Ladies and gentlemen, thank you for standing by. I am Yasmin, 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 touch-tone 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 morning, ladies and gentlemen, and welcome to the presentation of Lufthansa Group's results for the second quarter of 2018. My name is Dennis Weber. I have taken over the responsibility for Lufthansa's Investor Relations activities from Andreas Hagenbring at the beginning of July. I am excited to be part of the group and look forward to meeting you personally in the next few weeks and months. In today's call, our CFO, Ulrik Svensson, will give you an overview of financial performance in the second quarter and the first half year, as well as the group's outlook. As always, he will answer your questions after the presentation. Ulrik, over to you.
Thank you, Dennis. We are glad to have you here. Ladies and gentlemen, a very warm welcome from me, too. Let me start with a summary of the group's performance in the second quarter of 2018. Our key profit metric, Adjusted EBIT, was down slightly compared to the previous year level. It reached EUR 982 million in the second quarter of 2018, EUR 35 million below last year. Integration cost at Eurowings partly masked a very solid operating performance across the business. Excluded the one-off charges at Eurowings, Lufthansa Group would have recorded profit growth irrespective of the fuel cost increase in the quarter. This demonstrates the progress we have made in structurally improving the group's profitability. The group's airlines continue their growth. Despite significant capacity growth, especially at Eurowings, unit revenue improved by 1.3% at constant currency, demonstrating that one can go in hand with the other.
Unit cost at constant currency and excluding fuel would have declined by more than the reported 0.7% when excluding additional one-off cost at Eurowings. I will detail them in a minute. Unit cost reductions at the network airlines were even better than initially expected. The logistics, MRO, and catering generated higher profits than in the prior year period and did better than in the first quarter. However, the others and consolidation segment, which includes the cost of the group functions, missed the benefit from prior year currency gains. Looking at the rest of the year, we have turned more positive on top line performance. Forward bookings for the third quarter reflect good customer demand in key geographies such as Germany and the North Atlantic. On that basis, we raised our constant currency unit revenue outlook for 2018 from stable to slightly up.
A better revenue performance will be offset by integration expenses at Eurowings and higher fuel cost. We now forecast the constant currency unit cost reduction to reach the lower end of the guidance. The group's overall outlook of a slight decline of adjusted EBIT compared to the previous year remains unchanged. Let us look at the performance of the group's passenger airlines in more detail. Revenue growth was driven by capacity expansion of 8% and unit revenue improvement. Every network airline, as well as Eurowings, grow their unit revenues. Across the group airlines, the increase amounted to 1.3% at constant currency in the second quarter as well as the first half-year. Unit cost at constant currency and excluding fuel were down 0.7% in the quarter and 0.6% in the first half-year. The network airlines continue to manage cost extremely well.
Driven by the ongoing modernization of the fleet, the successful resolution of the labor disputes in 2017, and the streamlining of operating processes and structures, the network airlines achieved a unit cost reduction of 2.3% in the second quarter and 2.1% in the first half-year, which is above our medium and long-term target. In the reporting period, it became evident that the entire European aviation ecosystem is facing a lot of operational pressures. In the second quarter in particular, flight cancellations and delays were caused by strikes and a general shortage of personnel at air traffic control operations. Infrastructure limitations at airports and adverse weather conditions also impacted. We very much regret that this has led to inconveniences for many of our passengers across the different group airlines. The resulting cost affected network airlines and Eurowings alike.
At Eurowings, one-time expenses in relation to the acquisition of large parts of former Air Berlin assets had a negative impact, too. In the second quarter, integration expenses amounted to EUR 50 million, following a charge of around EUR 70 million in the first quarter. These costs primarily related to higher charter and leasing expenses. The technical overhaul of acquired aircraft in order to bring it up to our standards took longer than initially expected. We require additional wet leases to compensate for longer ground times. The repainting of aircraft, as well as hiring and training the crews, had an impact. We expect integration costs to amount to another EUR 50 million in the third quarter, but do not anticipate any further impact thereafter. Fuel costs increased by more than EUR 200 million in the second quarter, driven by a higher price, but also great volumes.
Turning to our aviation services, the sum of adjusted EBIT at logistics, MRO, and catering increased substantially by EUR 69 million to EUR 240 million in the second quarter. This was not enough, though, to offset the swing of almost EUR 100 million in the adjusted EBIT of the others and consolidation unit, which largely had to do with the non-recurrence of prior year currency gains. First half-year group revenues were stable on a reported basis, but up 5.2% excluding the negative impact from the first time implementation of IFRS 15. Adjusted EBIT was down 3%, but net income increased slightly, supported by a better financial result compared to the previous year. The trading environment in Europe continued to be strong in the second quarter, especially in our home market, Germany. We currently focus on strengthening our leading market position.
That is why we have seized the historical opportunity to consolidate the European market via the acquisition of significant parts of Air Berlin. The resulting strong growth has not had any negative impact on load factors. In addition, underlying yield performance continues to be strong. The reported constant currency yield decline in Europe of 0.9% in the first half year was due to structurally negative mix effect from the disproportionate growth of the lower yield Eurowings business. Excluding this effect, the regional yield would have remained stable. Turning to our best performing region, yields in our North Atlantic business grew hand in hand with the visible expansion of capacity too. Asia and Pacific continued to hold up as well, especially considering its strong performance in 2017.
Finally, performance in Middle East and Africa, which remains our smallest and most volatile region, was weaker mainly due to current political tension in the area. Overall, capacity grew at 7.8% and yields at constant currency increased by 1.1% in the second quarter at stable seat load factors. At a similar capacity growth, yields were up 0.7% and seat loads even increased 1.1 percentage points in the first half year. Let me discuss performance in the different segments in some more detail. Lufthansa German Airlines grew sales by more than 3% in the first half year, adjusting for the negative impact of the first-time implementation of IFRS 15. Adjusted EBIT was up 16%, driven by higher unit revenues and lower unit cost. Swiss expanded unit revenues even more strongly. This was due to strength in continental as well as intercontinental traffic.
The latter benefited from the upgauging of the fleet related to the addition of the two new 777s in the last six months, which helped to exploit strong demand on the North Atlantic and Asian routes to an even higher extent. The comprehensive modernization of the fleet also yielded strong efficiency improvements, which helped Swiss to significantly grow Adjusted EBIT in the first half year. Austrian Airlines did much better in the second quarter compared to the beginning of the year. Demand was strong, especially on routes to key North Atlantic, European, and charter destinations. However, increased fuel and maintenance costs, as well as higher number of flight cancellations compared to the previous period, put pressure on cost. As a result, Adjusted EBIT just remained around break even in the first half year.
In sum, the Network Airlines more than offset the burden from higher fuel costs through unit revenue growth and structural cost reductions. As a result, the segment's operating profit was up 26% in the first half year. Turning to the other airline segment, Eurowings, the picture remains mixed. On the one hand, we continue to be extremely pleased with Eurowings' top-line performance. This quarter, constant currency unit revenue grew by 3.6% on the 20% higher capacity, which was impressive once again. On the other hand, we continue to have work to do to lift Eurowings' profitability to the levels achieved by some key competitors. We expect to complete the technical integration of all 77 former Air Berlin aircraft by the end of the third quarter. This will allow us to focus on the optimization of the operational and organizational setup, including the streamlining of key processes and structures.
The growth of Eurowings has been unprecedented in the history of the European airline industry. However, the largely inorganic nature of this growth has also resulted in inefficiencies and significant complexity. Whose reduction would be a key driver of future margin improvement at Lufthansa Group. Coming to our aviation services, strong demand at Lufthansa Cargo continued into the second quarter. Once again, the logistics business benefited from double-digit yield increases, which more than offset a deliberate decline of load factors. This follows our strategy of making the cargo business as robust as possible in preparation of any potential changes in the market environment. Having said this, we have not experienced any trend changes, neither in cargo's North Atlantic business, which to date has remained unaffected by ongoing trade disputes, nor elsewhere. Benefiting from ongoing efficiency increases too, the segment Adjusted EBIT is up 60% year to date.
At MRO, Adjusted EBIT increased by EUR 30 million to EUR 150 million. This reflects an improvement over the course of the second quarter, after a difficult start of the year. Better performance was driven by the implementation of measures to turn around the engine business and increase throughput, despite ongoing industry-wide challenges. The component business continued to be strong. At our catering business, LSG Group, the transformation of the business model has advanced well. Good progress in the reduction of LSG cost base and lower transformation cost meant that Adjusted EBIT improved strongly from a small base, even though the top line was down due to adverse currency effects. The good performance of all the operating parts of the aviation services was offset by a normalization of the others and consolidation result, which decreased by EUR 176 million compared to the previous year.
This was largely due to the non-recurrence of prior year currency gains. The resulting negative contribution of EUR 127 million in this unit reflects the cost of group functions, which are not attributable to any additional segment. Turning to the group's balance sheet and free cash flow performance, net financial debt decreased by 11% to EUR 2.6 billion. Pension provisions, however, increased by EUR 302 million compared to year-end 2017, mainly due to a 3.1 percentage point reduction of the IFRS discount rate. The group's equity ratio decreased slightly by 1.5 percentage points to 25% as the balance sheet expanded. Compared to June 30 last year, however, the improvement is still significant, thanks to the strong profit generation over the past 12 months. The strength of our balance sheet allow us to invest in future profitable growth and value creation.
In the first six months of the year, investments of EUR 1.9 billion largely focused on the purchase of new aircraft to support the group's capacity expansion, to ensure a premium customer experience, and to generate cost efficiency improvements, mainly related to the much lower fuel consumption of new versus old aircraft. As a result, free cash flow declined by 53% to EUR 977 million. The first time adoption of IFRS 16 will change the way we look at our balance sheet structure going forward. As of today, we expect IFRS 16 to result in a balance sheet expansion of around EUR 2 billion. Taking the renewal of existing contracts and some new projects in the second half of the year into consideration, we expect the impact to become larger by the end of the year.
Based on the exact amount of capitalized lease obligation, we expect the ratio of adjusted net debt to adjusted EBITDA to increase slightly compared to our current levels. The effect on adjusted EBIT, however, will be negligible. We should be clear that this accounting change does not change our fundamentals. The approach of IFRS 16 has been applied by the relevant rating agencies since long. Therefore, we do not expect any impact on our rating and our finance conditions. Let me conclude my presentation with a discussion of our financial outlook. Today, we confirm our guidance of an adjusted EBIT slightly below the previous year. However, the composition of top and bottom line performance will differ slightly from our expectations at the beginning of the year. Compared to our initial outlook, we have reduced the total capacity growth planned for 2017 by half a percentage point to now 8%.
This primarily reflects the delays in the integration of the former Air Berlin aircraft. Please note that this outlook includes organic and inorganic growth, which is increasingly difficult to separate given the progress in the integration of the former Air Berlin assets. The slight moderation of capacity growth will be offset by a better constant currency unit revenue performance. We now expect this metric to grow slightly compared to our initial expectation of a stable performance in the full year. Turning to cost, we expect the network airlines to generate substantial efficiency improvements also going forward. However, higher than planned integration cost at Eurowings will impact the group's overall cost performance.
As mentioned earlier, we expect an additional one-off charge of around EUR 50 million in the third quarter, but no further expenditure beyond this point, as we will complete the technical integration of all former Air Berlin aircraft in the next two months. As a result, we expect the reduction of constant currency unit cost, ex fuel, to reach the lower end of our initial 1%-2% target range. This means that the cost reduction would be higher in the second half year compared to the first half year and amount to around 1% in the full year 2018. In addition, the fuel increase will be larger than projected at the beginning of the year. As of the end of June, we expect fuel cost in 2018 to become approximately EUR 850 million higher compared to the previous year.
Finally, we forecast the year-on-year change in the adjusted EBIT contribution from aviation services to be slightly negative. This has little to do with Lufthansa Cargo, Lufthansa Technik, and LSG Group, where the operational outlook continues to be good. Instead, the forecast reflects the negative year-on-year change in other than consolidation in the first half year, which we do not expect to fully compensate in the rest of 2018. I'm now 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, please. First question comes from the line of Jarrod Castle of UBS.
Good morning. It's Jarrod Castle from UBS. Just coming quickly back to the fuel. I noticed on your slide you've based the 850 on the 30th of June price, and I think you're using a forward of 79. I guess if you do more of a mark to market today, if you mark to market, a lower fuel price and hence actually an upgrade? Secondly, you also mentioned the cost of disruption in terms of flights canceled and the negative impact on first half earnings. Can you give a number in terms of what the cost was? Lastly, just anything in terms of current thinking on M&A and obviously you've been linked with Alitalia and Norwegian and any update on either? Thanks.
Okay. Thanks. Starting with the fuel cost. The fuel, of course, is slightly down compared to end of June, but you have to bear in mind that we are having a rolling 24 months hedging program. Although that, of course, will impact at the tail of that hedging program, there is not so much upside on the 850 as you would initially think, even if the market is down slightly today. Now, in terms of cost of our irregularities, the case is that we have doubled the cost in the second quarter compared what we had in 2017. This indeed is an impact, which we see compared with the year before. Therefore, I think the network airlines cost reduction is even more impressive in light of that headwind they have in the regularities.
In terms of M&A, it's still very much the same as we have said earlier. Italy is a very important market for us. We have handed in a concept to the Italian government on a much smaller, much more focused airline with heavy cost reductions. Before that is being made, there is nothing new to report from the Italy front. In terms of Norwegian, clearly we are a supporter of the European industry being consolidated. I think Carsten Spohr said it very nicely at some interview. Everybody speaks to everybody in this industry, we have nothing special to report there.
Thanks very much.
Next question comes from the line of Neil Glynn of Credit Suisse.
Good morning. If I could ask three quick ones, please. The first one on the network airlines. They seem on track for a record EBIT margin this year despite higher fuel. You're pretty much passing it on despite disruption, it seems. Just interested, how does this impact your thoughts on capacity planning? Does it make it slightly less fuel dependent in a more concentrated market these days? The second question on the steering of Eurowings and its network development. Should we expect a major recalibration once the dust settles and all of the ex-Air Berlin planes are integrated? How different will the 2019 network look in some parts relative to 2018, for example? On free cash flow.
I guess if you look at the first half, the EUR 977 million, which is an impressive figure, I would think adjusted EBIT seasonally will be bigger in the second half than the first half. CapEx probably similar or lower in the second half than the first half. I'm going to suggest the free cash flow could be over EUR 2 billion for the year. Just wanted to sense check as to whether there's anything I might be missing in terms of major restructuring outflows or other outflows in the second half. Thank you.
Starting on the network. Yes, it is indeed a very impressive network performance, network airlines performance here in the first half year, which we do indeed expect to continue. Gradually, I think you're right. A more consolidated industry, it will be quicker to pass on fuel price changes to the market. I think also historically they have always been passed on. It's just a question of how long is the lead time until that actually happening. We hear the same signals from many other airlines that gradually this fuel headwind is being passed on. In terms of the Eurowings network going into 2019, clearly we work a lot on reducing complexity in the network. In terms of the passenger offering, it will not look fundamentally different than it does today. Our focus will be very much on getting to stable operations.
In terms of the free cash flow, we don't give any guidance on the free cash flow, your basic reasoning is sound.
Great. Many thanks, Ulrich.
The next question comes from the line of Damien Brewer of Royal Bank of Canada.
Good morning. I guess just statutory three. First of all, on these network airlines, could you explain a little bit more about the development of the individual airlines operating margin? In particular, Swiss stands out, having lifted 300 basis points versus Lufthansa passenger only up 60. If you were to identify the differences there, what would the three key ones be in terms of what Swiss has done that Lufthansa passenger airlines has yet to do to achieve that margin differential? Secondly, on coming back to the subject of disruption. When you think about planning forward, not just for winter but for summer next year, are you thinking of any different balance between aircraft utilization and avoidance of disruption cost, and how is the group addressing that? Very finally, on the cargo side.
Clearly the volume comparatives are now much tougher as we go into the remainder of the year. How are you thinking about the pricing backdrop, given the very impressive performance in Q2?
Thanks. Well, starting with Swiss. We have to remember, of course, that Swiss have always been the more profitable airline in the group. There are a number of reasons for that. Since I'm originally from Swiss myself, of course, I have a bit of a heart in there. As you do remember, we went through some enormous tough times 12, 13 years ago, which of course, made it possible to be much more fundamental when it came to restructuring of the business than is possible in a more profitable environment. There are some late changes as well here, which are indeed helping. We have had a very successful integration of a number of 777 aircraft, which has added very profitable growth for Swiss.
The very young fleet has also helped to have a substantial lower maintenance cost, and the weakness of the Swiss currency, we must also admit, has helped to make the airline more competitive. In terms of the network going forward in 2019, is it going to be look dramatically different because of the situation with the operational performance? Well, short term now, indeed, we are making sure we have enough reserves to meet the very challenging operational problems we have on the whole European basis. This is nothing special for Lufthansa as we all know. The whole industry has been suffering from the same problems. I don't think you're going to see any dramatic changes looking into 2019.
It's more the question from an operational point of view that we as an industry has to tackle those challenges we have in terms of ATC, in terms of capacity constraints in the airports and so on. Your last question on cargo. Well, indeed, there are no changes as we speak today in terms of how strong the airline cargo business looks like. We know that this is a notoriously difficult business to estimate. It is extremely short-term bookings, and that's the reason we are not sticking out too long here when it comes to forecast. We are just making sure that we have enough flexibility in case the market would turn. As of today, there are no signs at all that that will happen.
Okay. Thank you very much.
The next question comes from the line of Daniel Röska of Sanford Bernstein.
Hi, good morning, Ulrik. Three if I may. Number one, on Eurowings and strategy and growth, a little bit more medium-term 2019, 2020, 2021 outlook. Can you give us an outlook beyond the current integration phase, and what you're planning or what the medium term targets in terms of growth and strategic priorities for Eurowings would be? Secondly, let me follow up on cargo and press that issue a little bit. H1 was up EUR 50 million in underlying EBIT, and you're guiding to below previous year, which would mean that H2 would need to be down by more than EUR 50 million, which seems unlikely. I'm just wondering whether there is a potential, whether Lufthansa Cargo guidance is maybe a little bit too pessimistic, and there is a little bit of more upside possibly in Lufthansa Cargo.
Lastly, you've said before, you'd like to move a bit more towards medium-term targets for the group. Just what's your current progress on that? Any light you can share on how you think about capital allocation and shareholder returns over the medium term?
Starting with Eurowings. Clearly, as we mentioned, the focus for the time being is operational stable. It is clear that we want to get the same EBIT levels as some of our competitors, and to be able to do that, we need to work very hard on efficiencies. That is, in other words, getting increased number of hours we run the aircraft, and so on. That has to be done in a fairly stable environment. In 2019, that is clearly the focus. At some stage, of course, we will like to grow this business. It will, of course, be very much also how we are increasing the element of the digital business, how we can become a very innovative travel platform. It is too early to say today what are the % in terms of ASK growth and so on.
That is something we need to come back to. I cannot stress enough that short term, this is all about getting the inefficiencies in there and to become profitable again. In terms of cargo, yes, indeed, looking at the first half year, the guidance might look slightly cautious. We have to bear in mind that the extraordinary performance we saw on the fourth quarter of the cargo business, is going to be very difficult to repeat. Again, as of today, there are no signs that the trends we have seen in the second and the first quarter is going to change. The first and the second quarter is not reflecting what that extraordinary profit generation you saw in the fourth quarter last year.
In terms of medium targets, we are having a target of when it comes to capital allocation of EUR 3.4 billion guidance in terms of CapEx for this year. We have said long term that our CapEx is between 8%-10% in terms of revenue. I think that's the most likely going forward. We are running a program of renovating our fleet, as you all know, and that reflects that 8%-10%. I think that's what we have on that front.
Okay, thanks.
Next question comes from the line of James Hollins of Exane.
Hi. Morning, Ulrik. Three, please. First one, I think previously you've given a lot more detail on premium versus non-premium unit revenue trends. I was wondering if on that Q2 RASK up 1.3, if you could give us some quantitative detail on premium versus non-premium. The second one, it's probably hard to give too much detail, but would love some quantitative detail on this as well. Eurowings RASK up or unit revenue up 3.5% in Q1 and Q2. Clearly, there's a lot of mix effect of massive growth and different airlines and the rest of it. I was wondering if you could just maybe give an underlying figure of like for like, whatever you call it, of how Eurowings unit revenue is trading. Thirdly, on the Middle East, you called out as weak due to political tensions.
I thought largely that was behind us. I was wondering if maybe there was an impact of Gulf carriers growing again or anything like that. Any detail would be welcome. Thank you.
Starting with the political tension. Indeed, we are having the benefit of the Middle East carriers growing less than they have done earlier. That's not what we are referring to here. It is more a political tension in some of the African countries which have impacted us negatively. In terms of premium and leisure traffic, I think the best indication of that is that the network airlines increased by 1.2% RASK, while Eurowings, which mostly is leisure traffic, increased their RASK by 3.5%. I think that's the clearest signal to how it's split between premium and leisure.
What was your second question again, James?
Yeah.
You wondered about the underlying RASK performance at Eurowings. What do you mean by underlying?
Clearly, it's growing capacity enormously. I was wondering if there was any sort of stage length issues or whether, if you could just give comparable same route analysis year-on-year, how that would look in terms of Eurowings performance? It may not be possible. I was just checking.
Okay. I understand your question. Well, there's not a big long-distance traffic in place last year, so that mix effect is really negligible.
Okay. Thanks very much.
Next question comes from the line of Michael Kuhn of Société Générale.
Good morning. Also three from my side. Firstly, on the competitive situation at your key airports, can you give us an update there with a focus on Vienna, where it seems there's currently a capacity rush for the next upcoming winter season? What do you expect to happen in Vienna? A competitor recently spoke about an aggressive price war coming up. Secondly, back to longer term targets. You mentioned CapEx as % of sales, but I think in earlier calls you also mentioned that at some point you would be willing to provide some medium-term profitability targets. How far away are we from those targets? Lastly, on ATC. In the absence of any strikes, there were quite heavy problems in the German ATC systems recently due to capacity shortages, and I think you have a dialogue with them.
Do you have assurance from the German ATC side that they can solve their capacity issues soon and that we won't see further disruptions in the next peak season next year? Thank you.
Thanks. Yeah, starting with Vienna. Indeed, there is a large gathering of many competitors in Vienna. This is nothing which is new for us. As you know, we have had some interesting entrants also here in Frankfurt. We are not afraid of that, even if we take every competitor very seriously. We have a very good offering in Vienna with Austrian, with a very high frequency, very good product, which at least here in Frankfurt, has shown that the customers are indeed appreciating a high-frequency timetable and are indeed appreciating our product. We are well prepared for that competitive increase there. In terms of long-term or medium-term targets, we are working internally to put those kind of targets in place. I think it would take a little bit of a time until we go out externally with medium-term targets.
As we all know, there is a checkered past with Lufthansa of giving long-term targets. I think I'll be slightly cautious before we go out and do that. In terms of ATCs, we have had very good talks with the ATC here in Germany. It is not only, of course, a German issue, it's also a whole European issue. There is a lot to be solved. I think that both politics and the industry realize that this is a very serious issue. It's all about how do we make quality growth and not just growth in the future. Can I guarantee there are no further issues? No. This will take some time to resolve.
There is a commitment from the German ATC to be better prepared next year?
Oh, there is. You might have seen that even our Minister of Transport was having a public announcement together with yesterday. There is indeed, from the highest political decision makers, a very serious commitment to have these things resolved.
Excellent. Thank you.
Next question comes from the line of Johannes Braun of MainFirst.
Yes. Good morning. Thanks. Three questions from me as well. Firstly, if you talk to corporate clients these days, any indication that the general mood is worsening or changing, that people get strict on travel budgets, or anything like that? Secondly, how do we have to think about cost development next year? Obviously the airline integration costs are falling away. I think airport and navigation fees are flat or falling. I guess there will also be more benefits from streamlining the business. I guess it seems that unit costs next year look quite easy to further reduce, probably more at the higher end of the 1%-2% guidance. Any details on that? Just lastly, Ryanair is obviously accusing you to hold back planes and also withdraw aircraft from Laudamotion. Can you just give an update on that and what your view is on that?
Starting on the corporate clients. Well now and then, of course, there are clients who are reducing their travel budget just due to different cost saving programs. We see no generic change among our clients that times would get tougher and therefore there is a reduction in the travel budgets. Our corporate client and premium traffic is holding up very well. In terms of cost development, we have this long-term objective of 1% to 2% every year reduction, which we are sticking to. In terms of specific guidance for 2019, we typically give that guidance at the very beginning of the year, and I think also this time we will wait and give you that guidance in January next year. In terms of Ryanair, well, we are not holding back any aircraft.
As a matter of fact, we have a number of aircraft with Laudamotion or Ryanair where they just haven't paid the lease rates, and that's why we have this whole issue with them. It is a very simple case, actually. What the statements you have seen from them are just simply false.
Very clear. Thanks.
Next question comes from the line of Andrew Lobbenberg of HSBC London.
Oh, hi there, Ulrik. Hi, Dennis. Can you talk a little bit about the dynamics in the relationship with Fraport and also the relative trading of Frankfurt against Munich, since you've now taken to disclosing on a monthly basis what the traffic stats are, and they look quite healthy at Munich, and with the larger aircraft going in there, I would imagine the unit costs go down. Yeah, how are we meant to think about the future development of capacity between the two, and is that leverage going to work on Fraport? Can I ask about Brussels Airlines? There was an announcement that they're going to be within Eurowings but keep their branding. How is that going to play into your efforts to simplify the Eurowings group? Why did Brussels Airlines belong in the Eurowings group when Austrian belongs in the Network Carrier group? That'll do.
Okay. Starting on Fraport. Well, I think what is indeed very positive that we have constructive talks with Frankfurt, with Fraport, which is indeed moving in the right direction. At the same time, we have to say it's a long way to go. As I indicated earlier, they are 20% higher than the average of our other hubs. As long as that is the case, of course, it is more natural to grow where we have lower cost. As you rightly indicate, that will, of course, on the margin, lead to lower unit cost, which is indeed the case. Before that is resolved, we will continue to grow in Fraport, but we will grow even higher somewhere else.
In terms of Brussels, we are, as we all know, slightly delayed in our integration of Brussels with Eurowings due to this one-off opportunity we got by getting the possibility to buy part of Air Berlin. Now it is happening, now we have a new management in place in Brussels. We will keep the Brussels Airlines brand name in Brussels. It is a very strong brand name locally in the country, as we have shown many times before, to keep the local brand name very successfully, for example, in Swiss, we can do that at the same time as we take out cost, which the customer doesn't see. In other words, in operational backdoor admin and so on. I think the keeping of the branding, you should not see as a problem in itself to take out a lot of costs by integrating these two businesses.
Okay. All right. Thanks.
Next question comes from the line of Gerald Khoo of Liberum.
Morning. Two questions, if I can. Firstly, on MRO. In your prepared remarks, you talked about industry challenges for that business. I just wonder whether you could expand on that. Secondly, on the passenger side of the business, I was wondering whether you could perhaps give a split on the RASK outlook between Network Airlines and Eurowings, please.
Okay. Starting with the MRO business. Clearly there are a number of different challenges in this business, and it's very much due to spare parts for engines. I think that issue is gradually being resolved, but it is an industry-wide issue, and it is nothing really to do with Lufthansa Technik, but something which is gradually being resolved on a worldwide basis. That will probably continue to be a challenge going forward in the next couple of months as well. In terms of the RASK guidance, in terms of Network and Eurowings, the trends we have seen in the first half year are the most likely to continue in terms of higher RASK increase in Eurowings compared with what you see in the Network Airlines.
Okay, thank you.
As a reminder to ask a question, that's star followed by one on your telephone. The next question comes from the line of Malte Schulz of Commerzbank.
Hi, good morning also from my side. I have one question also. You talked in the past particularly about allocating growth to profitable airlines. If you look now at the figures or so, will you shift more and more capacity towards Swiss and how satisfied are you with the development at Austrian? You talked about if they're not earning their cost, we will not allocate growth there. Do you see any changes here?
Well, clearly the Swiss business is the most profitable we have. We announced only very recently that we will allocate and buy two new 777 aircraft to them. Indeed we are growing where we get more bang for our buck, so to say. In terms of Austria, we have seen a large improvement in terms of profitability compared with the last couple of years in Austria. There is still more to be done in terms of cost savings and so on. Before we get to different levels of profitability and supported cost levels to that, your questions are alluding to the right conclusion. We will allocate more growth to other airlines.
Thanks.
Next question comes from the line of Ruxandra Haradau-Doser of Kepler Cheuvreux.
Good morning. Just one question on 2018. You guide EUR 250 million higher fuel costs. The non-fuel cost guidance is weaker. The guidance for aviation services is weaker. These sum up to a negative on Adjusted EBIT of probably EUR 400 million. To offset that, RASK needs to improve around 3% in H2, but it was up just 1.3% in H1. Could you please give some details on what you mean with slightly below the level of last year? Thank you very much.
Well, I think what you're doing, you're comparing full year guidance with half year numbers, and that's why the numbers doesn't really make sense. I think that's the short answer.
Thank you.
Excuse me, there are no further questions at this time. Please continue with any other points you wish to raise.
Well, back over to Ulrich for some closing remarks.
Well, let me just summarize our key messages of today. Well, first, the RASK have increased both of our network airlines at Eurowings. Second, the network airlines decreased their CASK very substantially and more than our target. Third, profits at Eurowings have suffered from a significant one-off integration cost. However, we accept these costs as part of the great opportunity that the acquisition of the former Air Berlin assets represents. These costs will come to an end shortly, that we can fully focus on lifting Eurowings' profitability to the level of its peers going forward. Fourth and lastly, we are upgrading our unit revenue outlook today, we continue to be confident to achieve our profit targets despite the higher integration cost at Eurowings. I wish you all a good day and look forward to talking to you soon again. Thanks.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.