this, Brussels Airlines will significantly lower unit costs and reduce administrative expenses. The decision to integrate Brussels Airlines commercially into the Network Airlines also will create further synergies. In addition to these earning improvement measures, we are working on the development and expansion of the airline business. This includes, in particular, the expansion of our touristic segment.
The increase in demand in this area is especially strong. The transfer of the Eurowings long-haul routes to our hubs in Munich and Frankfurt means that we will be introducing another product line with presently 11 aircraft on the long-haul touristic routes. This will allow us to open growth opportunities. We are bundling our long-haul offer that way and flying to new destinations, as is Barbados or Anchorage. The Lufthansa feeder flights would allow our passengers to easily connect to these flights operated under the Eurowings brand. The commercial responsibilities for this operation will be integrated into Network Airlines organization. We are therefore transferring a business model now to Germany that has been functioning very well with SWISS and Edelweiss for many years in Zurich.
The combination of a hub airline on the one hand with a lower cost operating long-haul touristic airline is a profitable addition to our route network, as we have proven in Switzerland for quite some years now. Ladies and gentlemen, we're not only investing in new destinations for our customers, but also in the improvement of the travel experience. We increasing our lounge capacities, and we are tailoring our offers even better to customers' demands. We will also continue to expand our digital services to this end. As of 2020, for example, we will have a consistent non-contact biometric product in Munich, which will save time and money. Ladies and gentlemen, I would like to talk about our other business segments. The development here was inconsistent.
As Ulrik already mentioned, Lufthansa Technik was able to increase its earnings by 10% in the first nine months and showed a very strong performance. The freight business developed differently. After two exceptionally successful years at Lufthansa Cargo, the volatility of the air freight market is once again coming to light. Above all, the trade conflicts between China and the United States and the uncertainties regarding Brexit have had a great impact on demand. However, during the past years, Lufthansa Cargo has positioned itself very well and is able to react swiftly and very flexibly to these short-term shifts. We are further harmonizing our fleet even faster than previously planned. All of the MD-11 freighters will now be retired by the end of 2020. From that point forward, Lufthansa Cargo will operate with a standardized fleet of nine Boeing 777 freighters only.
This will allow us not only to improve our cost efficiency, it is also good news from an environmental perspective. Turning to LSG, the divestment process is going according to plan. In the first step, a contract for the sale of the European business should be signed by the end of 2019. The divesture of the non-European business will then follow in 2020. I can assure you that we have, as always, the interest of all stakeholders in mind here. We are firmly convinced that LSG and its employees will have better prospects for the future after a sale and the resulting new ownership structure. Employees will benefit from the targeted investments of a new owner whose core business will be catering.
Our investments in the Lufthansa Group are focusing much more strongly on the airlines in the future, and we also expect a better onboard product for our customers as a result of the sale. Ladies and gentlemen, a balanced business model determines for many years our actions in all areas. In addition to the interest of customers, shareholders, and employees, we are increasingly consider the balance between society and the environment. Our famous triangle now has an additional dimension. I would like to talk about our responsibility to protect our environment in a little more detail. Even if aviation industry's share in global CO2 emissions only accounts for 2.8%, we still feel obliged to do even more for climate protection. We would like to grow carbon neutrally, reduce plastics on board, and support the development of alternative fuel production.
This year, we will again invest over EUR 3 billion in the modernization of our fleet. Every second week, we receive a new aircraft that reduces CO2 emissions by up to 25% compared to its predecessor. This gives us the greatest possible short-term leverage to fly with as little an impact on our environment as possible. In addition to many other initiatives, we are increasingly investing in the development of alternative fuels, such as synthetic fuels, because they are indeed the only realistic option for largely CO2 neutral flying in the mid and long term. The individual passenger also has the opportunity to contribute by using the option that we offer for CO2 compensation.
In addition to the known and existing CO2 compensation choices, Lufthansa and SWISS will be the first airlines to offer their customers the offset of their CO2 consumption by refueling their flight with sustainable alternative fuels via the Compensaid online platform. This will allow our customers to fly as climate neutrally as technically possible if they wish so. Waste and plastic avoidance onboard also play a key role in our sustainability measures. The aim is to reduce over 50% of today's disposable plastic or replace it with more sustainable products by 2021. As you can see, we are doing a lot. Our progress would be even faster if more funds were channeled into the development of CO2 neutral fuels or in intermodality, so that ultra short flights can instead be operated by railway.
We have just expanded our Lufthansa Express Rail product from and to Frankfurt Airport. We are definitely interested to do more in this field. Therefore, politics must ensure that the increase in the air traffic tax is used for climate protection. Otherwise, the customer will only be burdened without any effect on the environment. The German air traffic tax already has a volume of EUR 1.2 billion. The reform will see it increase to almost EUR 2 billion. Imagine what one could accomplish with this amount were it to be used for targeted investment. If these funds would be invested in the development of synthetic fuels, large scale industrial production would be conceivable within five years. Ladies and gentlemen, in summary, I would like to conclude that the Lufthansa Group performed indeed well in a very challenging environment.
However, it is also clear that we need to further increase our earning levels, and we will. We will do our homework, especially on the cost side. We will open up new markets and tap growth potentials where available to us, and we will continue to develop the group in a sustainable way and place it on stable foundations also for the future. With all these measures and projects, we pursue one goal, to keep the interest of our customers, staff, and shareholders, as well as the society environment around us in balance. We want to be the number one choice for all stakeholders, because that's the only way that we can maintain our successful course in the long term. With that, ladies and gentlemen, Ulrik and I will now answer your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of James Hollins with Exane BNP Paribas. Please go ahead.
Hi, good morning, everyone. Actually, there's three from me, please. The first one is on Alitalia. There's been no mention of this. There's been an enormous amount of mentions you're about to invest EUR 100 million, EUR 200 million in Alitalia. I was wondering if you could confirm on record that you're going to stick by your policy of only investing in Alitalia if it were fully transformed first, i.e., it's not going to happen? Secondly, on full year 2020 capacity, could you give some guidance on where we are, both at Network Airlines and Eurowings? I think you said Eurowings is down. If you could quantify that, adjunct to that, what you'd expect CapEx to be? It sounds like, should we be thinking about EUR 3 billion or less? Finally, maybe just an update on the UFO discussions.
I think you had a meeting with them yesterday and, in fact, all unions. What are the chances after that meeting of these strikes disappearing, which are impacting today and tomorrow? Thank you.
Thanks. I will do the first and the last. Ulrik will answer everything in between. On Alitalia, our position has not changed. We have said numerous times we're not interested to invest into the current Alitalia. We are interested to look at a restructured new Alitalia if it makes sense to us and our shareholders, our staff, and our customers, due to the importance of the Italian market. Nothing new on this, as I just stated. On UFO, there is something new indeed. We had a good talk yesterday with the two, let's say, competing initiatives we have fighting for the votes of our cabin staff. After that meeting, we informed the public this morning that we are now willing to talk to all three of these groups, including UFO.
The aim is to indeed find an agreement with UFO on the arbitration process, which they offered yesterday.
Okay, looking at capacity into 2020, it will be around the same numbers as we indicated in connection with our capital markets day. We're speaking about 2%-3% for Network Airlines. In terms of Eurowings, indeed, it is going to be a reduction. It is too early to say we'll give you more clear guidance, but it will be a mid-single-digit decline for 2020. In terms of CapEx, we estimate to have around EUR 3.6 billion in CapEx this year. It will be a number of hundred millions lower in 2020, but it will not be below EUR 3 billion, as your question was. It's more likely to be around EUR 3.2 billion, something like that.
Okay. Thanks very much, guys.
The next question comes from the line of Jarrod Castle with UBS. Please go ahead.
Thank you very much, gentlemen. Three as well. Will there be any write-downs of the MD-11s as you phase them out, or are they fully depreciated, firstly? Secondly, seems like some good progress with regards to the catering disposal in Europe. Any other thoughts about any other divisions such as, either through disposals or demergers, such as MRO, for instance? Lastly, you're transferring the long haul from Eurowings into the Network Airlines. Can you talk about how profitable that business is or isn't at the moment, and if it isn't, how long it will take to achieve profitability? Thank you.
Yeah, thank you. I'll start with the last two. After the current known initiative to sell off LSG, there is indeed no other current plans on portfolio adjustments. Obviously, we always look at our portfolio as you would expect us to do, but no plans. On the long haul, it's no secret that we are not making money currently on the Eurowings long haul, but indeed, we believe that after a transition year in 2020, we'll be able to make money in 2021. MD-11, Ulrik will refer to.
Yeah, MD-11, there will be some further repayments in 2020, when we are ultimately phasing out these aircraft, and we are in the tune of around EUR 60 million.
Thanks very much.
The next question comes from the line of Daniel Roeska with Bernstein Research. Please go ahead.
Good morning, gentlemen. Three for me. I'll stay on consolidation for the first one. Could you comment a little bit on Condor and what you see going on, what the options for that airline are and how you would think about it? Looking at your intensified, let's say, efforts to pivot towards more leisure travel, would seem that Condor could have quite some interesting capabilities you could use in the group. Any chance for Condor ending up with Lufthansa, and how would you think about somebody else like Wizz or so grabbing them? Secondly, is it right to say that more parts of the Eurowings group are now being controlled again by the individual larger organizations throughout the Lufthansa Group?
If I understand the scenario correctly, there's also some parts in Vienna moving over to Austrian's control. What does that do to the Eurowings set up within the group in the medium term, if bits and parts are moving away from that entity? Then a technical question, maybe for Ulrik, if that's the case on Eurowings and more and more is being controlled, not by the Eurowings people out of Cologne, but other parts in the group, are we to expect some changes to reporting again, reflecting that strategy change also in the numbers? Thanks.
Yeah. Starting with the reporting question. No, clearly, Eurowings will indeed be a separate reportable segment going forward. Of course, only short haul, as we said. The short haul business in itself, of course, a much smaller business than we discussed a couple of months ago, is indeed very much run by the Eurowings management. I think it's more on the long haul side where you are seeing what you were alluding to. In terms of Condor, as we said in the capital market today, there are many reasons why we didn't already in spring acquire the Condor. It's a low-margin business. It has a large CapEx in front of itself. Of course, for cartel issues alone, we could not buy Condor as it stands today.
I guess your question, is there more, whatever commercial impact of other parts of the group on the Eurowings capacity, that was always in line with how we positioned Eurowings. We said this is a second-tier, lower-cost production, and we use it in those markets where the higher cost premium Lufthansa brands or Austrian or SWISS cannot make money. I think this is an ongoing process because also markets change, but indeed, that philosophy has remained the same.
Thanks.
The next question comes from the line of Stephen Furlong, along with Davy. Please go ahead.
Yeah. Morning. Three from me. Can I just go back to Eurowings? Well done on, seems like capacity reductions are certainly helping both you and the market. I think you said, Ulrik, mid-single digits decline in 2020 or maybe something like that, but do you have the ability, if needed, just to keep doing capacity reductions if that's what it takes, maybe frequency reductions to get the business to profitability and then up to a positive margin development? The second thing, just a general question I wanted to ask Carsten on basically consolidation again, but maybe just have a comment on Latin America, i.e. Air Europa and just that market. Thirdly, I just wanted to ask about MRO because I know you said at the capital markets day, no one asked a question on MRO. Another good performance today.
Maybe just talk about your views of that market and that business over the next couple of years. Thank you.
Starting with Eurowings. The major drivers for the Eurowings turnaround going forward is the self-help in terms of cost reductions. It is not that we're going to decrease the size of this business, and then we have a very little fleet, but that little fleet is actually making nice margins. That is not the case. It is taking out complexity, increasing the productivity of both aircraft and the people, and reducing the regularity cost as we already have seen here now in Q3. That is the main driver for it. It's not actually the capacity reductions into 2020.
Stephen, on your question pointed towards me. Latin America, as you all know, being experts, historically, due to the northerly positioning of our hubs, we never had the exposure to the Latin American market as our friends in Spain, in France, or in the U.K. have. Of course we watch with interest what's going on there, but this is not as strategically important to us as it is to our main European competitors. Nevertheless, of course, we grab opportunities like the recent opening of Munich, São Paulo, or our cooperation with Avianca. There indeed an announcement just a few days ago on Air Europa. You know my view. Overall, what our industry needs in Europe is consolidation, we welcome consolidation moves. This particular one raises obviously very interesting questions on the regard of antitrust.
Our lawyers have to look at that not only here in Frankfurt but also in Brussels and Madrid. MRO, indeed, another good quarter as we announced. Industry, as you all know, when it comes to the OEMs, is running on its limits of production capacity, of innovation, of technology, and that alone, I think, shows that our unique positioning in that market is the USP of the Lufthansa Group. We're expanding there all over the world. The more complicated airplanes get, maybe even sometimes too complicated for the OEMs, they surely are too complicated for many airlines, and that's where Lufthansa Technik has its strategic positioning to take advantage of.
Okay. Very good. Thank you.
The next question comes from the line of Ruxandra Haradau-Doser with Kepler Cheuvreux. Please go ahead.
Yes, good morning. Three questions, please. Can you provide some indications on regional premium traffic trends? I think your joint venture partner expects the premium cabin to underperform the economy cabin over the Atlantic in Q4, and Air France-KLM seems to be more cautious on premium traffic as well. Second, what was your experience with the aviation tax in Germany when it was initially introduced? To which extent were you able to pass it over to your passengers in the first year? Third, I'm a little bit surprised by the non-fuel cost performance at Eurowings in Q3. Could you please give us a breakdown between the non-fuel cost performance at Brussels Airlines and the rest of Eurowings in Q3? Thank you.
I'll start with aviation tax. Ulrik has time to look at the numbers for your specific questions. Of course, the ability to pass on any tax depends on the market situation. In those years where the market was tight, we were able to pass it on. When there's overcapacity, there's less a chance to do so. If you look at the overall impact the aviation tax increase will have, my view is it will somehow dampen demand in total, but the relative positioning of the low-cost carriers will be hurt more than Lufthansa with its high share of premium and business traffic. There will be light and shadow of that political decision for us as a company. Our view on a political level, that money should go to really issues which reduce the impact on the environment you heard me speaking about before.
I will now turn to Ulrik for the premium traffic development on the North Atlantic and the cost differences between Brussels and Eurowings.
Starting with the North Atlantic, as you saw in the third quarter, we are still seeing good increases in our yields growing over the North Atlantic, but they are not as strong as they were in the first half year. The trend is indeed trending downwards, but we do expect it still to be positive in going forward in the fourth quarter. That refers to both the premium and in our economy cabin. In terms of the cost trends splitting up Brussels and Eurowings, clearly, the benefits you are seeing here in Q3 is very much coming from Eurowings. At Brussels Airlines, we actually have seen costs going up. I was alluding to some of them. They were MRO costs. They were charter costs because of technical problems in their long-haul business. Actually in the quarter, the two were going in totally separate directions.
Thank you. Could you please give us some trends in terms of premium traffic also to the other regions?
Yeah. Starting with Asia, we are, for example, to China, as I already indicated in Q2, we are seeing a weakening of the trends. Of course, very much driven by the trade war in the world. In terms of Europe, clearly, as I also indicated in Q4, corporate demand is weakening due to different cost-saving programs among large customers. The best region from a premium demand is actually the North Atlantic and the American business.
Thank you. Maybe one more question on Europe. Comparable basis for short-haul yield in Q3 was significantly weaker than in Q2, short-haul yields at constant currency declined more in Q3 than in Q2. Given that the capacity declines that you highlighted in your hubs during the winter flight schedule, what kind of short-haul yield performance should we expect in Q4? Thanks.
We still expect a negative short-haul yield decline in the fourth quarter. We have two important factors working here. We have the capacity reduction of the low-cost competitors in all hubs except Vienna, at the same time as we have the balance effect of a more deteriorating macro. It's very difficult to say which one of these two is going to be strongest, but we expect the trend to continue in the fourth quarter.
The next question comes from the line of Michael Kuhn with Société Générale . Please go ahead.
Morning. A few follow-ups. Firstly, again, on the strike. Can you quantify the cost impact there? Also in relation to the strike, I think one major issue in the negotiations with UFO over recent months was that you doubt their power or their right of representation. Is that an issue for the proposed talks, or can you somehow overcome that, let's say, legal issue? Secondly, again, more, let's say, globally on premium versus economy. Was premium still outperforming economy cabin in the third quarter? Does, let's say, the weakening corporate demand indeed result in an overall outperformance of the economy cabin? Last but least, that was also a topic raised by other airlines. Clearly, you're lobbying a lot, let's say, for not being burdened too much by additional eco taxes, et cetera. Still, again and again, we see those taxes rising.
Do you expect that to change at some point? When could we maybe see some more political support for your industry? Thank you.
Yeah. Maybe I start with the financial ones and then Carsten speak about the more strategic one. Starting with the strike side. Typically, we say that these kinds of strike cost between EUR 10 million and EUR 20 million per day. Now, it makes it a bit more difficult, of course, that we had warning strikes earlier last week. We are having rumors in the market about more strikes from Eurowings today. Even if these are only rumors, they are indeed impacting our bookings. It is, as we stand here today in the middle of it, very difficult to say what this will all in all cost us. That's something we have to come back to. In terms of global premium versus economy demand, it is the non-premium business which is outperforming the premium business as we see it today.
Michael, on UFO, well, obviously, only after last night's summit, we now have decided to reenter talks. This is a very young process. This process, kicked off today, will take time. During that process, we are confident to find a way to overcome the existing legal issues while finding a way to an arbitration, which we announced this morning. On taxes and political support, I'm not that optimistic that aviation will come out of the focus, even though we all know it's only 2.8%. I have hopes for two things, that there is more rational views on where aviation and money going in and out of aviation can really lower the impact on the environment, my favorite topic being synthetic fuels. Also in the relative positioning of Lufthansa, this probably is hurting our competitors a lot more than it hurts us.
They are the two more optimistic views I have. Overall focus on the industry, I think it will continue, though.
Very clear. Thank you.
The next question comes from the line of Neil Glynn with Credit Suisse. Please go ahead.
Good morning. If I could ask two questions, please, both with respect to the short-haul business. Just firstly, on the Eurowings side. I noticed that the net FX gains were up EUR 28 million year-over-year in the third quarter, which accounted for, I think, about half of the year-over-year gain of Eurowings.
Just interested, can you give us some flavor as to whether that was long-haul or short-haul led, or how that splits between long-haul and short-haul so that we can understand the underlying ex-currency developments a little better? Also with respect to short-haul, but on the Network Airlines side, obviously Eurowings' short-haul performance gets a lot of attention, and you highlight the low-cost carrier capacity coming out of your hubs, which is clearly going to be helpful, you would expect. Looking at the yield performance year to date at Network Airlines, I can calculate a few hundred million EUR drag on revenue and presumably EBIT on short-haul within the Network Airlines.
It just prompts a question for me: Over time, can that short-haul part of the Network Airlines piece get closer to breakeven, which could be quite helpful in terms of thinking about the margin potential of Network Airlines?
Yeah. Starting with the Network Airlines yields. Clearly this year, the yield drag has been quite substantial. This is still a positive business, it's not loss-making. Of course, the profits have decreased substantially due to this yield decrease. I think we just have to continue what we have been doing before to constantly take out cost to compensate for this yield decline. It's very much a self-help agenda, that will just continue going into next year as well. In terms of short-haul Eurowings versus long-haul exchange differences, it's very difficult to say how much of that is in Eurowings and how much is in long-haul. Clearly there are the long-haul, where we have the revenue side of it, which is more also external non-euro revenue.
The cost side, of course, is when it comes to the maintenance cost, when it comes to fuel and so on, they are both dollar-based. I think that specific question, we have to come back to you in detail.
Great. Thanks a lot.
The next question comes from the line of Johannes Braun with MainFirst. Please go ahead.
Yes. Hi, good morning. Thanks for taking my questions. Can I come back to cargo? You talked about the measures you have taken to adjust to that weakening market. When I look at the numbers in Q3, I can still see a 9% capacity increase, and a steep decline in the load factor yields, therefore down some 25%, if my math is correct. Can you help me to understand why you increase capacity still currently, despite the significant market weakness? Any improvement on cargo trading in Q4? How much capacity will be actually taken out in 2020 once you have phased out all the MD-11s? Just on the Eurowings restructuring, any new thoughts about which of the two remaining AOCs will be the surviving one? Thank you.
Yeah. On cargo, what we saw in the last month was a significant split between the very weak development on the non-key routes, which very much hurt our belly loads. On the trunk routes, the demand was more or less there. That's why we had to operate our freighters on those trunk routes to create a contribution margin there. We lost a lot on the basically low belly loads on those routes where we cannot take out capacity because it's just belly only. We will see a shift also due to some wide-body changes in the schedule as of this winter on that one, 747, A380 changes. The 777, of course, eventually coming in two years from now, also having a significant impact on that one.
That's why we were not able to perfectly adapt our capacity on those markets that we would like to, because it was belly driven, and we had to maintain some freighter operations on those markets where we could make money. The number of capacity, roughly, was it your question how the nine 777s compare to the current MD-11 fleet? Was that the question?
No, the question was basically how much capacity you will take out in 2020 in cargo overall, once you have phased out the MD-11s.
Yeah. For 2020, there will be around a 9% decline in the freighters alone. Of course, as Carsten Spohr was alluding to, the total capacity is then mitigated by that you have larger belly capacity into next year. That is a bit too early to say exactly how much it will be in total, that I don't have at hand. All the MD-11s, of course, are not going out from the beginning of the year. It is spread over 2020, and some of them are actually going out only at the very end of 2020.
Again, our worst problem in cargo right now are the belly routes. Those leisure routes, which we alluded to before, where we think there is growth potential for us with Eurowings. These, of course, are basically no cargo routes. Not much exported out of Barbados and Anchorage.
The trunk routes that obviously are still performing relatively well, can you be more specific which routes these are?
Well, North Atlantic is very strong. Chicago, Los Angeles, these are the strong routes. South Africa with the German car industry still. It's those typical cargo trunks where Lufthansa has been strong due to the export nature of our economy. Second question was on Eurowings AOC. While it's obvious that the one which is shrinking is the Germanwings AOC, and the one which is growing is the Eurowings Germany AOC. Of course, continuing to be of strategic importance for us will be Eurowings Europe AOC, which will operate outside of Germany. The ones where we had wet lease operations, of course, these wet leases are, as we explained at the capital markets day, there we are moving away and fading it out both at LGW and at TUI.
Okay. Thank you.
The next question comes from the line of Carolina Dores with Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for taking my questions. I have two. First one on the turnaround of Eurowings. If you can quantify how much of it you depend on agreements with unions and how much of it is self-help that you can do it on your own. Second question is, it's just to have an understanding of the trends for the fourth quarter. If I look at consensus, is at EUR 2.03 billion fall for EBIT, which would imply a 16% decline year-on-year. Is this decline, do you think, mainly due to the effect of the strikes? There's some upside from that other than the decline of the strikes? Thank you.
Yeah. I guess if I start with the Q4 numbers. Clearly, the guidance, which is the same as we had announced earlier in the year, doesn't have any strike effect in themselves because, as I alluded to, it's very difficult to speak about what is the strike effect ultimately because of all these unknowns in terms of bookings and so on. We are really in the middle of that as we speak today. It means that the guidance we're giving here, EUR 2 billion-EUR 2.4 billion, we are due to the macro outlook and, of course, due to the strike situation we are seeing now, more towards the lower range of that EUR 2-EUR 2.4. In terms of your second question, was that the Eurowings?
Union.
Union?
I think I can say that we are short of announcing agreements, both with the pilot union and the cabin union on some agreements on Eurowings. They both have understood our strategic directions, where we need to get to, of less complexity, because usually the compromise lies in extending the timeline for that. The major initial restrictions will be overcome soon, and then there will be a phasing of those decisions we are jointly taking. I'm more positive on that than I was probably half a year ago.
The next question comes from the line of Malte Schulz with Commerzbank. Please go ahead.
Good morning, also. Thank you for taking my question. One a little bit more detailed on what's your short to midterm plan on Eurowings long haul in your hubs. Do you intend to keep it on the Eurowings branding, or do you follow what BA doing in Gatwick or also Air France on the leisure routes and rebranded to Lufthansa, but on a high density configuration? Also on M&A activity. You talked already about Condor and Alitalia. Given in the light of IAG's deals, is there also anything you're particularly aiming for, and would you also look into acquisitions or larger investments outside of Europe? On the corporate travel demand, you already indicated that there was some weaker demand, particularly in your home market.
Is it mostly automotive and manufacturing, or is there also some other industries which have lower or show lower corporate travel at the moment?
Well, on your first question, I think it's an easy answer. Surely, we will not operate our second-tier operation on long haul with the Lufthansa brand. Lufthansa brand is a premium brand, and we will maintain it as it's well positioned, and there will be a second brand, which currently is Eurowings. If we ever had plans to change that, I think we would announce it when we change it. Consolidation is similar. I think this is something you do and not something you talk about in public. You know our overall view on consolidation, but you also know that we will not do any kind of acquisition if it doesn't serve our shareholders and our customers in terms of expanding our market reach. That restricts, of course, the options which are there.
Corporate demand in Germany, I think it's no secret that indeed the German machinery industry, and a lot of it depends on the industry in the end, is showing some weakness. We are partly compensating that with good loads from outside in. Finance industry, consultants, that's a very healthy corporate demand we see there. We partly compensate what we are seeing as a weaker core industry of the German production focus.
The final question comes from the line of Andrew Lobbenberg with HSBC. Please go ahead.
Hi there. Can I come back to Alitalia, please? You said you're only interested in buying an Alitalia that is restructured. I'm interested in the detail there, because previously you said you'd only buy Alitalia if it had been restructured. Yet, if we look at the people involved in the consortium of the railways and Atlantia, I don't see anyone with any capability of restructuring an airline, and the only people who could do it would be you. In the past, you said you'd only buy an Alitalia that had been restructured. Has that changed now to you'd buy an Alitalia if you were given permission to restructure it? I think there's a subtle but quite important difference there, because otherwise, I can't see why you're bothering looking at Alitalia at all, because I can't see anyone else will restructure it.
The second question on the 777, are you still confident in 2022? Given everything that plays out at Boeing and the complexities of that with the engines and with the 777 as a derivative product, are you planning for a potential rolling delay on that? Just the final one back on Condor. You said you couldn't buy it for competition policy reasons, given your newfound enthusiasm for long-haul tourism, could you? Would you take the long-haul business from Condor?
Thanks, Andrew. I'll start with the first two. Again, just to be clear, there needs to be a new co, as we always have said in Alitalia, to raise our interest to invest. Of course, those elements of restructuring, taking number of aircraft out, taking part of the value chain out, that, as I understand, is currently discussed in Alitalia, in Italy, and would be a requirement for us, as we have said for months, to look at that new co afterwards. Indeed, I guess also for the new co, people want experience. If that comes from Atlantia, if it comes from Frankfurt, I'm sure there's more than just us who know how to run an airline and make it more efficient.
We believe that the overlap of the markets of Alitalia make it maybe more interesting to have a commercial agreement, which has to come in line with us than to have a commercial agreement with somebody which only serves one common market, which is the Atlantic. That's where I think the Lufthansa maybe expertise comes in. The technical restructuring of taking elements out, people out, needs to be done by the current ownership before we can see ourselves getting involved here. That is what we have said now, I think, for a couple of years, and it's not changed. The 777, we'll actually be in Seattle in two weeks, but of course, if you look at the performance of the OEMs to bring new aircraft to the market in time, of course, we would be ill-advised not to have backup plans for further delays.
Actually, the further delays are to have additional D checks on our 744s, which are partly young enough to have another D check on them, and they would be operated longer if there is further delays or also to cover the delay we already know about.
Your question on Condor, I didn't quite understand your Condor question, actually.
You said you thought you couldn't take it for competition policy reasons, but could you take the long-haul business of Condor? Would you want to take the long-haul business of Condor?
Well, I think that's not even an option for the moment. For the moment, they are selling the business as a whole. I think that's a very theoretical question. That was also the question that you remember last in spring, they were only selling it as a whole, and there were basically no takers of this business. From that point of view, the analysis is the same as it was then.
Can I just follow up, watching on the ground, in Germany, and I'm sure you have a very close eye on what happens there, do you see a lot of interest in people taking it? Or do you think there's a relevant possibility that there are no buyers and that potentially a breakup scenario could play out?
Andrew, we cannot really speculate over what is happening on the ground here. You probably know better than us what is happening. That's nothing really we have anything to add to, I think.
Andrew, that's why I read your newsletter every morning, so I learn from you.
Good. You know about phase III down. Thank you.
There are no further. Yeah. Yeah I understand that is the last one of the series of questions. As always, thanks for your interest to cover us, to discuss with us. Hopefully we were able to get across the message that we stick with our overall idea of our sustainable and balanced business model, which I am, as you well know from the personal context, we had somewhat proud of that this is in the DNA of this company because I strongly believe that's what creates long-term value for all shareholders, my staff, and surely our customers who have given us great ratings over the last couple of years. Also there's no doubt that there are things we have to work on. I think when it comes to the big issue of Eurowings, we were hopefully being able today to show the first signs of success.
I am also glad to see that, especially Ulrik, doesn't spend a day in his office without mentioning the numerous times our strict focus on unit cost reduction between 1% and 2% every year is paying off, also in our results. Is also no doubt that we are committed to improve those businesses which are currently underperforming. Some of them mentioned and discussed today. We'll stick with that and forward that. I think thank you very much wherever you all are. Thanks for your interest and looking forward to talk to you soon in person or on the phone. Thanks.