Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Lufthansa Group second quarter 2023 results conference call. 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. If you would like to ask a question, you may press star followed by 1 on your touchtone telephone. In the interest of time, please limit yourself to 2 questions only. Press the star key followed by 0 for operator assistance. I would now like to turn the conference over to Dennis Weber. Please go ahead.
Yeah, thanks, Caio. Good morning, ladies and gentlemen. Welcome to the presentation of our results for the second quarter of 2023. With me on the call today are our CEO, Carsten Spohr, and our CFO, Remco Steenbergen. They will present you our record results, discuss the strategic highlights, and update you on our latest expectations for the rest of the year. Afterwards, you'll have the opportunity to ask your questions. As Caio just said, and similar to prior quarters, I would like to ask you to limit your questions to 2, so that everybody has a chance to participate in the Q&A session. Thank you. Over to you, Carsten.
Yeah, Dennis, thank you very much, and also welcome everyone from my side. Thanks for joining our call today. Most of you I've met before or talked to you before, hopefully would agree that not only working in this industry never gets boring, hopefully also analyzing and reporting on it never does. What we are showing today, I think, confirms that, that after probably the most extremely or the most difficult years of our industry during the pandemic, and then an unheard-of financial turnaround in 2022, now just arriving in 2023, we can report on the best second quarter ever, even beating the second quarter of our so far best year, 2017. While Remco will take you through all the details in a few minutes, let me give you some of the highlights up front.
All of our airlines, very important, I think, for also for the backup of the strategy of our group, all of our airlines were profitable already in the first half of the year. The Lufthansa Group achieved an adjusted EBIT of EUR 1.1 billion for the second quarter period, as I said before, unheard of. The group revenue totaled EUR 9.4 billion. We welcomed 33 million passengers on board of all the group airlines. We had yields up 13% from last year and 25% up from 2019. The operating cash flow was at EUR 1.5 billion. The net CapEx amounted to EUR 800 million in the quarter, and that is highlighting our commitment to renew our fleet for the benefit of not just the customers, but also the environment.
Please allow me a few words about the negotiations with our trade unions. In the last 12 months alone, we were able to reach more than 20 agreements with 10 unions in 5 countries. We see that's a very positive development, that also the negotiations with the Union Cockpit were constructive and have now led to an agreement or result which our pilot will now vote on to turn it into an agreement. That, I think, confirms that Q2 was more than just a quarter of outstanding results. It's also a quarter in which we made progress, and maybe we made most progress in the transformation of the Lufthansa Group from an aviation group to an airline group.
In an unheard-of series of M&A transactions, we were able to sign three transactions in only three months, another first for us in Lufthansa, and it clearly shows our determination in executing our strategy. Let's start with our divestments. In April, we announced to sell the remaining part of LSG Group, LSG. We expected this transaction to be completed in the third quarter of this year and still do. Closing the transaction also means that we discontinue our catering business segment, and that, an interesting number, I think 160 legal entities are leaving the Lufthansa Group, so it's a significantly contribution to reducing our organizational complexity. In June, we signed an agreement with SEB Kort Bank for the sale of AirPlus, the group's payment specialist.
The purchase price amounts to around EUR 450 million, and the transaction is expected to close in 2024. Also here, we withdrew from an area that is not part of our core business. We are confident that we have found excellent buyers for LSG Group and for AirPlus that will allow the companies to realize their full potential in new ownership. We're also on track for potential partial sale of Lufthansa Technik in the second half of this year, but, and you know, this depends on the strategic fit with a potential buyer offering us strategic opportunities we don't have alone, and of course, the financial terms offered. The signed transactions, already signed transactions, further reduce our complexity, they reduce our capital intensity, and they reduce financial risk for the Lufthansa Group, and obviously they strengthen the focus on our core airline business.
That brings me to the third transaction. In May, we reached an agreement to initially acquire a 41% stake in ITA Airways for EUR 325 million through a capital increase, with the option and clear intention for a full takeover at a later stage. This is a win-win for all parties involved. Obviously, a stronger ITA will enhance competition in the Italian market. Consumers will benefit from more choice and improved connections to and from Italy, and it broadens Lufthansa's access to the important Italian aviation market, and obviously supports our further regional diversification of our network. We are in a constructive dialogue with the European Commission and the other relevant authorities to allow for a timely clearance, hopefully still before year-end. When it comes to making ITA part of the Lufthansa Group, we obviously can build on our heritage of successful integrations.
The ITA deal is also proof that our multi-hub, multi-airline, and multi-brand strategy allows for the realization of extensive synergies, and that it is attracting other airlines in the ongoing consolidation process of our industry. ITA becoming a member of our group, will also accelerate our existing path towards an even more international company. This is crucial in global competition. One-sided dependence on one regulatory framework or only one labor market would cause us to fall behind eventually, globally. Therefore, it's important that already today, only about 30% of our turnover come from Germany, going further down. This is obviously how we have become number one in Europe and currently the number four worldwide. For all of our stakeholders, it shows variety and diversity, or Vielfalt, how we call it in German, is our clear strength in USP and not any element of weakness.
The second quarter also brought the first stress test to the operational stability and viability of our flight operations. Thanks to the exceptional commitment of our colleagues, as well as optimized processes, we master not only the Easter and Whitsun travel waves successfully, but also the summer peaks of the last two weeks. This, on the one hand, was driven by significant operational investments. In 2022, we hired more than 11,000 new colleagues. For 2022 and 2023 combined, we expect this figure to be around 20,000. We already reached the target at the end of July, and we continue to recruit. However, not all our suppliers and partners are as successful on the labor markets as we are. That's why staff shortages still occur, especially at peak times at the airport operators.
The stabilized operations also came at the expense of productivity at our airlines. In other words, better reliability came at a high price due to the numerous buffers we had to build into the system. summer holidays are now in full swing in many parts of the world. We adjusted our schedule to the maximum capacity of our airport operators, and we do everything we can to ensure smooth operations, consciously accepting compromises regarding efficiency and productivity. For this year, this surely was and is the right decision. After the summer, we will prepare for a significant efficiency increase starting in 2024, because next year we want to put alone 15 additional long-haul aircraft into the service and increase productivity while continuing to improve schedule, stability, and punctuality.
70% of our flights departed on time in the first six months of the year, and of course, that's just not a number we are satisfied with long term. In addition to operational challenges and staff shortages, supply of spare parts and raw materials remain one of the biggest difficulties. In some areas, we see improvements, but in many parts of our business, we and our suppliers still face long and uncertain lead times. Missing parts for engines are still among the biggest problems. Swiss, for example, currently has to substitute the capacity of six to eight of their 30 Airbus A220s which are grounded for maintenance due to premature engine wear. From an operational perspective, these bottlenecks are painful, every single one of them, but also they mean the global aviation will not return to the overcapacities of pre-pandemic times anytime soon.
Supply and aircraft delivery delays are likely to persist with corresponding shortages on the supply side for the whole industry. Looking on the demand side of things, the desire to travel continues unabated. We already had 86% of 2019 passengers back on board in the second quarter, and current bookings for Q3 and the rest of the year already exceed 90% of pre-crisis levels compared to the same point in 2019. Also, close-in bookings continue to be very strong in July. The trend towards flying more business and first class among private travelers also remains unbroken. Also, regarding business travel, which has recovered to just about 60% in terms of pre-crisis passenger numbers so far, the outlook is now increasingly positive.
Based on surveys and the feedback we receive from our corporate customers, we forecast increases in the remainder of the year, driven by the larger scale opening of China and Japan and the gradual recovery of the world economy. Already today, business travel has recovered to more than 70% on the transatlantic, outpacing short-haul, and especially outpacing German domestic corporate travel, which will, in our view, remain structurally smaller compared to pre-crisis levels. Looking ahead, demand remains extraordinarily strong. This is true for as far as we have visibility, including also late summer and autumn. Similar to last year, the summer season will extend into October. For us, obviously means the extension of our peak season. In addition, advanced bookings for winter and 2024 are currently up at double-digit % rates compared to the prior year period.
We expect yields in the third quarter to be up versus 2019 at similar rate as in Q2, by around 25%. This would even mean a slight increase compared to the already high prior year level. Let's talk about customer satisfaction, which obviously remains key for us. Our investments in improved product and service quality adds up to EUR 2.5 billion by 2025, in addition to the around EUR 2.5 billion annually for new aircraft. Many of our guests and our crews are eagerly waiting for the arrival of our first long-haul aircraft equipped with the new Allegris onboard product. Introduction will take place with the first delivery of our newly ordered 787-9, unfortunately, now delayed until early 2024.
We continuously enhance our offerings of innovative solutions, be it additional biometric boarding gates, more efficient and faster security checks, and of course, new lounges. With the Lufthansa Digital Hangar, we have accelerated our digitalization and the offer of digital services to our customers. For example, we relaunched our new Lufthansa App across the digital ex- applications of our group. More than 1.5 million active users every week benefit from real-time information on flights, baggage, waiting times, or services like rebookings. In the last 3 months, almost 150,000 customers managed their rebooking independently, and 81% of our customers by now use our digital check-in options. More than 80% of all our refunds are already fully or partially automated. In addition, we see a double-digit growth year-over-year of customers using our Travel ID for an even more personalized experience.
Also, sustainability is top of the agenda, both for our customers and us at Lufthansa Group. Since almost 100 years, we as Lufthansa have always contributed to the progress of aviation. We are leading the way also when it comes to transforming the industry in terms of the environmental challenges. We invest in the most extensive fleet modernization program in our history. We use every drop of fuel even more efficiently with the help of technology. We continuously grow our corporations with local rail providers on top of that, to avoid short-range flying wherever customers prefer the train. We continue to expand our offers and services for more sustainable flying. With our Green Fares, we're the first airline group in the world to offer a tariff that includes the offsetting of individual flight-related CO2 emissions.
Since the introduction in February 2023, almost 300,000 guests have already opted for them. However, tackling global challenges like climate change require level playing fields worldwide. SAF is one of my favorite examples. Today, only 0.1% of the industry's global fuel requirements can be covered with SAF. In 2022, the Lufthansa Group used around 13,000 tons of SAF, translating into 0.2% of our total fuel demand, so twice of the industry average. That meant that we needed access to 5% of all SAF worldwide, which makes us one of the five largest SAF customers in the world. If you look at the US, they now incentivize production and usage of SAF. The EU, however, so far, has only set mandatory and steadily increasing blending quotas without ensuring that sufficient sustainable fuel will be available in the foreseeable future.
Such a strategy is of little use to the climate and harms the European air industry in international competition because customers just use hubs outside of Europe without any benefit to the environment. Can we call this equal opportunity? Probably not. That's why we strongly advocate for a course correction and, for example, a dedicated SAF funding program like the US. Ladies and gentlemen, in summary, this has been another excellent quarter. With the sharpening of our portfolio, we have accelerated our transition into an airline group in which all 11 airlines will be profitable for the first time. Lufthansa Technik is benefiting greatly from high maintenance needs across the global airline industry.
For Lufthansa Cargo, the market environment somewhat normalized further in the second quarter, but average yields are still solidly above the pre-crisis levels, and therefore, in the long term, 23 will be a year with good results also for Lufthansa Cargo. The fascination to work for aviation, to work in aviation is back. Never in the history of Lufthansa have we hired that many colleagues per month, per week, per day. We continue to lead by example, also, when it comes to sustainability. The basis of all stable operations only allow us to put an unwavering focus on the core of our business, which is our customers, and all that combined results in an outlook which is very strong. We expect the favorable supply-demand relationship to last far beyond this summer and this year.
Therefore, I'm proud to say that Lufthansa Group is not only back, as I said a few months ago, but it's now looking to the future much more optimistically than hardly ever before. Thank you again for joining us today. Now let me hand over to Remco to talk you through our results in more detail. Thank you.
Thank you, Carsten. Welcome to everyone on the call. Let me start by giving you my take on our second quarter results. As Carsten said, we recorded an operating profit of EUR 1.1 billion, the highest ever second quarter result in the history of the Lufthansa Group. Our strong revenues over the quarter clearly reflect our guests' great enthusiasm and wish to travel the world. We also achieved a new record in net income, which reached EUR 881 million in Q2, supported by lower financial expenses due to our deleveraging and effective tax management. Adjusted free cash flow was EUR 589 million, including investing in our future with CapEx of more than EUR 800 million, in line with the original planning. Our passenger airlines also had a record second quarter. Adjusted EBIT amounted to EUR 965 million.
All passenger airlines made a profit, with particular strong performance at Swiss, which recorded an operating margin of almost 18%. Lufthansa Airlines and Austrian Airlines generated a double-digit margin, too. Yields were 13% above the previous year and even 25% higher than in 2019. As Carsten just explained, the strong yield environment continues to be driven by high premium demand, especially from our leisure customers. While yields in our long-haul business continue to rise, too, the year-on-year increase was even higher in short haul, as demand, especially for holiday destinations around the Mediterranean Sea, soared. Seat load factors increased to over 83% and thereby were on pre-crisis level, resulting in unit revenues 25% above 2019. Productivity and cost efficiency, however, were below pre-crisis levels due to the operational decisions we made in response to the instability across the entire airline industry.
These decisions support the stability of flight operations and are meant to ensure that customers receive the best possible service. The more resilient European aviation system becomes again, the greater the chance to scale them back. We are doing everything to make this happen as soon as possible. In addition, we are incurring significant one-off ramp-up costs, including extensive training of pilots and cabin crews, as well as the reactivation of aircraft which had been parked during the crisis. Finally, we are facing high industry-wide cost inflation, especially in the areas of fees and charges, MRO, and personnel cost. The latter are due to the collective labor agreements concluded in the second half of 2022 and new hires, especially in operational areas. With capacity at the lower end of original expectations, we can't leverage the cost to the full extent yet.
In sum, unit costs in the passenger airline business increased around 7% compared to the prior year quarter. For the remainder of the year, we expect the unit cost performance to improve, driven by further increase in capacity, lower ramp-up costs, and improved productivity. As a consequence, we expect CASK for the full year to be up at a low single-digit % rate versus 2022, compared to our expectation of a stable development before. For 2024, we still expect, as stated before, a decline in year-on-year unit costs due to improved productivity, lower one-off costs, and increased capacity. Turning to other businesses, our MRO business generated a record second quarter Adjusted EBIT of EUR 156 million. Lufthansa Technik continues to benefit from the fact that airlines worldwide are expanding their capacities.
The delays in delivery of new aircraft forces many airlines to fly older aircraft for longer than initially planned. This adds to the shortage of MRO capacities and help Lufthansa Technik to pass through higher material and personnel costs to customers. Lufthansa Cargo's market environment continued to normalize in the second quarter as industry capacity increased due to the return of belly capacities and demand decreased, resulting in a yield decline of 47% compared to the prior year quarter. Adjusted EBIT, as a consequence, declined to EUR 37 million. Having said that, Lufthansa Cargo yields remained at around 40% above the pre-crisis level, a significant premium over the broader market, demonstrating Lufthansa Cargo's favorable position, which is also helping the business to gain share.
While we do not see any significant trend changes in the short term, it will be a question of time until companies will have to replenish inventories and growth of the global economy picks up again. For the remainder of the year, we expect yields to remain at around current levels relatively to 2019. We are therefore confident that Lufthansa Cargo will be able to achieve an Adjusted EBIT of around EUR 300 million for the full year of 2023. A very good result by historical standards. Adjusted free cash flow in the first half of 2023 amounted to EUR 1.1 billion. The operating cash flow of EUR 3.1 billion was mainly driven by the strong operating result, good working capital management, and decrease in customer prepayments.
The business recovery at AirPlus, our credit card company, resulted in a receivable increase of around EUR 370 million. net CapEx amounted to around EUR 1.9 billion, related to prepayments on aircraft orders and 13 aircrafts, which we took delivery of in the first half year. Our guidance for net CapEx of EUR 2.5 billion-EUR 3 billion in the full year, factors in sale and leaseback transactions, which we expect to conclude in the 4th quarter. As a result, we confirm our full year CapEx outlook also today. Based on the good generation of free cash flow, we continued to strengthen our balance sheet also in the 2nd quarter. As a result, we can and do repay maturing liabilities, primarily with cash. At the end of June, the available liquidity amounted to EUR 10.8 billion.
Financial net debt decreased further to EUR 5.9 billion, even around EUR 700 million below the end of 2019. The net pension liability increased slightly to EUR 2.3 billion, mainly because of a 30 basis point decline in the discount rate, which reflects a tenor of 23 years. As a result of our success in deleveraging, trailing financial leverage, that means the ratio of adjusted net debt, including pensions over EBITDA, over the past 12 months, amounted to 1.7. This is quite a bit below the 2.8 at the end of 2019, when we were rated investment grade. Therefore, we consider the recent upgrades by the various rating agencies during the second quarter as only an intermediate step on the way back to investment grade, which is now only 1 notch away.
Before concluding with our financial guidance, let me give you some more details on our fuel cost outlook. Since the last update in May, our fuel cost expectations for 2023 have increased just slightly to EUR 7.6 billion. For the second half of 2023, we have hedged around 85% of our crude oil exposure at a break-even range of around $91 per barrel. Keep in mind that our option-based hedging strategy allows us to also benefit from a lower oil price. For the jet crack, we have hedged around 56% of our exposure in the second half year at an average strike price of $28 a barrel, slightly below the current spot price. We recently decided to increase our hedging ratio back to 85%.
We will hedge up to 50% of our total exposure with options on gasoil as a proxy for kerosene. This will allow us to continue hedging the jet crack, but with options instead of swaps as before, so that we can profit from falling prices. The remaining 35% will continue to be hedged with options on crude oil. The group's performance in the second quarter, the continued industry-wide supply constraints, and the positive booking and yield outlook for our airlines, give us confidence to specify our full-year financial outlook. We expect Adjusted EBIT to amount to at least EUR 2.6 billion in 2023. This would put our results among the highest 3 results ever. adjusted free cash flow is guided to be significantly positive, with a clear ambition to at least come close to our target of EUR 2 billion per annum.
Our financial outlook is based on a capacity of around 85% of 2019 levels for the full year. This represents the lower end of our original range of 85%-90%. Carsten already explained the different industry-wide operational constraints that prevent us from expanding our schedules even more this year. We forecast the third quarter to make the largest contribution to our full-year profit target. At a capacity level of around 88%, we expect to exceed the Adjusted EBIT of EUR 1.3 billion, achieved in the third quarter of 2019, primarily due to ongoing high yields and strong performance in MRO.
Ladies and gentlemen, we are determined to deliver on our promises, as we have done for many, many quarters now, in the third quarter and in the year as a whole, and we also reconfirm our targets for 2024. We will continue to work on getting as close as possible to our 2024 targets of an adjusted EBIT margin of at least 8% and a ROCE target of at least 10% already in the current year. Based on our year results, we're in excellent position in this regard. Thank you very much for your attention and listening to me. Dennis, over to you.
Yeah, thank you very much, Remco. Considering that we got several questions on the offer that we've made to the pilots or to the union Vereinigung Cockpit, I'd like to ask Carsten to give us an overview on that subject before we'll then enter into the Q&A session. Carsten, please.
Yeah, absolutely. Well, as probably most of you know, we were-
... in more or less 12 months of intensive dialogue with our pilots of the main airline, constructive, as I may say, dialogue, difficult negotiations. Nevertheless, we now have a result which, by the current voting of the pilots, will then be turned into an agreement. The agreement or current results consists of various elements. Three of them are salary increases, the first one kicking in in December 2023 with 7%, followed by one in January 2025 of 5%, and another one in January 2026 of another 5%. The duration of the whole agreement is 42 months, which is long in our world and probably for us, an asset in itself.
There's a special element in there which will allow us to reintegrate the pilots from the closed down operation of Germanwings into the main line, main airline, which will also allow us to grow capacity in the summer of 2024, which we are looking forward to, due to the strong demand. It has no scope clauses involved this time, different than other agreements in the past, where, for example, we had to give commitments on minimum fleet or other topics. Upside for us, for sure, is that this is a fairly long period of stability and also peace, if I may say so. I think it's important for you to know, as our shareholders, that this will not require any change of our financial targets, which Remco has pointed out.
Due to the fact that these increases are more or less in line with inflation. Secondly, this, by now, is only focusing on the minority of the pilots in the Lufthansa Group, less than half, because obviously the group by now has more than 11,000 pilots to, to the 11 airlines we have. Overall, I think it's a result we can live with. We therefore have handed over as an offer, and we now have a 1-week voting period ahead of us, which I think is starting tomorrow. Any further questions we're happy to answer, but maybe that gives you a little bit of a framework, Dennis, which you intended, I guess, with your question.
Yeah. Thank you, Carsten, and moderator, over to you, for the Q&A session.
Thank you. Ladies and gentlemen, at this time, we'll begin our question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. In the interest of time, please limit yourself to 2 questions only. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please leave the handset before making your selections. Anyone who has a question may press star followed by one at this time. Our first question comes from Stephen Furlong with Davy. Please, go ahead.
Yeah, good morning, gentlemen. 2 questions. First, I, I appreciate H1 was very busy in M&A and disposals. I'm just wondering, is there anything on the in-tray or out-tray in H2? I'm particularly thinking about where are we at with Lufthansa Technik. That's the first question. Just a general question I just wanted to ask about, because I asked the other airlines about this, about EU ETS. I mean, there, is there any concern, Carsten, that that is expanded to long haul? Would that worry you if that's the case, particularly if CORSIA, that scheme is not strengthened or the number of countries come into it are not added? The EU suggests that if that doesn't happen, then long haul could come into scope for ETS. Thank you.
Stephen Furlong, good afternoon to you. On 1, there is nothing new, and I would hope you find 3 transactions in 1 quarter sufficient, that there's no need to provide anything beyond the known status of Lufthansa Technik, which, you know, is a different league by its own, by just being a minority issue. On emission trading, well, I think the financial impact of potentially extending EU ETS to long haul would be devastating, therefore, I think same with blending. As much as there is, and the huge impact this would have, there is the other side of the medal, that this damage to the European industry is so obvious that I think it will not happen because the regulators in Brussels understand that this is the end of, you know, the competitiveness of the European industry as we know it today.
It's a little more difficult with ETS on feeding, landing on feeding, where, of course, there's also effects, which is why we work against it, but you have to dig a little deeper to understand those. Therefore, I do believe that this is a political environment where communication and lobbying play a big role. It's probably easier to get across the arguments why ETS on long range or even blending on long range would have negative impacts on the industry than it was in the last months as an uphill battle to also make people understand that having ETS and blending on a flight from Stockholm to Paris is hurting my competitor in Paris because you could also go to Cape Town eventually via Istanbul. That takes a little bit more knowledge of the industry.
Coming to your question, concerns, yes, but also hope to have an easier work on the explaining why this cannot happen.
Got it. Thank you. Thank you, Carsten.
Our next question comes from James Hollins, BNP Paribas Exane. Please, go ahead.
James, we can't hear you.
James, is that you?
Hello? Sorry, can you hear me?
Yes, I can.
Apologies for that. Yeah, two questions. The pilots deal. Perhaps you could, well done or potentially well done. Perhaps you could quantify on a percentage basis what the pilots will be being paid in 2024 versus 2019, and, and better still, maybe quantify numerically what the wage bill would be for those pilots, 24 versus 19, given I assume you have slightly higher crewing ratios, but also less senior, pilots than you had pre-COVID. That was one question. The second question, perhaps you could just run us through some of the engine issues that you're having. I believe you do run some Pratt & Whitney GTFs, and perhaps just sort of quantify or run us through where we are in terms of your, fleet, et cetera. Thank you.
James, good afternoon or good morning. The first one, that's a tough one. Let me give you some data points. EUR 1.1 billion is our current amount of salaries we paid to the main airline pilots. Again, being a little bit less than half of what we overall have. We already gave EUR 800 or EUR 980 last year. That was more or less 10%. Now what we are doing here today, 7 plus 5 plus 5 results by math in more or less 18%, as I just explained. That probably gives you an idea of what you have to add to the EUR 1.1 billion, where the first 10% are already in. That's important.
You add 18% to the 1.1, gives you an outlook, but we're now talking 3 years down the road at the end of the contract, starting in 2026. In 2024, only the first 7% kick in, that's 7% out of 1.1. That's, yeah, EUR 77 million. If that answers your question. Now, the other elements, yes, we let many, many senior people go, and we hiring now very young people, and they have to take that effect into that, which might even compensate a big part of the EUR 77 million, but I don't have that at hand. Yes, the demographics work towards lowering costs. The salary increase obviously increases cost. If that now balances out, I need to ask my team to give you some numbers.
I'm sure Dennis will provide that to you, but I don't think we have that now ready here. Let's be honest, by letting so many people go, we surely significantly improved our unit costs in the cockpit, but of course, the training we now need to re-qualify people, move them from one aircraft to the other, eats up certain element of that, but it's one-time cost. The long-term unit cost improvement by letting senior people go and rehiring or hiring young people, of course, stays in the system. Depending on how deep you want to go into this, I'm sure Dennis can do more, but that's all I can give you now here out of my head.
On engines, the first batch, the one which has to be taken off the wing by end of September, is 50 engines, out of which 13 are operated in the Lufthansa Group, 12 in Lufthansa Airlines, 1 in Swiss. We have to pull those off the end, the, the wing by the end of September, and Lufthansa Technik probably will do that and check them out, which will require us to put some airplanes on the ground, but we have enough backup to manage. There's another 1,000 airplanes in the second batch, out of which 50 are Lufthansa Group aircraft. Sorry, air engines, not aircraft. For this 50 engines, currently, experts are analyzing what the options are, when they need to be taken off the wings, in which order we'll do that. Can we reduce the impact, which is too early to tell.
Definitely a few single-engine grounded aircraft this year, again, with enough backups available, and next year, some bigger operation. Let's be honest, as you all know, we own Lufthansa Technik, so of course, 50 engines are on the downside of Lufthansa because they are operated by my airlines, 950 are operated by potential customers. I cannot even give you a number now, if this whole thing will work in our favor or against us. It's a good thing of owning-
Thanks. Sorry, just on the issue, this may be a net benefit for the Lufthansa Group then?
Could be, but surely makes less impact than those airlines who don't own Lufthansa Technik. I understand there's a low-cost area in Europe being affected. We don't have a contract yet with Pratt. Pratt will need partners around the world to get these engines fixed. It's too early. Of course, there is two elements of this. Again, we are affected with our airlines, and we obviously owning the largest MRO provider in the world, will try to get our share of helping Pratt & Whitney out of their struggles. One small fee.
Okay, thanks.
Our next question comes from Jarrod Castle with UBS. Please, go ahead.
Good morning, everyone. Firstly, obviously, you've kind of appealed the EU ruling on financial aid. If it's upheld, what do you think it could mean for the group, given, you know, all the aids being paid up, paid back, and then, you know, the government's exited their stake as well? Secondly, just looking at kind of airport fees, any color on increases at Frankfurt, in terms of magnitude of increase? Thanks.
Hey there, Jared, good morning to you, Remco here. Yeah, the EU ruling on state aid, correct, you know that we are appealing against the the the outcome, logical consequence, because we we do not agree, and we want to have some legal clarity. It's a bit of an academic discussion, correct? Because we we repaid everything. The German state, of course, got interest paid, and had an enormous amount of benefit on the sale of the of the shares as well, correct? Which is all related in the in the total consequence. We don't think it is correct, the the outcome, that we are handling it to make sure that from a legal perspective, we know where we stand. Nothing more to be said.
I don't sleep one hour less because of this, this issue. With regard to the airport, fees in, in Frankfurt, we work in very, very close cooperation with, with Frankfurt, to make sure first and foremost, that the quality levels which you receive at the airport are increasing day by day, so that's really, really important. Airport fees, as around the world, correct, are increasing also in Frankfurt, so they're increasing high single digits. We have also some agreements, because we work closely at the airport as well, so we have some benefits as well. Net-net, no, specific, specific issues which we have here. Most important for us is to ensure the quality level at the airport goes up, and that this is most of our attention.
Right. Thank you.
Our next question comes from Muneeba Kayani, with Bank of America Merrill Lynch. Please go ahead.
Good morning. Firstly, I just wanted to understand on unit cost for 2024, and the guidance of it declining. How confident are you about that, given the cost creep this year? Secondly, just, Remco, you mentioned the sale and lease backs in the fourth quarter, so they won't impact the net CapEx, but they would impact net debt, I understand, under IFRS 16. What's the impact on net debt and lease payments from those transactions? Thank you.
Good, good morning, Muniba. Hey, first of all, on the, on the unit cost, correct? Also, the unit cost, because everyone compares that against the prior year when you think about 2023. If you compare the unit cost versus 2019, I think we see a much more consistent picture, right? In Q1, unit costs were up around 18% versus 2019. They're about 16% up in the second quarter, and in the second half of this year, we expect it to be slightly down, but end of around 15%-16% for the full year.
If we compare that with the capacity level of 85% versus 2019, and then we consider inflation in the system, we consider all the ramp-up costs we have to handle, which we didn't have in 2019, you can see underlying the cost savings we have done over the last couple of years, really coming in now. If you now think about 2024, and we increase our capacity from 85 to 95, so it's 10% increase in capacity, and with that also, all the productivity which we expect to come back in the system, which we didn't have this year, that we can more than offset the inflation, which is also part of the system. Those two elements will really help us, and therefore, we are confident. We have to see where that will end up.
At the moment, we're looking at low single digits, perhaps it's a bit higher, it's too early, we have to go through the budget process. If you think, think in 2024 versus 2019, on a 95 capacity level with inflation over five years, I think we're competitively in a, in a very good position that we're really looking for. With regard to your second question on the sale and leaseback, you know, that we normally have lease payments in our adjusted free cash flow of close to EUR 500 million, which also relates to normal, say, operating leases, we conclude to that level. For this year, we expect that to go in the range of EUR 700 million-EUR 1 billion, so a little bit higher. Of course, that impacts net debt.
The impact on the cash outflow in the adjusted free cash flow will only go slowly up over time. The EUR 400 million-EUR 500 million we have now, will go slowly over time, and we think that is also the right view. We clearly stick, for everyone having any doubt, between the EUR 2.5 billion-EUR 3 billion. That's clearly what is the current plan in terms of the net CapEx of this year, and there we stand for it. I hope that answers your questions, Muniba.
Thank you.
Our next question comes from Tobias Fromme with Bernstein. Please go ahead.
Good morning, all. Tobias here from Bernstein. My questions are first on fares and passenger yield. Could you perhaps shed a bit more color around where you've seen the most increases in terms of fares, and then ultimately yield as well, and maybe also how sustainable this is going into the next couple of quarters in 2024? Secondly, I appreciate that Steve has asked the question in a similar manner, but maybe on your strategic positioning regarding the growth ambitions in the Middle East and Turkish, and how worrying this is to you going forward?
Tobias, good morning, Remco here, correct? As you know, yields in intercontinental are around 30%, correct, in the total. On the short haul, they are more around 20%, right? Particularly, we see the trans-Atlantic very strong. When we look at Asia Pacific, there's certain countries where it's a bit higher intercontinental, for others, a bit lower. Overall, that 30% is something we see. We see that also continuing in Q4, with the bookings we have. When you look just in the whole supply chain and the constraints which are in the system, also, we expect high yields to continue in 2024. We don't have yet that to underpin because of the bookings. Schedules are still low for 2024, all logic and also the direction points in that direction.
It's also needed for the industry with all the inflation is that. We believe it must be sustainable by the simple math of how the supply chain currently looks like, and the inflation in the system, and many airlines having debt to pay and invest in the future. The positioning versus the Middle East and Turkish, yeah, we know the Turkish Airlines is benefiting a lot because of the situation which is there in Russia. We, we have to see how that further develops. We don't see a significant threat from this, because particularly a lot of the travel goes from Europe to the US, and flying with us makes much more sense and is also logical.
At the moment, we are not worried, but of course, the positioning from the Middle East and particularly what Carsten mentioned before, the positioning of the EU and the position they take there, it's essential that the EU also pays attention to make sure the European airlines industry can compete well with the Middle East in general.
Thank you.
Our next question comes from Sir Andrew Lobbenberg, with Barclays. Please go ahead.
Hi there. Carsten explained that there's no scope clause in the pilot agreement, what does that tell us about your plans or aspirations for the new CityLine two or City Airlines, whatever it's called? Also, I think there's stuff in the press about you rebranding Eurowings Discover to just Discover. What are the plans to evolve that? Not sure if that's one or two. I'll pretend it's one. I thought Remco was working on finding out a magical, clever, financial way to stop the pension going back up, it's just gone back up. Is that, are you gonna find financial ways to lock the pension position in?
Andrew, good afternoon. Yeah, on the pilot agreement, as you know, there is no scope clause element in these discussions, and CityLine two, as the name implies, is about the future of CityLine. This is also where it will be discussed also with the union, which happens to be the same union, but it's a different negotiation because it's the negotiation about the future of CityLine. We had 3 reasons for CityLine two or strategic targets. 1 was to have a future into perspective for the pilots in former Germanwings. 1 is to have a future and a perspective for the staff of CityLine, and 1 is the need for competitive feed into Frankfurt and Munich, which currently CityLine is providing. Out of those 3, 1 is taken care of by the current negotiation result, which is the Germanwings pilot issue.
It's part of the package I just explained. The other two are not, and will be part of a negotiation with the CityLine topic. On Eurowings Discover, we used Eurowings when we launched the airline, which, by the way, is profitable for the first time this year, already in the first half, which not many people believed, I think, because we couldn't afford to launch a new brand in those days in the pandemic, and we needed to be close to Eurowings. Does it make sense long term to be so close to Eurowings in a different business model, one being non-hub, one being hub? Probably not. Therefore, we are now looking at adjusting the branding of the Eurowings Discover, but not rebranding probably is going too far, and it will not happen over the next weeks. Let's make some money first.
Andrew, my fun with the pensions. As you know, the sensitivity on the calculation is very, very high, correct? When you think about Q2, the long-term interest rate went down, which we have to use as a discount rate, with some risk premium, went down from 4.2 to 3.9, particularly in the way technical risk premiums in the market have developed. This is very, very volatile because of the current market circumstances, so I want to pay a little bit, not so much attention for the pension provision going up a couple hundred million EUR either way, because it could go next quarter the other way as well.
What we do and what I said before, that of course, we want to limit the exposure of the company for movements in the interest rate going forward. We started that process. We have partially already mitigated that effect, and over the coming periods, we will further mitigate the effect. Considering the fact that significant amounts of monies are involved, which you're then investing and reinvesting, and you, you can imagine that we have to do that with, with all caution and also confidentiality, I can't comment on it. I can assure you that over the coming times, we will further minimize that in line with what I've said, said before, and I will continue to have fun with that. We have to make sure also that we spread that risk over a little bit of time.
You can do that all in one go, that would also not be very smart. Continue to be fun, but exactly in line with what we promised before.
Brilliant. Thank you.
Our next question comes from Neil Glynn with AIR Control Tower. Please go ahead.
Hey, morning, everybody. I'll also ask too. Following on from the Eurowings color, about a 9% Adjusted EBIT margin in the second quarter, which is very impressive relative to history, so congratulations on that. Actually broadly in line with easyJet in the quarter. Just interested in your take now, having achieved that, the key drivers in terms of that step up and a nod to the sustainability of those would be helpful. I think the unit cost adjusted for sector lengths actually looks pretty similar to Transavia, which gives me some confidence in that. The second question, with, we've already had some questions looking forward to 2024 and ex-fuel costs, et cetera.
Thinking about it a different way, in, with capacity restrained and bottlenecks, EBIT per ASK is up very strongly relative to pre-pandemic levels. With the maybe simplistic, lazy premise that you would add back stronger routes earlier, where possible, as you restore capacity, can you give us some color as to how you think about the effect of the incremental capacity and whether it might dilute profitability per ASK simply by adding back the weaker routes as you go? Thank you.
Hey, Neil, good afternoon, Remco here. Let me start with the first question. I think we have to see Eurowings a little bit in the history of the last 5 years, right? A lot of the cost programs were actually executed and came to its full fruition during the crisis or slightly before the crisis. During the crisis, of course, everything came down and now Eurowings is getting back on full feet. We of course see that the cost savings are really having its benefit. From that aspect, we are looking positive also to the years before, because the CASK is significantly lower than it was before. You have to see that in combination also with the strategic choices of where to fly in Europe.
Very conscious choices have been made to to do that and where to compete, and in that sense, we look very positively forward to Eurowings also in the years to come, to to continue on this track. We have to keep working very hard on this. There's no doubt about it, but we are very, very proud of Eurowings, so what they realized this quarter and also what we expect for the rest of the year.
Neil, without now lecturing on aviation, which I don't need to do to you, any new route, in that theory, reduces margins, because you always fly the best route first. Every airline should only fly one route in that logic. Of course, there is counterbalancing elements, which, first of all, is growth, and therefore, the overheads and fixed costs are better contributed. That's why I think most airlines, including us, want to go back to 100% fairly quick, because that's where your business usually is dimensioned for. There is additional elements of efficiency. We are running, as I mentioned, and Remco also gave you some number and color, not in the optimum efficiency range right now, because we created buffers and rooms for quality, you know, elements in this, which we'll take out next year and allow us to fly additional routes.
More specific, on the post-pandemic situation we're currently at, we'll be adding routes which have a corporate focus. First of all, China. One is doubling our capacity into China, which a high share of corporate, usually these are very profitable routes, but we couldn't fly them already. Your logic of we fly the profitable ones first and the other ones later, doesn't fully apply this time. Also corporate in general, by the way, also in Eurowings, comes later than leisure. Some of the routes we are now adding, we can now add because they have sufficient corporate demand, which they wouldn't have had two years ago. Again, overall, your logic, I think, is right for every airline in the world.
This time, with the four arguments I mentioned: overhead, efficiency, rising corporate share, and China being a specific topic, I think the answer to you is no, there is no negative effect.
Great. Thank you both.
Great. Thank you.
Our next question comes from Sumit Mehrotra with Societe Generale. Please go ahead.
Thank you. The first one would be, on your CASK guidance for 2024. Earlier, you had said that you'll see a low to mid-single digit decline versus 2022, but now I see 2023 going up. Is it still the guidance linked to what you were trying to say, 2024 versus 2022 or 2024 versus 2023, with the decline? Secondly, about the dividend outlook, any range we should keep in mind for the payout ratios? Thank you.
Yeah, good afternoon, Sumit, Remco here. Just to clarify what I said on the CASK 2024 and the decline, that's a decline versus 2023, right? Vertically, that's also the logical. Versus 2019, we would then still be up, but then it's of course, 5 years further with inflation in the system and considering then around capacity level of 95%. I hope that that takes out the confusion which we apparently created. With regards to the dividend, we have said before that we, with an outlook for the year being positive and in line with we expect, that we would come back with a dividend in 2024 for 2023. Our dividend policy is a payment of 20%-40% of net, continuing net income.
We haven't decided yet what that is exactly. Of course, the net income will be then multiplied with whatever we present and then divided by the number of shares. We shouldn't forget that the number of shares have doubled because of the capital raise we did 2 years ago. All in all, I think we are in a good position, and I think also one of the few airlines who will actually do this again. I hope you will all appreciate that, and we see that back in our share price. Thank you, Sumit.
Thank you.
... Our next question comes from Johannes Braun with Stifel Europe. Please, go ahead.
Yeah, thank you. 2 for me as well. First one would be on the free cash flow, on the free cash flow side. I think Q2 looks a little bit light versus consensus. At least my interpretation is that this is largely due to less working capital benefits from forward bookings. I think those were only EUR 100 million in Q2. Looks a little bit odd, given your confidence in the demand environment, maybe you can help us here in, in that relation. Are you confirming your full year free cash flow guidance of close to EUR 2 billion? Secondly, on ITA, is there any new insight what the synergy potential might be in terms of, I don't know, euros or relative terms, like 5%, 10%, 15% of revenues or so?
In this regard, what is the fate of Air Dolomiti? Will it be merged with ITA, or will it remain a separate entity? Thank you.
Let, let me start with your question on the, on the free cash flow. When you look in the free cash flow, you have seen a significant amount of prepayments coming in, in the first quarter. In the second quarter, that remained about stable. That is roughly also what we expected to happen. If you look at the prepayment level on the balance sheet, it's a couple of billion more than it was in the end of December. There is, of course, a seasonal pattern in this, but clearly, when you look at the bookings and the yields and the outlook, what we see in Q3, we have, we have more than 90% of the bookings we'd had at the same time in 2019, 70% of what we expect for Q3, 30% for Q4.
All that is fully in line and prepaid, so we're not worried on there. If you see the working capital itself, performance, excluding the prepayments, you're seeing that despite a massive growth, of course, we have underlying, and we shouldn't forget, we've been able to hold the working capital stable or even slightly down, with exception of AirPlus, where, of course, it's a credit card company, so that part increases, but net-net, overall, it's not moving up. We have no secret things in our working capital as other airlines have, correct? We are, we are current on our receivable, we are current on our payables, and therefore, also believe that overall we can stick to our commitment of close to EUR 2 billion of free cash flow here.
We said in the beginning of the year, it might be a little bit lower because of the payments of the CapEx. We said around EUR 2.5 billion of net CapEx, now it might be a little bit higher. We still have to see year-end, how the whole prepaid works out into 2024, all in all, we are confident to stay exactly on track where we were before, right, of targeting the EUR 2 billion. With regard to your second question on ITA, as Carsten also said before, we're currently in the discussions with the EU. We are positive to come to some kind of conclusion.
If that happens, we're targeting in two years from now or after, the takeover will happen, to come to a break even and bring that in a positive. Of course, there are synergies involved on the different areas. I don't think it's very good to quantify that at this point in time. That also depends a lot on the further agreements and the speed of the work. We are very clear on the plans and, and team ready once we get the clearance to start acting upon this. With Air Dolomiti, of course, as you know, Air Dolomiti is a feeder into our hubs. At the moment, that stays, it's not changing, and in a couple of years we might reevaluate this, but currently no changes in the plans.
I hope that answers your question.
Yes. Thank you.
Our next question comes from Satish Sivakumar with Citi. Please, go ahead.
Thank you for taking my questions. I've got 2 questions here. Firstly on, Frankfurt Airport is talking about lifting restrictions for, slot restrictions for the airlines from Far East, especially from Asia. Whereas you today just updated the outlook, saying that you're likely to grow at the low end of your capacity guide. Does it imply that you'll continue to focus on transatlantic, and given the advantage of Chinese airlines flying over Russia, and that you find it not unit economics-wise, not profitable to compete on those routes? Second one is quick follow-up. You said Frankfurt Air- Airport, talking about high single digit tariff increase. How does that compare with the other hubs, Munich and Zurich? Thank you.
Yeah, Satish, it's Carsten. Well, first of all, maybe we misunderstood you. There is no such thing in our airports that slots are allocated to a certain destination. Any slot is just a time window and can be used wherever you want to go to. When it comes to Asia, we are growing significantly into China, going back to probably 80% ahead of our competition as early as next year. In India, we'll be above 100% very quickly. When it comes to Southeast Asia, where the Gulf carriers, of course, are the major competitors, we withdrew from those markets a long time ago. The only Southeast Asian destinations we are serving is Bangkok and Singapore, where we are very happy and successful, but the others we have given up years ago to those local carriers with their subsidies.
You basically cannot compete with them, therefore, there is no impact. Frankfurt fee increases, obviously Frankfurt starts from a higher level, but the increase in itself, I think, are more or less similar over the next years in our various hubs. Is there another question? Was that hopefully answering your question?
Yeah. Thanks, Carsten. Yeah.
Our next question comes from Achal Kumar with HSBC. Please go ahead.
Yeah, hi, good morning. I have two, actually. One, coming back to Asia, now, given that the cargo is weak, and I believe Asian operations would have been subsidized significantly by the strong cargo business previously. Now, given the cargo is weak, how the economics looks like, you're increasing operations in Asia, how does the profitability looks like versus previously when the cargo was very strong? My second question is about the closing bookings. You said that closing bookings are strong, while on the contrary, Remco Steenbergen mentioned that the closing bookings are a bit soft. I mean, for you, is that closing bookings strong on the long haul, is it, or on the overall network? Could you please help on that? Thank you.
Hello, Achal. Yeah, on Asia, let's not forget, cargo is not weak. Cargo is not even back to normal. It's going towards normal, maybe, and currently, if I remember correctly, Dennis will correct me if I say something wrong now. The cargo yields are about 35%-40% above 2019, which was an okay year. We are not anywhere having a problem with cargo. We just didn't have the extraordinary two years which you're referring to. In those years, you're right, cargo subsidized our routes to Asia, but we had no passengers at the upper deck, so cargo carried the whole route. We are now going back towards normal relationships, but still with a higher cargo contribution than most of the years in our history, therefore, I'm not worried about Asia.
The closing bookings, try to book a holiday on Lufthansa short haul or long haul for the next days. You'll find that we are very strong and almost sold out, both short range and long range. Short range is something I have not seen on the Mediterranean, Spain, Italy, Greece. These routes are among our top routes, and therefore, I think that what I said, and Remco and I said about closing bookings, can be applied to the whole network, more or less. There might be some routes and issues where that doesn't apply with 400 destinations, obviously, but in general, to your question, the answer is both.
Remco.
I know there was a competitor who came out. I know there was a competitor, or somebody who loves to be our competitor, who came out a few weeks ago with some guidance on short-haul bookings. We don't share that yet, and hopefully won't.
Right. Remco, could you also please comment on Asian profitability, please?
Well, Asia profitability is strong. It's China, among the best routes in our network. It's India, where we are expanding. You know, maybe that the Airbus A380 is going to Bangkok this winter. We wouldn't put it there if it wasn't a very strong route. We are not unhappy at all with Asia, and again, there's lots of our positivism for 2024 will come from the recovery of Asia, where Lufthansa tends to be number one out of Europe, which will help us to keep yields high, also in 2024. Of course, a limited offer to those markets helped.
Our next question comes from Jaime Rowbotham with Deutsche Bank. Please go ahead.
Hi, guys. Just one from me. It looks like you could get pretty close to your 8% midterm margin target this year, which is impressive. Clearly, you expect to be there or higher next year. Consistent with that and the capacity growth, consensus expects year-over-year profit growth next year from the high base this year. But it feels like the market's thinking differently. The multiples you and some of your peers are trading on, the share price reactions to very strong results, seem to suggest a belief that you're, in fact, over-earning this year, that the current performance can't possibly be sustained. What, what would you say to try to convince people that that's not the case, i.e., that, that this isn't simply a freak year in terms of the interplay between yields and unit costs? Thanks.
Jaime, this is a wonderful last question, correct? I don't get it, correct. Since I'm here around now, almost three years, correct, I think we have consistently delivered on the promise we put along, correct? There were doubts from the beginning, from the savings we put in, the strategic changes were there, the profitability, what we did on the CASK, the yield discussions, which we also had in Q4 last year when people were not believing it. I think on our end, what we will do is consistently continue to deliver on what we say. That is clearly our looking ahead.
We, we think we have given a lot of data points, particularly with the constraints in the supply chain, which continue for quite a bit longer, and certainly through 2024, that there's no logical reason at all that our profitability will deteriorate, correct? It's a combination of, of those two. When I look at the share price also this morning, you can imagine that there is some disappointment on our end, that we confirm on a, a top three kind of result for the full year. We have a top result in the second quarter. We have delivered on all the changes, also, in terms of the portfolio, to simplify the organization and to move on, on Technik.
Having also a company in terms of the brand and the performance, et cetera, which is truly outstanding, with truly outstanding employees, we have to work every single day and bring this up very, very significantly. The agreements we make also to stabilize our relationship with our employees, which, which, our colleagues are working on. I, I hope with this, correct, I can give you some confidence, but I equally do not understand a 3x EBITA multiple, which underpins our current valuation. In many other industries, you would find a company in complete distress without management to have such evaluations. Yeah, that's just me as the CFO of Lufthansa. With that, thank you very much, Jaime, for that question to end the session today.
Yeah. Thank you very much, to both of you, Carsten and Remco. Thank you for your interest, your participation in today's call. We look forward to speaking and meeting, many or probably most of you, over the next few weeks and months. Have a good rest of the day. Thank you.
Ladies and gentlemen, that concludes our conference for today. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.