Ladies and gentlemen, thank you for standing by. I'm Haley, your chorus call operator. Welcome, and thank you for joining the conference call of Deutsche Lufthansa AG. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. Everybody who would like to ask a question may. If you would like to ask a question, you may press star, followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Dennis Weber, Head of Investor Relations. Please go ahead.
Good afternoon, ladies and gentlemen. Welcome to the presentation of Lufthansa Group's 2018 annual results. With me today are Carsten Spohr, our CEO, and Ulrik Svensson, our CFO, who will give you an overview of the group's performance in 2018, as well as present our outlook for the current year. As always, you will have the opportunity to ask questions after the presentation. Carsten, the word is yours.
Thank you very much, Dennis. Good afternoon to all of you. It's now 2018, which we are looking back to, and as you well know, this is the year where we celebrated basically 100 years of the anniversary of our crane, our longtime brand symbol. When we, in spring, refreshed the crane, the entire appearance of Lufthansa and our corporate identity was refreshed. We always said, and we still say that combining this legacy and tradition with modernizing the company, restructuring as we are doing now for years, is, in the end, the unique position Lufthansa can be in, setting it apart from others in our industry. I think it's fair to say today that our results also last year have lived up to this expectation.
As one of the few companies in our industry, we achieved the financial targets we had set ourselves at the beginning of the year. The group's operating profit amounted to EUR 2.8 billion, which is the second-best result in our history. While sales reached a new record high, we were further able to reduce costs. The modernization of our fleet continued with the reception of 46 new aircraft, not only upgrading the customer proposition but also improving our environmental footprint. Capital returns exceeded 10% even after tax, highlighting our strict discipline in allocating cash. These achievements should not hide from the fact that our passengers suffered from far too many delays and flight cancellations last year. Of course, there are parts of our business where we can and will and need to improve further.
Before I'll discuss our initiatives in this regard in more detail, I'd like to hand over to Ulrik for a review of our financial performance. Ulrik.
Thank you, Carsten. A warm welcome from me too. As Carsten pointed out in his introduction, 2018 offered highlights and challenges. The increase of irregularity costs by more than EUR 200 million was one of several headwinds, also including $855 million higher fuel costs, as well as $170 million one-off costs at Eurowings, resulting from the integration of aircraft taken over from Air Berlin. In sum, those challenges were greater than we had initially anticipated. Nonetheless, we achieved our original targets. Profitable growth and our continued efforts to reduce costs meant that we are generating underlying improvements of more than EUR 1 billion. The group's adjusted EBIT amounted to EUR 2.8 billion in 2018, including EUR 122 million positive effect from a change in the accounting of engine overhaul events. Excluding this effect, operating profits decreased 9% and reached a good EUR 2.7 billion.
Historically, the timing of engine overhauls created significant volatility in our quarterly development of costs and profits. This volatility would have further increased going forward, given that we expect engine maintenance costs to rise because of the growth of our business. That is why we decided to capitalize the cost for engine overhaul events as a separate component of the aircraft and to depreciate them over a period of six years, in line with common industry practice. We are convinced that this change provides a better view on the operation performance of our airlines because it distributes the cost of engine maintenance more evenly across the periods. In the long term, this change will have a neutral effect on EBIT. In the short term, however, the change had a positive impact on 2018 profits. In contrast, the accounting change lowered the adjusted EBIT reported for 2017 by EUR 4 million.
In the further course of my presentation, I will focus on performance excluding this accounting change so that you can compare our results with our 2018 guidance on a like-for-like basis. In 2018, regional performance differed significantly. While short-haul was under pressure, yields were up in long haul. Performance in Europe was impacted by a tough comparison base related to the short-term demise of Air Berlin last year, which had led to a surge of demand across all airline groups in the second half of 2017. In the meantime, the capacity that Air Berlin had left has been filled by us and others, the market has become more competitive again.
We respond to this competition by offering high frequencies and attractive prices, especially on routes where we are competing directly with low-cost carriers. This obviously comes at a price, especially when market-wide capacity growth is too high, as was the case in short-haul in winter. Rest assured, though, that even those routes continue to generate profits. Finally, a good third of the full-year decline in Europe was attributable to the mixed effect caused by the disproportionate growth of the lower-yielding Eurowings business. Turning over to long-haul, performance on the North American and Asian routes held up well throughout the year. Weaker performance of the Americas in the fourth quarter was entirely due to South America. Yields on the North Atlantic were up 3.5% in the period. Finally, the Asian routes benefited from moderate capacity growth and the continued healthy demand in all major markets, particularly Japan and China.
Full-year RASK was down 0.5% across both airline groups, affected by significantly weaker performance in the fourth quarter. In line what I just mentioned, the 1.2% RASK decline at the Network Airlines in the fourth quarter was entirely due to the yield pressures in short-haul. Nonetheless, strength in long-haul supported slight growth of unit revenues in the full year. Eurowings performance showed the same pattern. However, the impact from declines in short-haul was even larger because of the airline's far greater exposure to the European market compared with the Network Airlines, and even more difficult comparison base. Unit cost reduction largely offset the revenue pressures. Full-year CASK ex-fuel were down 1.2% across both airline groups, in line with our original guidance. Excluding the one-off costs related to the integration of former Air Berlin aircraft, we would have even reduced CASK by a full 2% in 2018.
The CASK improvement at the Network Airlines of 1.7% was primarily driven by cost reductions and productivity improvements at crew level. In addition, we successfully renewed important infrastructure contracts at better terms and continued to reorganize administrative structures and processes. Ex-fuel unit costs at Eurowings were above the prior year level due to the integration-related costs I mentioned before, as well as the inefficiencies created by the diversity of flight operations. Performance in the fourth quarter was much better, supported by the completion of the technical integration at the end of Q3, as well as the non-recurrence of some other acquisition-related expenses incurred in the fourth quarter 2017. Irregularity cost, that is costs related to the flight delays and cancellations, affected both airline groups. In sum, they were up 70% and amounted to EUR 580 million in 2018.
Fuel costs came in as expected at the time of our last reporting at the end of October. In the full year of 2018, fuel costs increased by 16%, or EUR 855 million, and amounted to almost EUR 6.1 billion. EUR 261 million of the increase were due to the capacity expansion. Without hedging, costs would have increased by nearly EUR 700 million more. Our Network Airlines fully offset the impact from rising fuel costs and kept quite stable. Lufthansa German Airlines recorded full-year profits virtually on par with prior levels, benefiting from moderate unit revenue growth and cost reductions, mainly driven by better crew productivity. This was the best performing Network Airline, benefiting from solid unit revenue growth across all traffic regions and cost reductions related to the renewal of its long-haul fleet.
Austrian Airlines came under increasing pressure over the course of the year because of the significant capacity growth in Vienna and the resulting yield pressure. Eurowings recorded an operating loss of EUR 178 million in 2018, largely explained by the EUR 170 million of integration costs. In addition, irregularity costs more than doubled compared with the previous year. Including the effects from the change in maintenance accounting, the adjusted EBIT at Eurowings amounted to negative EUR 231 million. Our stance on Eurowings has not changed. We are not satisfied with the results of the business in 2018. However, we regard the last year's losses as a price we have to pay for the unique opportunity to further consolidate our home market. In 2019, the turnaround of Eurowings will be a major focus for the group. Carsten will walk you through the key measures in a few minutes.
Turning to our aviation services, all operating companies increased their results in the full year. Lufthansa Cargo continues to lead its industry based on its quality promise that materializes in significant yield premium compared to peers. Supported by further efficiency improvements and the ongoing digitalization of its business model, this drove an operating profit increase of 10% to EUR 265 million in the full year. Lufthansa Technik had a strong finish to the year, so that the full-year profits increased 2% to EUR 425 million. Strong performance in the components business compensated for some challenges in the engine division, where spare parts cost inflation and capacity shortages related to long throughput times created some pressure. Our catering business is making good progress in the transformation of its business model, which focuses on the centralization of the production and logistics setup in Europe and the global expansion of its onboard retail activities.
LSG grew its full-year profits by 74% to EUR 150 million, supported by the fact that we will incur some transformation costs only in 2019 rather than 2018. Finally, the result of the other business and group functions decreased to a negative EUR 186 million. Performance was burdened by significant costs for the modernization of the IT at AirPlus, the capacity expansion in our flight training operations, and group-wide digital project costs, as well as a non-recurrence of a prior year's currency gain. Turning to the balance sheet and cash flow, investments were broadly in line with the prior year level, excluding the change in maintenance accounting. On a reported basis, investments amounted to almost EUR 3.8 billion, including EUR 470 million related to the capitalization of engine overhauls. Keep in mind that operating cash flow increases by the same amount, so the net effect on cash flow is neutral.
The allocation of investments within the group is based strictly on capital return performance. For the group as a whole, return on capital employed after tax declined by 1.3 percentage points to 10.6% in 2018, affected by the decrease in profits as well as the expansion of our capital base. On a pre-tax basis, capital returns amounted to a solid 14.2%. By segment, capital returns differ significantly, ranging from as high as 26% for Lufthansa to negative 8% for Eurowings. This is reflected in the allocation of investments, which are heavily weighted towards the highest returning airlines, Lufthansa and SWISS. The disproportionate investment in Eurowings was largely related to the one-off takeover of Air Berlin aircraft, so it will lower again in 2019. The slight increase of investments was one reason why free cash flow declined to EUR 250 million in 2018.
More importantly, though, operating cash flow was below prior year levels. This was due to the decline in profits as well as the non-recurrence of prior year working capital effects. This reflects the strong growth and booking situation of our airlines following the market exit of Air Berlin at the end of 2017, which did not repeat to the same extent in 2018. In addition, outflows increased because of higher variable compensation and tax payments related to the significant profit improvement in 2017. Costs accrued in 2017, but cash out was in 2018. Because of the lower cash flow, net debt grew 21% to almost EUR 3.5 billion. Pension provisions were up 15% because of the effect that financial market decline had on the performance of plan assets. At the end of the year, provisions amounted to EUR 5.9 billion. Nonetheless, our balance sheet remains strong.
Net EBITDA amounted to EUR 1.8, significantly below our maximum threshold of EUR 3.5. Our dividend proposal of EUR 0.80 per share follows the group's policy to pay out between 10% and 25% of the group's EBIT to shareholders. It reflects our commitment to let investors participate in the success of the group while ensuring that we have sufficient funds to finance future growth. Turning to our 2019 outlook, let me start in our home region, Europe, where an overheating of the market led to pressure on yield in 2018. That's why we made a decision already in autumn last year to curb the growth of our airlines in summer 2019 to 3.8%. In the meantime, we have further moderated our expansion plans to just 1.9%. As expected, peers have followed. We forecast the overall industry to expand capacity only very slightly in summer.
Supported by this moderation in growth, we are confident that unit revenues in short haul will improve in the second half of the year. At the beginning of the year, however, they will still be under pressure, also considering the late timing of Easter, which falls into the second instead of the first quarter this year. Turning to long haul, current bookings indicate a continuation of good demand on the transatlantic route, supported by market-wide supply, which is growing very much in line with the current demand. In Asia, demand continues to hold up well, too. We expect performance in Japan to remain particularly strong. Market-wide capacity growth on the Asian routes is primarily driven by China, where local carriers expand at a significant pace. In an uncertain environment, it is good to know that we have many measures to bring down unit costs in our own hands.
2019 will be the fourth year in a row where we reduced unit cost, highlighting the fundamental change in cost culture and discipline the group has undergone in recent years. Let me highlight some key focus areas. The ongoing modernization of our fleet supports significant operating cost reductions. Staff productivity continues to improve in the cockpit and in cabin. Unit cost at Eurowings will benefit from the non-recurrence of integration costs and the reduction of operational complexity. Distribution costs will be lowered by the increased share of direct distribution. MRO costs will benefit from the phaseout of old engine types and the closer cooperation between Lufthansa Technik and the airlines. Finally, we are constantly improving our processes by implementing the lean concept throughout the organization.
Taking it all together, ex-fuel unit cost reductions will be key when it comes to mitigating higher fuel costs in 2019 and achieving a group-adjusted EBIT margin of 6.5%-8%. This guidance includes a low double-digit million EUR negative impact from the implementation of IFRS 16. We intend to narrow the range as the year progresses. The Network Airlines will grow their full-year capacity by around 4%. Unit revenue should develop stable to slightly down, negatively affected by the pressure in short-haul at the beginning of the year. Unit cost ex-fuel and currency will decline by between 0.5% and 1.5%. Nonetheless, a fuel cost increase of around EUR 550 million will mean that the segment's margin declines to between 7.5% and 9.5%.
Capacity growth at Eurowings will amount to just around 2%, supported by a recovery of short-haul as the year progresses and improvements in long haul, unit revenue should develop stable to slightly up. We will reduce unit cost by 7%-9%, including the non-recurrence of EUR 170 million prior year integration cost. Eurowings will achieve an adjusted EBIT margin around breakeven, even assuming a EUR 100 million higher fuel bill. Turning to the non-passenger business, our logistics business should tie in with a good performance in the past two years and record a 7%-9% EBIT margin on the back of a high single-digit growth. The MRO business is expected to grow at a mid-single digit rate and achieve a margin between 7% and 8%, broadly in line with the prior year level. Catering should generate an EBIT between 2%-5%, 2%-4% EBIT margin.
Finally, the result in other businesses will decline by around EUR 150 million, primarily because of the continued transformation of the AirPlus business, the expansion of pilot training activities, and higher digital investments. Back to you, Carsten.
Thank you, Ulrik. Ladies and gentlemen, we are operating in a challenging environment. Ongoing trade conflicts, lingering budget disputes in the U.S., deep divides between the different EU member states, and the uncertain outcome of Brexit mean that the world economy faces many question marks in 2019. In our industries, many airlines are having financial troubles or have even exited the market in the last few months. The beginning of the year is clearly going to be challenging for us and for others. Capacity growth in Europe has been too high in winter, so yields in Germany and the rest of Europe will remain under pressure as airlines are fighting hard for market shares. However, we expect the situation to improve over summer when supply growth is going to fade, as Ulrik outlined.
Assuming a base case of more moderate global economic growth and no political shocks, solid demand growth will support our performance during the rest of the year. As an airline group, we will always be exposed to the ups and downs of the economic cycle. It's important to have detailed plans in place to react to every possible market scenario, we have them ready. However, our focus will be on actively building our strengths to ensure that we further improve our market position relative to our peers. The group is in good shape to do exactly that. Our two airline groups, the Network Airlines and Eurowings, address distinct customer segments in Europe's strongest economies. They form the core of the Lufthansa Group today and in the future. All other businesses need to demonstrate that they can create synergies with this core.
This is evident with the logistics business, where Lufthansa Cargo uses the bellies of our commercial fleet in addition to their own freighters. This is also the case to our MRO business, which benefits from the access to new technology provided by the airlines in return for its contribution to maintaining a world-class fleet. In contrast, the synergies between the airlines and our catering business are smaller. That's why we are open to pursuing different options for this business. This process is completely open in terms of its timeline and outcome. We will do what is right for the future of LSG's business as well as all stakeholders involved, customers, shareholders, and our employees. With Lufthansa, we own one of the world's strongest aviation brands. Various rankings do speak a clear language in this regard. While not the only factor, a strong brand starts with a strong product.
According to Skytrax, which rated us the only five-star airline outside of Asia a good year ago, we do have the best product in Europe. Importantly, customers share this view as the latest Passenger Choice Awards and our measurement of customer satisfaction confirm. It is therefore key to the health of our brand and future economic success to maintain an edge over our competition by offering the best product in the market. By introducing more than 160 new product elements, services, and digital innovations in the next two years, we will make sure that this is the case. As part of our product innovation strategy, we strive to offer an even more individual service to our customers, considering their needs differ significantly from customer to customer and from occasion to occasion.
A frequent flyer on a business trip will appreciate other services and aspects of our offer than a family going on holiday. That is what we call New Premium. Let me outline a few measures which will put this promise into practice. We have just started a comprehensive renewal of seats and cabins throughout the entire Network Airlines fleet. In a few days, for example, we will start receiving the Airbus A321neo with new ergonomic seats and internet on board. Above all, we will launch a new business class when we receive the new Boeing 777-9s in summer next year. We will expand and upgrade our lounges, especially in major hubs. We will offer more choice in our food and beverage offer. We invest in digital services along the customer journey.
This includes the launch of chatbots to facilitate the communication with our customers and the expansion of internet on board. The modernization of our fleet goes hand in hand with this product drive. In 2018, the short-haul fleet received eight new A320s, including six Neos and 13 new C Series, which we put in service at SWISS. 11 used and six leased aircraft primarily related to the takeover of former Air Berlin planes. The long-haul fleet was upgraded by adding six new A350s and two Boeing 777 aircraft. The order of 40 new aircraft announced yesterday is another important step in this regard. The addition of 20 A350s and 20 787s between 2022 and 2027 will allow us to replace inefficient four-engine aircraft, for example. This relates to A340s in particular, but also the six A380s, which we decided to divest.
Besides the improvements of the customer experience on board, the rollover will drive significant cost and carbon emission reductions. Obviously, the new models consume around 25% less fuel compared to the aircraft they are replacing. In total, we intend to discontinue seven aircraft types until the mid-20s. The complexity of our long-haul fleet will decrease significantly. In the long term, it will focus primarily on the A350, the 777, and the Boeing 787. The commercial success of our premium product depends on our ability to convey its benefits and quality promise to our customers. We take great care to make sure that our offer meets the individual demands of our customers, so we do not compete on just price. The presentation of our offer must adhere to this principle.
We were a front runner in the adoption of the new IATA distribution standard NDC because we wanted to overcome the limitations of the traditional GDS-based distribution, including its primary focus on price comparison. NDC allows us to offer customer greater choice and a more personalized offer. For example, NDC allows us to understand whether a customer travels on his own or with his family, so we can give him the choice of products that will make his life easier, be it lounge access and free Wi-Fi for a business trip or extra baggage of pre-booked seats for a holiday trip. We expect this to grow our ancillary revenues, which currently account for around 8% of traffic revenues. Thanks to the expansion of NDC, the share of direct distribution has increased steadily over the past four years.
In the month of December, the number of bookings made through direct channels, our own websites such as lufthansa.com, swiss.com, et cetera, as well as corporate customers and agents connected via NDC, exceeded those made indirectly through GDS for the first time in history. In the full year of 2018, direct distribution accounted for around 45% of total bookings, up from just 30 in 2015. In 2019, we will further capitalize on this development by further rolling our continuous pricing. Over the past 12 months, continuous pricing in certain NDC-based distribution channels and on certain routes yielded some very positive effects on RASK. We will now expand continuous pricing to drive volumes where price gaps have been too large in the past due to the GDS implied limitations of just 26 booking classes. The relaunch of our airline website will be an important step in this regard.
We will harmonize the IT backbone of the lufthansa.com, swiss.com, and austrian.com websites so that we can offer continuous pricing and expand the offering of ancillary revenues. At this moment, we are in the midst of beta testing the new SWISS website. It will go live once we have incorporated all customer feedback, then followed by the Austrian and Lufthansa websites. 2019 will also mark the year of the Eurowings turnaround after a difficult 2018. With the takeover of 77 aircraft previously operated by Air Berlin, Eurowings made an unprecedented growth step, especially when considering that we did not take over a fully operational airline, but a jigsaw of slots, aircraft, and crew. The technical integration of the new aircraft took longer than expected, and Eurowings suffered too many delays and cancellations in summer. This is why our first priority in 2019 is to regain operational stability.
While we don't expect ATC and other external factors to improve materially, we implement a number of measures which will improve on-time performance. The resulting reduction of deregulation costs is a key element of our ambition to reduce CASK Ex-Fuel in 2019. Most important, though, we will improve crew and aircraft productivity significantly. Going forward, we target to operate just one flight operation per base so that we can allocate resources more flexibly and efficiently. The recent sale of LGW to Zeitfracht, a Berlin-based logistics company, was another important step in this direction, especially so as the divesture of all Dash 8 aircraft has greatly reduced fleet complexity. Excluding the non-recurrence of EUR 170 million of costs related to the technical integration of former Air Berlin aircraft, we expect Eurowings CASK Ex-Fuel to decline at a high single-digit rate in 2019, continuing the progress we made in prior years.
We plan significant changes to the Eurowings long-haul business. In October, Eurowings will start offering flights to popular leisure destinations such as Barbados, Mauritius, and Windhoek from Frankfurt. As a result, the majority of Eurowings long-haul business will be operated out of Frankfurt and Munich going forward. Similar to Edelweiss, which successfully served leisure destinations out of Zurich, we expect Eurowings to benefit from the feeder traffic in our two German hubs. Lufthansa will market the Eurowings routes under a code-share agreement so that we tap the disproportionate growth in leisure long haul as effectively as possible. We are confident that bringing together the best of two worlds, Lufthansa sales and marketing power on the one hand and Eurowings competitive cost base on the other hand, will improve the profitability of Eurowings long-haul business. At Austrian Airlines, we achieved the turnaround already some years ago.
An influx of low-cost competition at Vienna Airport is now challenging the progress we have made since then. It is obvious that this will put yields under pressure among all players involved. Austrian Airlines will defend its leading market position by expanding and streamlining its short-haul fleet, adding 10 A320 Family aircraft while retiring 18 old turboprop planes, latest by 2021. On balance, the flight offering from Vienna will be expanded by more than 10%. Consequently, the route network will focus even more on the hub in Vienna going forward. Routes connecting the provincial capitals in Austria with destinations in Germany will be taken over by other group airlines over time. The long-haul network has been realigned successfully as part of 2018-2019 winter flight schedule already, including the discontinuation of unprofitable routes such as Havana, Colombo, and Hong Kong. In turn, the offering to North America was expanded.
The strategic program is backed by additional measures to improve cost efficiency, in particular when it comes to simplifying and digitizing administrative and operational processes. Considering also the closure and relocation of local bases I just mentioned, we intend to achieve mid-double-digit million EUR cost savings in the next two years. Ladies and gentlemen, tying it all together, we operate in a structurally growing industry. Quoting the last IATA forecast, passenger growth should average at around 5% over the next seven years. Growth rates should be similar in our home markets, which we are the clear market leaders. Increasingly, though, this growth is hitting the limits of the European aviation system, as we painfully experienced in summer last year. Capacity constraints at airports, air traffic control, and in airspace will inevitably limit the pace of supply growth going forward.
Assuming that existing overcapacities, moderating global growth, and fuel price volatility will further propel industry consolidation in the next few years, the Lufthansa Group is well-positioned for long-term profitable growth, even more so as we are continuously streamlining our cost base. Thank you for your attention. We'll now be happy to answer your questions.
Ladies and gentlemen, at this time, we'll 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. The first question is from the line of Jarrod Castle of UBS. Please go ahead.
Thank you. Good afternoon, everyone. Three if I may. Can you just give some more color on your margin guidance of 6.5%-8%? As you said, you'll narrow the range, but at the moment, are you more concerned about the pricing environment or, I guess, your ability to achieve cost targets? Secondly, just on M&A
Obviously, a number of reviews from competitors in terms of what they want to do, some on the tour operator side, some more direct competitors. I guess you said that you want to keep the balance sheet very strong to take into account opportunities. Should these opportunities not result in anything, would you look to give more back to the market? Just lastly, if you could just give a bit more color in terms of capacity by brand. I think you've given some flavor, but if you could just give a bit more in terms of SWISS, Lufthansa, Köln, Austrian, et cetera. I think you gave Austrian, thanks.
Thanks for the question. Starting with the margin, 6.5% to 8%. Indeed, where the risk is on the RASK side, as we indicated, we estimate that the sum of the trends we saw towards the end of the last year is going to continue into the beginning of the year. When it comes to the cost targets, basically, as you've seen over the last three years, we are basically reaching our cost target every year, and we expect to do so as well in 2019. On that aspect, we get more like a normal engineering business where you are getting your efficiency out every year. I feel very happy with that. When it comes to the M&A and the balance to return funds to the shareholders.
Of course, in the end, if we are not able to consolidate the European market, obviously we will, at some stage, start to have a discussion on how to return money to the shareholders in form of extra dividends or whatever way it might be. I think that would be very sad, however, if that would be the conclusion. I firmly believe that a consolidated Europe is going to be a much more profitable market. In terms of capacity growth by brand, overall, 4% for the Network Airlines. Lufthansa is around 4%, SWISS is a bit more, and Austrian is a bit less, and it's 2% for Eurowings.
Thanks very much.
The next question is the line of Stephen Furlong of Davy. Please go ahead.
Good afternoon, gentlemen. I'm just interested in your comments about, first of all, the short-haul market and maybe the revenue environment's improving. Do you see that just from where you see the market capacity growth situation? Is it really you feel probably from peak summer onwards or even going into next winter, given all the problems and failures, Germania, et cetera? The second question would be on Eurowings. I noted your comment that the strategic stance is unchanged. Would it be fair to say you still feel that Eurowings is set maybe in the next two to three years to have a profitability level near your prime competitors? Thank you.
Starting on the short-haul market. I think that we are indeed speaking about peak summer. As you remember, we have tough comparisons as well, both in the first quarter and the second quarter of this year. The question, of course, is when is this reducing capacity growth biting? I think we are starting to see the biting from a yield point of view in the second half of the year. Your second question was about Eurowings.
Obviously, you're targeting break-even this year, do you think that the longer-term plan remains that it can get margins up to near where competitors are over a three, four-year period?
We see no reason why we should not get to the levels of some of our competitors, like Eurowings or Vueling. There is a very interesting market in our home market, specifically in Germany, of course. In the same way, we have clear cost reduction targets and actions going on how to get there. I think the delta between the two should be a margin very much in line with our peers. Most of that, of course, is within our own hands. When it comes to cost, that's much easier than to change your yields.
Understood. Thanks Ulrik. Very good.
The next question is the line of Damian Brewer of Royal Bank of Canada. Please go ahead.
Good afternoon. It's Damian Brewer from Royal Bank of Canada. A slightly different balance sheet. Two questions, please. First of all, coming back to Eurowings. If I strip out the EUR 170 million, you're at a -1.4% margin in 2018. The ambition for 2019 is 0%, really 140 basis points improvement. What is it that you see beyond 2019 that over a two to three-year view would allow you to achieve those sort of 8%-9% margins of some of the other low-cost airlines? What accelerates within the process that isn't happening in 2019? Secondly, and sorry for a slightly prosaic question, but I noticed AirPlus in particular was an equivalent of about a EUR 62 million EBIT decline year-on-year in the year. Can you talk a little bit more about what happened there, and particularly the IT investment?
Does that decline and pressure continue into 2019, or does it revert back to its more normal levels of profitability? Thank you.
Starting with the Eurowings and what we are doing there. The majority of the improvements within Eurowings is all about productivity, both in aircraft and in stops, flying stops. Clearly, in 2019 as well, there is a swing of having less irregularity cost. We have a number of actions to reduce the irregularity cost, which was quite substantial. It was actually EUR 180 million for Eurowings in the year of 2018. In terms of long-term, however, as we all know, it will take time for Eurowings to get to basically one AOC in each base. Before you do that, there will be a tail of different activities which will only bite one or two years later. I'm confident that there is the cost measures to be made to get to the kind of EBIT levels we spoke about with an earlier question.
In terms of AirPlus, there will be continuing IT costs going into the business in 2019. We will not get back to the EBIT levels you saw in 2017 already this year.
Okay, thank you. When do those IT costs roll off?
Into 2020.
All right. Thank you very much.
The next question is Marlijn Michels of Societe Generale. Please go ahead.
Good afternoon. Two follow-ups on guidance for the Network Airlines. You're guiding for 7.5%-9% versus 10.7% last year. Maybe you could give us an idea on the performance by airline maybe not quantitative, but qualitative, especially Austrian looked pretty bad in the fourth quarter. Do you expect Austrian to be profitable in 2019? One on indebtedness, which obviously went up in 2019. Do you expect to reduce net debt over the course of 2019? One last question on regional performance, knowing it's a smaller segment for you, but LATAM performance was pretty bad in the fourth quarter looking at yields, whereas competitors spoke about some signs of improvement. What was the reason there, and what do you expect there over the course of 2019? Thank you.
Starting with the Network Airlines, we expect Lufthansa and SWISS to be fairly stable, while Austrian indeed is going to be the operation where we see the largest pressures. We have seen, of course, the strongest increase of low-cost competition in Austria. There are a number of different activities the Austrians are doing to fight their market share, and we believe very much long-term in the Austrian market, and we will basically continue to hold our turf there. There will be pressures on profits, clearly. Indebtedness in 2019 will be not very different from what it is today. Regional performance. We see, of course, in Brazil, there is some political pressure.
Brazil has, as we indicated earlier, been one of the drivers for the negative yield development in the fourth quarter for South America, and that is probably going to continue as well when we go into the beginning of 2019.
Will Austrian be profitable in 2019?
I am not really indicating anything for each individual airline, but profits are not going to go up.
All right. Thank you.
The next question is Neil Glynn of Credit Suisse. Please go ahead.
Hello. Neil Glynn from Credit Suisse, to put it the right way around. If I could ask three questions, please. The first one, it hasn't been touched on before, the margin focus within the group has been ramping up through previous presentations. I think this is the first time you've actually provided guidance in this way on an annual basis, which to me suggests a little bit more ownership of the profitability outcome. I'm just interested to what extent does this change steering and returns focus within the group? Does it shorten conversations and meetings by simplifying your focus, for example? Second question, again, on Eurowings. There's a big long-haul reorientation in Eurowings in 2019. I'm just interested in your thinking on your ability to achieve Network Airlines-type margins with a long-haul, low-cost platform over time.
Can you point to any numerical evidence that suggests this is possible at this point, or is it still a bit early to think that way? Finally, on distribution, you've mentioned direct bookings over 50% in December. To what extent is this shift driven by the German and European markets, and can you provide any detail on how this is actually helping you outside of Europe, which I guess is more difficult to achieve? Thank you.
Thank you. Starting with the margin focus. I think you're absolutely right, gradually, we are indeed getting very much more margin and return on capital employed focus, which, of course, the reason why we showed it to you as well for the first time, how the different return on capital employed is developing per entity. I think the whole Lufthansa has, over the last couple of years, become much more driven by the classical KPIs, I think this is something we are discussing much more in our different management meetings and also making sure that we have remuneration tied to it. I think this will ultimately long-term help. In terms of long haul, Carsten, is that something you are happy to answer?
Sure. Very important, we never called Eurowings a low-cost long haul operation, because I don't really believe in low-cost long haul. What we have there is what we have done successfully many years in Zurich. We have a second product line running on more leisure-oriented routes, we now combine that, as in Zurich, with the market and marketing power of the Network Airlines and the feed potential with the lower cost operation of Eurowings, obviously operating in those markets. Historically, that has been done in Lufthansa by Condor before we sold them. I think we saw a little gap there the last years, finally we have the right platform to do it. Basically, the best practice is Zurich Edelweiss, which is, in terms of margin, sometimes higher on some routes than the SWISS margins because you have just much better cost structures.
We're not there yet with Eurowings, but I can see that happening in some of the upper-end leisure markets like Mauritius and Maldives. If you've ever flown there, you know what the yields are on these routes.
Could I just jump in with one of the questions we had earlier regarding the financial debt? We indicated the financial debt will not be very different in 2019 compared with 2018. I just want to point you to the fact as well that next year, well, 2019, we have the implementation of IFRS 16, it's one of the backup pages in your presentation. With that, we will increase our debt, which is just an accounting thing. It's not a real debt increase of EUR 2.4 billion, that's, of course, important to take into account.
The next question is from the line of James Hollins of Exane. Please go ahead.
Hi, good afternoon. First one was on CapEx for full year 2019. Clearly, you talked about 8%-10% of revenue before. Does the accounting change mean that that 8%-10% needs to change? Also, maybe just give us a hard figure for what you expect CapEx in the year. Secondly, just looking at the shorter term, obviously, you guided Q1 being fairly horrific as is everyone. Just looking at H1 as a whole, is the current performance of long haul enough to offset that short haul? Would you expect RASK for the group in H1 to be down? Finally, clearly you've got Investor Day coming up. I was wondering if you could give us a heads up on some of the themes you expect to talk about, if you can. Thank you.
Starting here at the bottom on the RASK. Indeed, RASK will be much more under pressure in the first half-year. So it's not only a Q1 effect, it will be there for the second quarter as well, while then in the second half-year, we would see a much stronger RASK. Overall, we have to look at the RASK will be in line with our guidance, but with quite a big split between the two different periods. Our CapEx number for 2019 is EUR 3.6 billion. Of course, the EUR 500 million we have now in extra maintenance capitalized cost will indeed increase our CapEx numbers going forward. It will, of course, have absolutely no impact on our cash flow. It is just an accounting change.
We will go a bit more into the details of the CapEx when we meet at the Capital Markets Day. What we will give you much more detail to when we meet is, of course, how the network airline market is developing, not only short term, but very much long term as well. How we see the infrastructure both on air and on ground. How ultimately that will benefit Lufthansa. Of course, the turnaround of Eurowings is a very important topic, which we will cover here then.
Can I just clarify, therefore, I know there's an accounting move from one slot to another, but in terms of modeling the CapEx, I should be thinking about 4.1, right?
No, sorry. The 3.6 was already included in the 500.
Okay. Fine. Thank you very much.
The next question is from the line of Johannes Braun of MainFirst Bank. Please go ahead.
Yes, hello. Thanks for taking my questions. I have three. First one on free cash flow, which has been down last year quite significantly. Obviously, you already gave the reasons being trade working capital and also tax payments. If I look into your cash flow statement, we have a EUR 1 billion hit from changes in other assets and liabilities. Just wondering if you could give some further explanations on that and to what extent this will turn around this year, and then maybe also give us a rough free cash flow outlook for this year. Given your earlier comments on indebtedness, I guess free cash flow should be around EUR 400 million-EUR 500 million for this year. Secondly, if my math is correct, I think cargo yields were down 10% in Q4.
Obviously aware of the ambitious previous year base, any indication you can give us for the trend into the new year would be helpful. Lastly, it was reported that Qatar has received full access to the European skies. I think also there's some discussion whether Emirates will get the same rights. Just wondering how that can be. Obviously, that is, I guess, against your lobbying efforts to restrict traffic rights also going forward for the Middle East carriers. Any thoughts on that? Thanks.
Thanks. Yeah. Starting with the free cash flow. Indeed, there were a number of different reasons, some of those reasons I mentioned are indeed included in that, so to say, change in other assets and liabilities you are referring to around EUR 1 billion. Clearly, we have the change in the variable compensation. Of course, there is an element of that there were some one-offs in terms of cash in 2018, which would not be repeated. There were certain VAT we expected back from the government, which didn't come at the end of the year, will come now in 2019 as well. There were some up-front payments for build-up of engine and maintenance and so on. We don't do a free cash flow guidance as most airlines are not.
It's clear that the free cash flow we saw in 2017 is not something we are repeating here in 2019. If I would give you any guidance, it's more closer to 2018 level compared with the 2017 level. That's, I think, the only guidance we can give at this stage. Cargo. Yeah, Cargo had a fantastic 2018, you are right that the market now towards the very end and the beginning of 2019 is starting to be a little bit weaker. It's too early to say. As you know, visibility in cargo business is very short. It's too early to say, are we seeing a trend or is this a temporary dip? Carsten, do you want to speak about Qatar?
On Qatar, I think it's important that there's no open skies with Qatar unless the European Commission has assurance that there is a fair trade underneath. Don't ask me how the EU Commission will judge, measure that, but I promise you that governments like the German government and others will make sure that that rule is enforced, because otherwise, this would have been an open sky agreement where one side had given something, the other side had received nothing. What I hear is that the talks between the UAE and the European Commission have been disrupted because of a huge gap of interest. I'm not worried that there will be open skies with the UAE at all.
Thank you.
The next question is the line of Andrew Lobbenberg of HSBC. Please go ahead.
Hi there. Can I ask, please, about the structure of Eurowings, in terms of how it's being steered? I think previously there was the idea that the short-haul business was being run by Eurowings out of Düsseldorf, and that the long haul was being run out of Brussels. As you move Eurowings long haul into Frankfurt and indeed grow it out of Munich, to what extent is that structure appropriate? Secondly, can I ask about premium revenue trends? Obviously, you seem fairly confident about trading on long haul, which would seem to suggest you're happy with the outlook for premium travel, and yet the macro environment is certainly very uncertain. How much confidence have you got around that? No one else has asked it, but it's fairly obvious, but can you make any comments about what your thinking is in the context of Condor?
On the first issue, basically what you are saying is still correct. Düsseldorf, by the way, is Cologne, that's where the headquarter of Eurowings is, and long range will be managed out of Brussels. With the exception of those aircraft who more or less operate on behalf of the main airline, the Network Airlines. Which even initially includes the wet lease in the summer of next year going forward. We have a different commercial model, which is more the model of Edelweiss, where there is no wet lease required, but still the commercial control is done by the commercial team of the Network Airlines. That is at this point 7 aircraft. Can we think about growing those aircraft to a more substantial fleet? I think that leads to your last question. It will very much depend on the outcome of the Condor disposal.
We believe there's usually, like, a 15% need for leisure traffic out of the hubs. That's what we have in Zurich with Edelweiss. That's what we see in Frankfurt and Munich if you combine the airplanes of Condor and Eurowings. Assuming we'll, one way or another, to get hold of Condor, be it through an acquisition, be it through a bankruptcy, that could be the number of airplanes we could end up with in Frankfurt and Munich. Outcome of Condor, I cannot tell you. Is there really somebody who buys it all as they were hoping for? I find that hard to imagine. Could we buy all of Condor, at least, including the short range? This will very much depend on antitrust concerns. Will the airline be broken up? I have no idea.
If somebody would want to do it against us, I think it's very unlikely because there is more than 30% fleet on Condor airplanes by Lufthansa short haul. I don't think that anybody could operate that against us out of Frankfurt or Munich. We are quite relaxed.
Answering your question on premium revenue trend. Yes, indeed, that is holding up well into the long-haul market. There we have not seen yet any trend of worsening economy impacting travel, of course could happen, but it's not happening yet.
Okay, thank you.
The next question is from Malte Schulz of Commerzbank. Please go ahead.
Hi, good afternoon, and thank you for taking my question. Mr. Klein already answered. We are already on the topic of M&A. I'm particularly interested to what you also have to say on the Alitalia rumors, that easyJet Delta solution might not come through and that there might be something local again. Is it something where you would then become active, or do you generally see it as a preferable option as Italian solution's probably a weaker one than a combination with Delta and easyJet?
Well, on this, our position hasn't changed, whereas I read something new in the Italian media every day. We believe we can only do something with a new Alitalia in a restructured fashion, and we don't want to be next to the government being owners. I never understood what easyJet and Delta would do jointly. easyJet wants slots in Linate and Delta wants to protect their joint venture on the North Atlantic. I don't understand how that would be a joint offer creating value, but it's up for the Italian government to decide. My personal view is, with the current government, it's difficult to find a rational solution. Even the Italian local solution, if it doesn't fulfill our two requirements, for us wouldn't make a difference. It's getting smaller every so.
Okay, thanks.
The next question is from analyst Penny Butcher of Morgan Stanley. Please go ahead.
Good afternoon, everyone. two questions from my side. One is to come back on the free cash question. Apologies, Ulrik, but I think it would be a bit helpful when you mention the one-offs that I guess were effects in the 2018 year. Could you itemize them by size? I guess we're working out that some of these are quite large, I guess, such as the inflows from the Air Berlin effects in Q4 2017, that I guess helped with forward booking receivable, trade receivables in that sense, or prepayments in that sense. I think it was also mentioned earlier this morning that there were one-offs related to pension contributions and you mentioned the maintenance elements as well. Is it possible that you can size those in any way, just so we understand what that effect will help in terms of the 2019 free cash?
My second question relates to, I guess it's usually asked, but I don't think we've got there yet. Relations with Fraport specifically, particularly in light of, if you move ahead with anything on the Condor side, obviously that potentially increases, again, your share at Fraport specifically. What is the latest outlook with regard to the updates on fees and how that profile might look into the medium term? Thanks.
Okay. I start with the cash flow. Well, Carsten is actually prepared already for the second slide. Thinking about the cash flow while
Comes to crop right away. Yeah. Unfortunately, we have now talked two and a half years about the three topics you know: cost, quality/punctuality, and how can we intensify the way we work compared to Munich. Talks are constructive, but very, very slow. We basically took the next decision. As you know, we have announced today to move two more A380s next summer from Frankfurt to Munich. We have decided to replace 744s by smaller 777s. We also at this point are not moving ahead with the high number of 777Xs as we have intended before because we're probably moving more towards smaller aircraft for the hubs in Vienna, Zurich, and Munich. We are now at a point where growth is basically only happening in the other hubs, but in Frankfurt. The exception was this summer for this month.
Unless Fraport significantly reduces their fees and improves the quality on behalf of the customers, we'll just make it basically reduce the aircraft size one by one and maintain our slots, of course, in the portfolio. We even have moved now Air Canada to Frankfurt again to safeguard slots which were formerly flown by A321, which we have moved to Munich.
Speaking about cash flow. We spoke about earlier the one billion which we had in change in other assets and liabilities. Indeed, in that number, that's around one quarter, which is a one-off effect. Of course, what is impacting the cash flow as well is just the pure fact that the results are lower. Our earnings before tax is EUR 375 million lower in 2018 compared with 2017. As can be seen in the cash flow statement, the actual higher tax payment is around EUR 280 million higher in 2018 compared with 2017.
That's great. If I may ask just one quick follow-up then. In terms of the overall trade working capital, a broad expectation for 2019, assuming the growth that you have talked about capacity-wise, the expectation would be for that sort of trade working capital development to be more stable as well on a year-on-year basis, because you won't have the one-off effects of the Air Berlin boost?
Well, as we stand here today, that would be correct. Of course, I guess the reason is that none of the airlines are really giving any free cash flow guidance is that booking patterns can quickly change. Of course, that does indeed change the working capital, as we now clearly can see when we compare 2017 and 2018. As we stand here at this very second, you're absolutely right.
That's great. Thank you very much.
The next question is the line of James Goodall of Redburn. Please go ahead.
Yeah. Should we take the next one?
The next question is the line of Nuala McMahon of Goodbody. Please go ahead.
Hi, guys. Just three questions from me. The first is on the guidance outlook for group revenue to be mid-single digit growth. Given what you're saying for the Network Airlines and Eurowings between the two, pricing should be down, even more moderate level of pricing. I'm struggling to get unit revenue growth at mid-single digit 5%, and it looks more to be more 2%, 3%. I'm just wondering, is there something I'm missing there? Is it being offset by a better performance in ancillary? My second question then, which leads on from that, on the ancillary side, you say it's 8% of overall traffic revenues. I'm just wondering, what are your ambitions for what this can grow to? Secondly on that, you say direct customers are now 52% with continuous pricing only coming in this year.
What are your expected yield benefit from having now over half your customers coming direct to your website? The last thing, Carsten, is just your approach to M&A. I'm just wondering, has your tour process changed much from last year given the hit from Air Berlin, which was EUR 170 million? If we do hear something lumpy on the acquisition side, are we going to hear this airline has return on capital employed of, let's say, between 10%-12% in order to ensure the hit you're taking in one year is actually creating shareholder value the year after? Thank you.
Let me start with the last one, because just to make sure there's no misunderstanding. Don't forget we paid for Air Berlin EUR 1, actually less. Another issue of all, as you know, I don't understand your question. If you buy an airline for nothing and you have 170 losses of one-time loss in the first year, it's like buying them for EUR 170 million, which we would have paid easily for 77 aircraft with slots in our home market. In the end, I think we all understand the huge market share increase. We are number one now in every German airport besides Schönefeld. That was, of course, giving it for free, was basically resulting in one-time cost to invest into the model rather than into an M&A transaction. If that was not the way I should have understood your question, please come back.
Now Ulrik will answer the other ones first.
Something on the revenue side. Clearly there are a number of items there further to be added on, so to say. We are speaking about ancillary revenues, there is cargo revenues and so on, which makes the difference to tie up. When it comes to yield and distribution, well, clearly, in the segment of direct distribution, the yield is lower compared with the rest. The pure fact that we are getting a high distribution through that channel doesn't mean that our yield goes down. We're just substituting exactly the same kind of passengers, basically. Did you understand my question? Please go ahead.
That's correct. Just in terms of your ambitions for what the ancillary is expected to grow to, have you any targets set for that?
We have actually not made an external target. That's something we will, maybe not a target, but we'll surely discuss what we are doing on that side when we are meeting in the Capital Markets Day.
Okay. Thank you.
The next question is the line of James Goodall of Redburn. Please go ahead.
Hi, everyone. Can you hear me? Sorry, my phone failed last time.
We hear you perfectly well.
Perfect. Cool. Thank you. I've got a couple from me. Firstly, on the 52% direct distribution number, which you kindly gave us, did I hear you correctly in that includes travel agency bookings via NDC? If so, can you outline what the current share of bookings is made by your website? Because I'd imagine that the majority of the increase that we've seen is the result of the new technology. Secondly, just on the SWISS website launch, can you confirm which quarter you expect this to go live? Can you also give us dates for when you expect the websites of Austrian Airlines and Lufthansa to be rolled out, too? Thanks.
The 52% distribution. Yes, indeed, that includes the travel agents as well. When it comes to the SWISS site, we haven't given a specific date when that is going to be turned on. As with all IT solutions, that is very dangerous. But this year it will be turned on. Your third question was? The online share.
Also, when you expect Austrian Airlines and Lufthansa websites to be rolled out, if that's this year or next year.
We will firstly successfully launch SWISS before we have Lufthansa and Austrian afterwards. It's a bit too early to give you an indication of that.
Okay.
This concludes our question and answer session. I hand back to presenter for any closing remarks.
Thank you very much for your time today. We'll meet again for the publication of first quarter results at the end of April. We already look forward to seeing you then at our capital markets day here in Frankfurt at the end of June. Have a good day.
Thank you.
Thank you. Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.