Earnings Call: Q4 2018

Mar 14, 2019

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. 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 Ulrich 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. Custom the word is yours. Well, thank you very much, Denise. Good afternoon to all of you. It's now 2018, which we are looking back to. And if you will, now this hits the year where we celebrated basically 100 years of the anniversary of our crane, our long time brand symbol. And when we in spring refreshed the crane, the entire appearance of Lufthansa, and our corporate entity was refreshed. And 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. And 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 1,000,000,000, which is the 2nd best result in our history. While sales reached a new record high, we were further able to reduce cost. 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. However, these achievements should not hide from the fact that our passengers suffered from far too many delays and flight cancellations last year. And of course, there are parts of our business where we can and will and need to improve further. But before I discuss our initiatives in this regard in more detail, I'd like to hand over to Ulrich for a review of our financial performance. Ulrichs. Thank you, Kaston, a warm welcome from me too. As Kaston pointed out in his in 2018 offered highlights and challenges. The increase of irregularity costs by more than 1,000,000 was one of several headwinds, also including 855,000,000 higher fuel costs, as well as EUR 170,000,000 one off costs at Eurowings resulting from the integration of aircraft taken over from Evolent. In some of 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 1,000,000,000. The group's adjusted EBIT amounted to EUR 2,800,000,000 in 2018, including a EUR 122,000,000 positive effect from a change in the accounting of engine overhaul events. Excluding this effect, operating profits decreased 9% and reached a good 2,700,000,000. Historically, the timing of engine overhauled created significant volatility in our quarterly development of cost and profits. This volatility would have further increased going forward given that we expect engine maintenance costs to rise because of the signed it to capitalize the cost for engine overhaul events as a separate component of the aircraft and to depreciate them over a period of 6 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, this change had a positive impact on 2018 profits. In contrast, the accounting change lowered the adjusted EBIT reported for 2017 by 1,000,000. 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 twenty seventeen. In the meantime, the capacity that Air Berlin had left has been filled by us and others. So the market has become more competitive again. We respond to this you on the route 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 roads continue to generate profits, Finally, a good third of the full year decline in Europe was attributable to the mixed effect caused by disproportionate growth of a lower yielding Eurowave business. Turning over to long haul, performance on the North American and Asian routes held up well throughout the year. The 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 4th quarter. In line with I just mentioned, the 1.2% RASK decline at the Network Airlines in the 4th quarter was entirely due to the yield pressures in short haul, nonetheless, strengthening long haul supported slight growth of unit revenues in the full year. Eurings performance showed the same pattern. However, the impact from declines in short haul was even largely because of the airline 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 end was primarily driven by cost reductions and productivity improvements at crew level. In addition, we successfully renewed important infrastructure contracts at better terms and continue to reorganize administrative structures and processes. X 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 light operations. Performance in the fourth quarter was much better supported by the completion of the technical integration incurred in the fourth quarter 2017. Irregularity cost that is cost related to the flight delays and cancellations affected both airline groups. In sum, they were up 70% and amounted to 1,000,000 in 2018. Fuel cost 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 1000000 and amounted to almost 1,000,000. Million of the increase were due to the capacity expansion. Without hedging, cost would have increased by nearly 1,000,000 more. Our Network Airlines fully offset the impact from rising fuel costs virtually on parman 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 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 gene measure. Eurowings recorded an operating loss of 1,000,000 in 2018, largely explained by the 1,000,000 of integration cost. 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 1,000,000. 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. So Kasably walk you through the key measures in a few measures. 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 digitization of its business model This drove an operating profit increase of 10 percent to 1,000,000 in the full year. Lufthansa Technik had a strong finish to the year, so that the full year profits increased 2% to 1,000,000. 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 percent to EUR 115,000,000, supported by the fact that we are that we will incur some transformation cost only in 2019 rather in 2018. Finally, the result of the other business and group functions, decreased to a negative 1,000,000. Performance was burdened by significant costs for the modernization of their 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 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 1,000,000,000 including 1,000,000 related to the capitalization of engine overhauls. Keep in mind that operating cash 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 pretax basis, capital returns amounted to a solid 14.2 percent. By segment, capital returns differed 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 1,000,000 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 18%. Because of the lower cash flow, net debt grew 21 percent to almost EUR 3,500,000,000, Pension provisions were up 15% because of the effect that financial market decline had on the performance of planned assets. At the end of the year, provisions amounted to 1,000,000,000. Nonetheless, our balance sheet remains strong, Net EBITDA amounted to 1.8 significantly below our maximum threshold of 3.5%. Our dividend proposal of per share follows the group's policy to pay out between 10% 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, PSL followed So 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 road. 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. 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 would be the 4th 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 recur of integration costs and the reduction of operational complexity. Distribution costs will be lowered by the increased share of direct distribution MRO cost will benefit from the phase out of old engine types and the closer cooperation between Lufthansa Technik and the airlines. And 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 high fee cost in 2019 and achieving a group adjusted EBIT margin of 6.5% to 8%. This guidance includes a low double digit €1,000,000 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, having been 0.5% and 1.5%. Nonetheless, a fuel cost increase of around EUR550 1,000,000 would mean that the segment's margin declines to between 7.5% 9.5%. Capacity growth at Eurowings will amount to just around 2%. Supported by a recovery of short haul yields, As we hear progresses and improvements in long haul, unit revenue should develop stable to slightly up. We will reduce unit cost by 7% to 9% including the non recurrence of 1,000,000 prior year integration cost. The Eurowings will achieve an adjusted EBIT margin around breakeven, even assuming 100,000,000 higher fuel bill. Turning to the non passenger business, our logistics business should tie in with a good performance in the past 2 years and record a 7% to 9% EBIT margin on the back of a high single digit credit. The MRO business is expected to grow at a mid single digit rate and achieve a margin between 7% 8%. Broadly in line with the prior year level. Caterings should generate an EBIT between 2% to 25% 2% to 4% EBIT margin. And finally, the result in other businesses would decline by around 150,000,000 primarily the course of the continued transformation of the AirPlus business, the expansion of pilot training activities and higher digital investments. Back to you, Catherine. Well, thank you, Ulrich. 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 Oerig outlined. Assuming a base case of more moderate global economic growth of the year. As an airline group, we will always be exposed to the ups and downs of the economic cycle. It is important to have detailed plans in place to react to every possible market scenario, and we have them ready. However, our focus will be on actively building our strength to ensure that we further improve our market position relative to our peers. The group is in good shape to do exactly that Our 2 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 that Lufthansa Cargo uses the bellies of our commercial fleet in addition to their own freighters. This is also the case of 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 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 1 of the world's strongest aviation brands. Various recognitions do speak a clear language in this regard. One of the only factor, the strong brand starts with a strong product. According to SkyTrax, which rated only as the as the only 5 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 satisfactions confirm. It is therefore key to the health of our brand and future economic success to maintain and 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 2 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 that need to 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 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 airline fleet. In a few days, for example, we will start receiving the Evers 321neo with new economic seats and internet on board. Above all, we will launch a new business class when we receive the new Boeing 7779s 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 and we invest in digital services along the customer journey. This includes the launch of chat boats 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 8 new A320s, including 6 neos and 13 new C Series, which we put in service at Swiss. 11 used and 6 leased aircraft primarily related to the takeover of former Air Berlin planes. The long haul fleet was upgraded by adding 6 new A350s and 2 or in 777 aircraft. The order of 40 new aircraft announced yesterday is another important step in this regard. The addition of 2350s and 20787s between 20222027 will allow us to replace inefficient 4 engine aircraft. For example. This relates to 340s in particular, but also the 6 380s which we decided to divest. Besides the improvement of the customer experience on board, the rollover will drive significant costs 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 7 aircraft types until the mid-20s. So the complexity of our long haul fleet will decrease significantly. In the long term, it will focus primarily on the 350 the 777 and the Boeing 787. The commercial success of our premium product depends on our ability to convey its benefits and quality to our customers. We take great care to make sure our offer meets the individual demands of our customers. 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 a distribution standard NDC because we wanted to overcome the limitations of additional GDS based distribution. Including its primary focus on price comparison. NDCs 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 prebook seats for 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 4 years. In the month of December, the number of bookings made through direct channels, our own websites such as lufthansa.com, swiss.com, etcetera, 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 uncertain routes yielded some very positive effects on RASK. We will now expand continuous pricing to drive volumes where price gaps had 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. You 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're in the midst of beta testing the new Swiss website. It will go live we have incorporated all customer feedback, then followed by the Austrian and Lufthansa website. 2019 will also mark this year of the Eurowings turnaround after a difficult 2018. 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 it jigsaw slots aircraft and crew. The technical integration of the new aircraft took longer than expected, enduring 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 would improve on time performance. The resulting cost of sorry, the reduction of irregulation costs is a key element of our to reduce costs 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 Zeitcraft, a Berlin based logistics company, was another important step in this direction, especially so as a divestiture of all dash 8 aircraft has greatly reduced fleet complexity. Including the non rig recurrence of 1,000,000 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. Finally, 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 re operated out of Frankfurt and Munich going forward. Similar to EDELWEISS, which successfully served leisure estimations out of Zurich we expect Eurowings to benefit from the feeder traffic in our 2 German hubs. Lufthansa will market the Eurowings route under a codeshare 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 2 worlds looks at the sales and marketing power on the one hand and Eurowings competitive costs based on the other hand will improve the profitability of Eurowings Law Hall business. At Austrian Airlines, we achieved a turnaround already some years ago. An influx of low cost competition at Vienna Airport is now challenging the res we have made since then. This is obviously, so this will put yields under pressure among all players involved. Austrian Airlines will defend its leading market position by spending and streamlining a short haul fleet, adding 10 E320 family aircraft, while retiring 18 or turboprop planes, latest by 21. 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. Rutes 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 the 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 all to the closure and relocation of local basis, I just mentioned, we intend to achieve mid double digit €1,000,000 cost savings in the next few years. Ladies and gentlemen, tying it all together, we operate in a structurally growing industry. According to last, the other forecast, passenger growth should average at around 5% over the next 7 years. Growth rates should be similar in our home markets in which we are as a clear market lead which we are the clear market leader. 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 airspace will inevitably limit the pace of supply growth going forward. Assuming that existing over capacities, moderating global growth and fuel price volatility will further propel industry consolidation in the next few years, The look to the group is well positioned for long term profitable growth, even more so as we are continuously streamlining our cost base. Thank you for and answer The first question is from the line of Jared Castle of UBS. Please go ahead. Thank you, and good afternoon, everyone. 3, if I may, can you just give some more color on your margin guidance of 6.5% to 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 And 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. And I guess you said that you want to keep the balance sheet, very strong to take into account opportunities. But should these opportunities not result in anything, would you look to give more back to the market? And then, just lastly, if you could just give a bit more color in terms of capacity by brand. I think you've kind of given some flavor, but if you could just give it, a bit more in terms of Swiss Lufthansa call, or Austrian, etcetera. I think you gave Austrian. So thanks. Yes. Thanks for the questions. Margin, 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 target, mean, basically, as you've seen over the last 3 years, we're basically reaching our cost target every year, and we expect to do so as well in 2019. On that aspect, we get more and more like a normal, engineering business, where you are, you know, getting your efficiency out every year. So I feel very happy with that. When it comes to the M and A and the balance to return funds to the shareholders, no, of course, in the end, if we are not able to, consolidate the European market, then obviously, we will let some states start to have a discussion on how to return the money to to the shareholders in form of extra whatever way it might be. I think that will be very sad, however, if that would be the conclusion. I firmly believe that the 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 the Austrian is a bit less, and it's 2% for Eurowings. Thanks very much. The next question is from the line of Steven Furlong of Davy. Please go ahead. Good afternoon, gentlemen. I'm just interested in your comments about, 1st 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 maybe you feel probably from peak summer onwards or even going into next winter given all the problems and failures Germania, etcetera. And then the second question would be on Eurowings. I noted your comment that the strategic stance is unchanged. And would it be fair to say you still feel that Eurowings is set maybe in the next 2 to 3 years to have a profitability level near your prime competitors. Thank you. Yes. So starting, on the short haul market, Yeah. I think that, we are indeed speaking about, peak summer. As you remember, we have, tough comparisons well, both in the first quarter 2nd quarter of this year. And 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. Yes. So I was just obviously, you're targeting breakeven this year. You think that the longer term plan remains that it can get margins up to near where competitors are over a 3, 4 year period. Yes, we see no reason why we should not get to the levels of some of our competitors like Eurowings or Welling there is a very, very interesting market in our home market, specifically in Germany, of course, And in the same way, we have a clear cost reduction targets and actions going on on how to get there. So I think that delta between the 2, should be a margin in, you know, very much in line with our peers. And most of that, of course, is within our own hats. When it comes to cost, that's much easier than to, to change your yields. The next question is from the line of Damian Brewer of Royal Bank of Canada. Slightly different balance sheet. So two questions, please. First of all, coming back to Eurowings, if I strip out the 1,000,000, you had a minus 1.4% margin in 2018. The ambition for 2019 is 0% It's already 140 basis points improvement. What is it that you see beyond 2019 that over a 2 to 3 year view would allow you achieve those sort of 8% to 9% margins of some of the other low cost airlines, what accelerates within the process that isn't happening in 2019? And then secondly, I'm sorry for a slightly present question, but I noticed Air Plus in particular was an equivalent of about 1,000,000 EBIT decline year on year in the year. Can you talk a little bit more about what happened there in particularly the IT investment? And does that decline in pressure continue into 2019, or does it revert back to its more normal levels of profitability? 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 stop, flying stop. 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 Essential. It was actually 1,000,000 for Eurowings in the year of 2018. Now in terms of long term, however, As we all know, it will take time for Eurowings to get to basically one base in each one AOC in each base. So before you do that, there will be a tale of different activities which will only bite 1 or 2 years later. So, well, I'm confident that there is the cost measures to be made to get to the kind of EBIT levels, we spoke about with a lot earlier question. In terms of AirPlus, there will be continuing, IT cost going into the going into the business. In 2019. So we will not get back to the EBIT levels you saw in 2017 already this year. Okay, thank you. And when do those IT costs roll off? Into 2020. All right. Thank you very much. The next question is from the line of Michael Kuhn of Societe Generale. Please go ahead. Good afternoon. 2 follow ups on guidance for the network airlines you're guiding for 7.5% to 9% versus 10.7% last year. Maybe you could give us an idea on the performance by airline, maybe not quantitative but qualitative as especially Austrian looked pretty bad in the fourth quarter. Do you expect Austrian to be profitable in 2019? Then one on indebtedness, which obviously went up in 2019. Do you to reduce net debt over the course of 2019? And then 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 that 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. So there will be pressures on, on profits clearly. Indebtedness in 2019 will be not very different from what it is today. Regional performance. Yeah, 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 4th quarter for, South America, and that is probably to go into continue as well when we go into the beginning of 2019. And will Austrian be profitable in 2019? I am not really indicating anything for each individual airline, but, probably it's not going to go up. All right. Thank you. The next question is from the line of Glenn Neal of Credit Suisse. Please go ahead. Hello, Neil again from Credit Suisse, to put it the right way around. If I could ask three questions, please. The first it hasn't been touched on before, but the margin focus within the group has been ramping up through previous presentations, but 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 kind of ownership of the profitability outcome, but I'm just interested to what extent does this change steering and returns focus within the group to the shortened 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 and just interested in your thinking on your ability to achieve Network Airline type margins with a long haul low cost platform over time. And 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? And 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. Well, starting with the margin focus. No, 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. And 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. So, I think this will ultimately long term help. In terms of, of long haul, Cassie, is that something you are happy to answer? Sure. Because Very important, we never call 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, many years in Zurich. We have a second product line running more leisure oriented routes. And we now combine that as in Zurich with the market and marketing power of the Network Airlines and defeat potential with the lower cost operation of Eurowings of the Historically, that has been done in Lufthansa by Condor before we sold them. I think we saw a little gap there the last years. And now finally, we have the right platform to do it. And 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 could see that happening in some of the upper end leisure markets like Mauritius and Maldives If you have a flown there, you know, what the yields are, these routes. Could I just jump in with one of questions we had earlier regarding the financial debt. We indicated the financial debt could not be very different in 2019. Compared with 2018. But I just want to point you to the fact as well that next year, well, 2019, we have the implementation of 16 and it's one of the backup pages in your presentation. So with that, we will increase our debt, which is just an accounting thing, it's not a real debt increase of SEK 2,400,000,000, and that's of course important to take into account. The next question is from the line of James Hollins of Exane. Please go ahead. Yes, hi, good afternoon. First one, I was on CapEx full year 2019, I clearly talked about 8% to 10% of revenue before. Does the accounting change mean that 8% to 10% needs to to change and 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 shortfall? And would you expect RASK for the group in H1 to be down? And then finally, just you got an 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, if you can. Yes. Coming 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 of the year, we would see a much stronger RASK So overall, we have to look at, the RASK will be in line with our guidance, but with quite a big split between 2 different periods. Our CapEx number for the 2019 is 3,600,000 And of course, the CHF 500,000,000 we have now in extra maintenance capitalized cost will indeed increase our CapEx number 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 development, 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 And of course, the turnaround of Eurowings is a very important topic, which we will cover here then. Can I just clarify therefore, I mean, I know there's an accounting move from one slot to another, but in terms of modeling the CapEx, so I should be thinking about 4.1, right? No, sorry. The 3.6 was already included in the 500. Okay. Okay. So it's okay. Fine. Thank you very much. The next question is from the line of Johannes Brown of MainFirst Bank. Please go ahead. Yes, hello. Thanks for taking my questions. I have 3. 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, but if I look into your cash flow statement, we have 1,000,000,000 hit from changes in other assets and liabilities. Just wondering could give some further explanations on that. And to what extent this will turn around this year? And then maybe you 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 1,000,000 to 1,000,000 for this year. And secondly, if my math is correct, I think cargo yields were down 10% in Q4, obviously aware of the ambitious previous year base, but, any indication you can give us for the trend into the new year would be helpful. And then lastly, it was reported that Qatar has received full access to the European skies. I think also some discussion of whether Emirates will get the same, right? Just wondering how that can be of see that is, I guess, against your lobbying efforts to restrict traffic rights also going forward for the Middle East carriers So any thoughts on that? Thanks. Thanks. Yes, starting with the free cash flow, Indeed, there were a number of different reasons, and 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 $1,000,000,000. Clearly, we have the change in the variable compensation. And of course, there is an element of that there were some one offs in terms of cash in 2018, which will not be repeated that there were certain VAT. We expected back for the government. We didn't come at the end of the year. We'll come now in 2019 as well. There were some upfront payments for build up of engine and maintenance and so on. But, I mean, we don't do a free cash flow guidance as most airlines are not, but it's clear that the free cash flow we saw in 2017 is not something we are repeating here in 2019. So 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. Kargo had a fantastic 2018, but you are right that the market's now towards the very end 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, very short. But it's too early to say, are we seeing a trend or is this a temporary dip? Catherine, do you want to speak about Qatar? On Qatar, think it's important that there's no open skies with Qatar unless the European Commission has assurance that there is a fair freight underneath. Don't ask me how the new commission will judge measure that, but I promise you that, governments like the German and others will make sure that that be enforced because otherwise this would have been an open sky agreement where only site had given something that a site had received nothing. What I hear is that the talks between the UAE and European Commission has been disrupted because of a huge gap of interest. So I'm not worried that there will be open skies with the UAE at all. Thank you. The next question is from the line of Andrea Lobbenberg of HSBC. Please go ahead. Oh, hi there. Can I ask please about the structure of Eurowings in terms of how it's being steered? I mean, I think previously that was the idea that the short haul business was being run, like Eurowings at at a Dusseldorf and that the long haul was being run out of Brussels. But as you move urobindgonghole into Frankfurt and indeed grow it out in 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 your happy with the outlook for premium travel and yet, you know, the the the macro environment is is certainly very uncertain. So, how much confidence have you got, around that? And then 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? Well, on the first issue, And basically, what you are saying is still correct. Got this sort of, by the way, it's Cologne. So that's where the headquarter of Eurowings is. And long range will be managed out of Brussels, but with the exception of those aircraft who more or less operate on behalf of the main airline, the hub airlines, which even initially includes a wet lease in the summer of next year going forward, we have a different 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 hub airlines. And 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 will very much depend on the outcome of the Condor disposal. We believe there's usually like a 15% need for leisure traffic 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 Condo and Eurowings. So assuming we'll one way or another to get a hold of you 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 found it 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% feet on Condray Airplanes by Lufthansa short haul. So I don't think that anybody could operate that against us other Frankfurt or Munich. So we are quite relaxed. Then answering your question on the premium revenue trend. Yes, indeed, that is holding up well, into the long haul market. So 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 the line of Walter Schultz of Commerzbank Please go ahead. Hi, good afternoon and thank you for taking my question. Mr. Snow already answered, but we are already on the topic of M and A, particularly interested in what you also have to say on the Italia rumors or that easyJet Delta solution might not come through and 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 solutions 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. So we believe we can only do something with a new situation, and we don't want to be next to the government being owners. I never understood what Easyjet and Delta would do jointly. I mean, Easyjet wants stocks in Linate and Delta wants to protect their joint venture on the North Atlantic. So 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. So even Italian local solution, if it doesn't fulfill our 2 requirements, for us wouldn't make a difference. It's getting smaller. Okay, thanks. The next question is from the line of Penny Butcher of Morgan Stanley. Please go ahead. Afternoon, everyone. Two questions from my side. One is to come back on the free cash question, apologies but I think it would be a bit helpful when you mentioned the one offs that I guess were effects in the 2018 year. Could you kind of itemize them by size? Because I guess we're sort of working out that some of these are quite large, I guess, such as the inflows from the Air Berlin effect in Q4 'seventeen that, I guess, helped with sort of forward booking receivable, trade receivables in that sense or prepayments in that sense. And 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 kind of understand what that effect will help in terms of the 2019 free cash? And my second question relates to I guess it has 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 sort of potentially increases again your share at Fraport specifically. What is the latest outlook with regard to sort of the updates on fees and how that profile might look into the medium term? Flow? Well, cash flow is actually prepared already for the second, so I'm thinking about the cash flow right there. Right away. Yeah, unfortunately, we have now two and a half years about the 3 topics of qualitypunctuality and how can we intensify the way we work compared to Munich. Stocks are constructive, but very, very slow. That's why we basically took the next decision. As you know, we have to announce today to move 2 more 380s next summer from Frankfurt to Munich. We have decided to replace 744s by smaller 777s. So we also have this point out moving ahead with a 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, sorry, this month. And unless for airport significant reduces their fees, and improve the quality of the app. The customers will just make it basically reduce the aircraft size 1 by 1 and maintain our slots, of course, in the portfolio. So we even have moved now kind of areas to Frankfurt again to safeguard slots, which were formerly flown by 321s, which we have moved to Munich. So speaking about cash flow, we spoke about earlier the 1,000,000,000, which had been, in change in other assets and liabilities, And indeed, in that number, that's around, 1 quarter, which is a one off effect, of course, what is impacting the the cash flow as well is just the pure fact that the results are lower. Our earnings before tax is 1,000,000 lower in 2018 compared with 2017 and as can be seen in the cash flow statement, actually higher tax payments is around SEK 280,000,000 higher in 2018 compared with the 2017. That's great. If I may ask just one quick follow-up then, in terms of the overall trade working capital, I mean, 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. But of course, I guess the reason is that, that none of the airlines are really giving any free cash flow, guidance is that booking patterns can quickly change. And of course, that does indeed change the working capital as we now clearly can when we compare 2017 2018. But as we stand here at this right second, you're absolutely right. The next question is from the line of James Goodall of Redburn. Please go ahead. Yeah. Can we take the next one? The next question is from the line of Nuala McManus 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 2, 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 or 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? And then 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? And then the last thing, Carson, is just your approach to M And A. I'm just wondering, has your thought process changed much from last year given the hit from Air Berlin, which was 170,000,000 if we do hear something lumpy on the acquisition side, are we going to hear this asset as or this airline has return on employed of, let's say, between 10% to 12% in order to ensure the hit you're taking on 1 year is actually creating shareholder value the year after? Let me start with the last one because just to make sure we there's no misunderstanding, don't forget we paid for Air Berlin actually less. So another, if you have always, you know, I don't understand your question. If you buy an airline for nothing and you have 170 losses of one time offs in the 1st year, it's like buying them $470,000,000, which we would have paid easily for 77 aircraft with slots in our whole market. In the end, I think we all understand the huge market share increase. We are number 1 now in every German airport besides Schirmerfeld. That was, of course, for giving it for free was basically resulting in one time costs to invest into the model rather than into an M and A transaction. But if that was not the way I should have understood your question, please come back one. Now, Ulrik will answer the other ones first. Yes, there's something on the revenue side. Yes, Katie, 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 a difference, to tie up. When it comes to yield and distribution, Well, clearly, in the segment of, direct distribution, the yield is, lower compare with the rest, but, the pure fact that we are getting a high distribution through that channel doesn't mean that our yield goes down, where you're substituting exactly the same kind of passengers basically. Did you understand your question? Please go ahead. Yes, that's correct. And just in terms of your ambitions for what the ancillaries expected to grow through. Have you any targets set for that? We had actually not made an external target, but that's thing we will, moving on the 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 from 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. So I've got a couple from me. Firstly, on the 5th 2% direct distribution number, which you kindly gave us. Did I hear you correctly in that that includes travel agency bookings, via NDC? And if so, can you outline what the current share of bookings is made by your website? Cause I imagine majority of the increase that we've seen is the result of the new technology. And then secondly, just on the Swiss website launch, can you confirm which quarter you expect this to go live And then can you also give us data when you expect the websites of Austrian and Lufthansa to be rolled out too? Yeah. So the 40 52% distribution. Yes, indeed, that includes the travel agents as well, when it comes to the Swiss site, we haven't given 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. And your third question was, yes, the online share. Yes, no, also when you expect Austrian and Lufthansa, websites to be rolled out? If that's this year, next year? We will firstly successfully launch suites before we have the Lufthansa and Austrian afterwards. So it's a little bit too early to give you an indication of that. And this concludes our question and answer session. I hand back to presenter for any closing remarks. Yes, thank you very much for your time today. We'll meet again for the publication of the first quarter results at the end of April. And 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. Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.