Deutsche Lufthansa Ag Reg

A wonderful good morning or good afternoon, ladies and gentlemen. Welcome to the Lufthansa Group Q1 2024 results analyst conference call. My name is Francie, the course call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by Q&A session. You can register for questions at any time by pressing star N1. In the interest of time, please limit yourself to two questions only. For operator assistant, please press star and zero. At this time, it is my pleasure to turn the conference over to Dennis Weber, Head of Investor Relations. Please go ahead, sir.

Yeah, thank you very much and good morning, ladies and gentlemen. Welcome to the presentation of our first quarter results 2024. With me on the call today are our CEO, Carsten Spohr, and our CFO, Remco Steenbergen. They will present you our results and discuss our commercial and strategic outlook for the year ahead. Afterwards, you'll have the opportunity to ask your questions, and as just mentioned by the operator, and similar to prior quarters, I would like to ask you to limit your questions to two so that everybody has a chance to participate in the Q&A session. Thank you very much, and over to you, Carsten.

Thank you, Dennis, and a warm welcome, everybody, from my side as well. As you all know, in our industry, the first quarter is the weakest due to seasonal factors, but nevertheless surprising, unfortunately, in a negative sense, is the size of our quarterly loss this year, which, though, is mainly due to strike effects. But before Remco and I get into the details of our numbers, let me take a quick look moment to broaden our perspective and look at the global aviation situation starting with geopolitical instability obviously unfortunately the war in ukraine continues the situation the middle east has recently even deteriorated to a certain degree and that has not only led to repeated cancellations of flights into the region but it has also driven up the price of oil second And unchanged, though, is people's desire to travel the world and the ongoing strength of demand, which I really think is impressive and an impressive proof of that change of behavior across the globe in various parts of society with a positive swing towards travel. However, also, as you all know, various bottlenecks continue to limit the supply side of our industry. Delayed aircraft, delayed seat, delayed engines, unplanned engine overhauls, ongoing training requirements, sometimes our bottleneck, and still, in some cases, staff shortages at our system partners, mainly at the airports and ground handling companies. As a result, also our growth in the Lufthansa Group is lower than originally planned. We'll come to that in a minute. Operations also continue to be not as efficient as planned. For example, because of the need to increase the number of reserve aircraft or crews which cannot fly, for example, being trained for aircraft not yet delivered. In addition, our key hubs, especially in Germany, are suffering from significant cost increases. Taxes, fees, charges in Germany, for example, have increased by more than 80% since 2019. And now, as of tomorrow, the air traffic tax will go up again by another 20%. Added to this are the cost of EU regulations, such as the sharp increase in expenses for emissions trading, and from Jan. 1, 2025, on the cost of SAF, sustainable aviation fuels, in terms of the blending quota. At the same time, the necessary consolidation of our industry in Europe is being at least somewhat hampered by the demand for quite comprehensive remedies. In short, the environment in which we operate out of Europe is and remains challenging. With this, let us now come to the actual purpose of our conference today and look at our results. The Lufthansa Group revenues reached 7.4 billion euros, an increase of 5% over the previous year. Demand for air travel, as mentioned, remains strong. we welcomed 24 million guests on board, 12% more than the previous year. Adjusted free cash flow was lower than the first quarter of 2023, but still clearly positive at 3 or 5 million euros. Nevertheless, on April 15, we had to announce a higher than expected quarterly loss of 849 million euros. 350 million of this was due to the direct and indirect effects from strikes, be it from our own staff or from personnel of our system partners, airport or security checks. In our group alone, the various calls by the unions added up to more than 550 hours of strike action. In addition, there were strike-related work stoppages by airport security personnel, as just mentioned. In total, 6% of all planned flights were affected and we disappointed hundreds of thousands of passengers whom we have not been able to offer the reliability they expect and deserve from us. In addition, many customers were hesitant to book vacation trips short notice because of the strikes and the uncertainty they created also going into the summer months. These are financial burdens and losses in demand that no company in our industry can simply compensate for. Accordingly, we had to adjust our full-year forecast by the strike-related cost loss of €350 million in the first quarter and a further €100 million in the second quarter. Due to the losses, our core brand Lufthansa German Airlines has initiated measures to support earnings in the short term this year. Among other things, it is planned to reduce non-personal costs cancel new projects, and we review the need to fill vacancies in the administrative area. We undoubtedly had a difficult quarter. However, the challenges we experienced did not stop us from pursuing ahead with our strategic priorities. The financially worst quarter of the year is behind us. This marks a turning point, and we can look forward to the rest of the year with confidence. our investments in the offer are finally coming to the market and we are greatly enhancing the experience for our customers. With the launch of Lufthansa City Airlines, we are improving the profitability of our short-haul feeder traffic. By securing long-term wage agreements, we have good visibility on key cost items and more stable operations, allowing us to take advantage of growth opportunities along the way. And in this context, we can exploit the regained strength of our home markets and very strong summer bookings. Ladies and gentlemen, last Thursday, we were finally able to present the first Airbus A350 with our new Allegis cabin. Tomorrow, it will start its scheduled service initially from Munich to Vancouver. Second destination will be Toronto, followed by Chicago and Montreal. With Allegis at Lufthansa Airlines and Swiss Census at Swiss, whose product launch is scheduled for the second quarter of 25, we are once again setting premium standards in the industry. Because every guest has his or her own understanding of premium, we very much focus on maximum individuality. With Allegis, our guests can choose from a dozen different seat types across all classes. In total, we will install more than 31,000 new seats in our group's long-haul aircraft. Every new intercontinental aircraft will be equipped with either Allegis or Swiss X-Factory. Sorry, Swiss X-Sensus at X-Factory. And in our existing fleet, without Allegis cabins, aircraft which are being phased out, except for the 380 and the 330, for which we are also refitting the cabins with new state-of-the-art all-aisle access seats. the Boeing 747-8, and the Swiss 777s will also be retrofitted with Allegra's and Swiss 6 sensors in all classes. By 2028, Lufthansa and Swiss wide-body fleet will be equipped with a new product, basically across the whole fleet, and that is either including Allegra's or the mentioned all-aisle Xs, at least for business class, of course. We'll be investing around 4.5 billion euros in upgrading our offer this year. In addition to the modernization of our fleet and the renewal of our intercontinental cabins, we're also focusing on upgrading customer communication. Let me give you some examples for this. Communication heavily affects customer satisfaction, especially when things do not go according to plan. That's why we are expanding baggage tracking and enabling customers to rebook flights and request refunds themselves without the support of customer service personnel via our app. As part of the closer integration of our loyalty program into the offer, customers will be able to redeem points for award flights directly in the Lufthansa app going forward. These examples are only some of many other measures we are currently implementing using both the power of digital and the strength of our team. In network management, the launch of Lufthansa City Airlines marks a major step forward. Lufthansa City Airlines will start flying at the end of June. The airline will initially operate flights from Munich to domestic German and European destinations. In line with Lufthansa's product offering, passengers onboard Lufthansa City Airlines can expect Lufthansa's product range and customer experience for short and medium-haul flights. Lufthansa City Airlines will play an increasingly important role in the feeder network of our hubs. This will strengthen our short-haul network and, with competitive feeder services, secure our planned growth on the long-haul routes, which is obviously key to us. With the order of 40 Airbus 220-300 and a further 20 purchase options, we have set a clear signal for the future of this new airline. The first two of our four Airbus 319, which will also be operated at Lufthansa City Airlines, will be delivered this year, and they already have been painted in the new Lufthansa City Airlines livery. In view of the innovative products and services that will be launched in the coming month, it's good news that the risk of strikes has decreased significantly. We were able to reach long-term wage agreements for both our ground staff and our colleagues in the cabin and cockpit of Lufthansa Airlines, giving our guests and ourselves planning security in this regard. We achieved now the same for the flying personnel at Austrian Airlines only last week, and only this morning we concluded a new agreement for the pilots of Eurowings. As a result, most, by far the most of our workforce is now covered by new, long-lasting collective agreements. Our employees have achieved a great deal through their hard work in the recent years. We also want their salaries to develop appropriately and well. We offer them the best conditions in the industry and the agreements we have now reached are the best proof of this. However, it is also clear that the high and now rising personal costs represent a major economic challenge for us to which we must find answers. And this will not be possible without significant productivity gains in the coming years. Ladies and gentlemen, our capacity expansion in the second quarter is likely to be somewhat lower than originally planned, partly due to continuous delays in delivery of new aircraft. For the full year, we have moderated our capacity plans to now 92% which is two percentage points less than originally planned. Nevertheless, we are growing strongly. We are confident that we have another very good summer ahead of us. At this stage, bookings for the summer period are up another 16% on the previous already record year. So demand is outstripping our capacity growth. The drop in demand that we experienced during the strikes has been overcome. even if we cannot fully make up for the booking losses in April or for April and for May. Encouragingly, momentum in our home markets has picked up markedly in the past couple of months, catching up with the existing strength of the US market, which has been visible for quite some time. As a result, we expect both in summer a strong performance in the inter-European travel as well as as a continuing strength on the transatlantic, now driven by good demand from both ends. The recovery in Asia-Pacific, however, is progressing a little bit more slowly, at least when it comes to China. In comparison to China, India and Japan are doing much better. The latter two also contribute to the recovery of corporate travel, which continues to finally progress, especially on long-haul routes, where again, the transatlantic continues to be leading. Overall, we are pleased to see that demand remains solid and good, which also benefits Lufthansa Technik very much, as the need for maintenance, overhaul, and repair services around the world continues to grow. The disproportionately high growth on Asian routes and the increase in European demand will lead to some yield normalization. However, we continue They have good pricing power and to record double-digit growth in volumes even after a very strong year 23. Ladies and gentlemen, I begin by talking about a turning point. Yes, the environment in our industry remains challenging, but we have every reason to be optimistic. First, as mentioned, Allegri is finally here. This year, we will receive a new long-haul aircraft with a new cabin every month. Next year, it will go up to two. aircraft per month. We are constantly improving our product while modernizing our fleet. We have long-term agreements with our social partners, and we continue to recruit around 1,300 new colleagues every month, for which we get 20 applications each. And not only do we have the best team in the industry, but we also have the right strategy to continue to be successful. We are accelerating our transformation, from an aviation group to a global airline group with our multi-hub, multi-airline, multi-brand business model at the very heart of our strategy. And on top of that, as you know, the world-leading MRO provider, Lufthansa Technik, among other companies. And this strategy is paying off by making us more international, more flexible, quite more resilient, and surely more customer-focused. Thanks for your attention. I will now hand it over to Remco, who will take you, as always, to our financial highlights, provide you with some more specific information on the financial outlook before we look forward to the Q&A session. Thank you.

Thank you, Carsten, and a warm welcome to all of you. The first quarter was marked by an adjusted EBIT loss of €849 million, unfortunately a consequence of the challenges we faced including industrial action and a subdued cargo result. In an already seasonally weak quarter, the operating loss was higher than expected due to the various strikes, both in our own operations and at systems partners. The cargo result was down on the very tough comparison base from the previous year, as the first quarter of 2023 was still characterized by exceptionally high demand in connection with the supply chain disruptions during the pandemic and constrained air freight capacity. In the first three months, the gross profit contribution from the expansion of flight activities compared to the previous year was offset by mid to high single-digit cost inflation. Personnel costs increased mainly because of a 6% increase in headcounts and increasing wages. The inflation compensation premiums negotiated as part of the latest collective wage agreements had a one-off effect of 38 million euros on personal expenses in the first quarter. Variable costs increased, especially in the areas of fees and charges and maintenance, including the costs associated with the early maintenance required for the PW1100 engines. Focusing on our passenger airlines, the operating loss increased to €918 million, compared to €512 million in the prior year. Approximately three quarters of the increase, that is around €300 million, were related to strikes. EU 261 compensation payments to customers nearly tripled year on year to almost €100 million, with duty of care expenses increasing by half to 63 million euros in the quarter. However, the impact on revenue was even greater than that on costs due to the decline in the last-minute bookings as passengers were afraid of being stranded during their journey. In addition, many customers had to be rebooked because of flight cancellations. This absorbed capacity that was otherwise reserved for high-yield short-term bookings. Overall, the group airlines operated approximately 5 percentage points less capacity than planned relative to 2019 due to disruption from strikes and other events, including weather and AOGs, reflecting ongoing bottlenecks in the availability of spare parts. Yields were down 2.5%, with around two-thirds of the year-on-year decline related to strikes and one-third of the off-peak nature of the first quarter. coupled with the market-wide increase in capacity. RASC was down 6.3% due to the yield decline and an additional impact from the decrease in cargo revenues and the higher customer compensation payments mentioned before, which are not included in the yield definition. Unit costs were still down 1.8% when excluding the impact of strikes, despite the shortfall in capacity compared to initial expectations and cost inflation. On a reported basis, however, they increased 2.9%. As mentioned, our cargo division faced a tough comparison to the previous year, resulting in lower profits. However, it's important to note that were it not for the strike effect, our cargo division would have achieved a break-even result. Looking ahead, we are confident that cargo yields will remain stable year on year, so that the business will return to profit growth on the back of increasing volumes. In this context, ECOM-related growth in China is driving performance, while the rest of the global air cargo market remains challenging. Lufthansa Technik, on the other hand, demonstrated resilient performance with a 4% increase in results, excluding strike impacts, including the effect of the three-day strike-related complete shutdown of operations in Hamburg, Lufthansa technique-adjusted EBIT fell to €160 million in the first quarter. We expect the business to be able to recoup this €24 million effect on strikes in the second quarter. The generation of free cash flow was significantly better than the operating results suggested. Driven by robust booking intake for the summer season, as Carson already highlighted, the remaining working capital remained flat. despite the still significant year-on-year growth. Capital expenditure were down by around 10% compared to the prior year due to different phasing of investments. Again, the majority of investments related to fleet modernization and the rollout of new seats. Available liquidity increased to 10.8 billion euros supported by the renewal and expansion of the existing revolving credit facility to 2.5 billion euros. This new RCF is more favorable than the prior one due to the improved rating of the group. Net debt declined because of the generation of free cash flow, and also the net pension liability decreased due to a 0.1 percentage point higher discount rate. These reductions have favorably impacted our leverage ratio, which was down to 1.8, including pensions at the end of March. Our solid financial position means that we are not just the only European network airline holding investment-grade ratings by all leading agencies, but that we are also the first one to resume dividend payments after the crisis. The proposed dividend payment of 30 cents per share, which will be resolved at the upcoming AGM in a week from now, is a clear indication of our financial health and our commitment to creating value for our shareholders. Our fuel cost expectation remains unchanged, in line with the guidance provided in March. The increase in the price of Brent in the past couple of weeks has been offset by a corresponding reduction in the jet crack, supported by the expansion of refinery capacity in Europe. With a hedge ratio of 80%, with half of the hedges related to jet fuel and the other half to crude oil, we are well protected against the risk of rising prices. including the effects of a possible escalation of the conflict in the Middle East and its possible impact on the oil price. Looking ahead to the full year of 2024, we anticipate our task to remain flat, excluding the one-off impact of the Q1 strike. Including the latter, we forecast a low single-digit percentage rate increase. This outlook is grounded in our focus on operational efficiency and strict management of fixed costs to fully leverage the restoration of free crisis capacity this year and next year. Without question, the collective wage agreements just concluded both significant challenges for Lufthansa Airlines in particular, where structural improvements in network profitability and cost efficiency are required to achieve better margins, as Karsten emphasized already. Overall, however, the latest wage settlements, and a slight reduction in capacity compared to original expectation, do not change our unit cost forecast for the year as a whole, were it not for the effects of the strikes in the first and, to a lesser extent, the second quarter. For the year as a whole, we project capacity of 92% relative to 2019, two percentage points less compared to our original guidance given in March. This reduction reflects the lower level of capacity operated in the first quarter, as well as some trimming of schedules for the second quarter. The latter was done to support the stability of operations in combination with the delay in new aircraft deliveries. In this context, let me emphasize that we do not assume that we will be able to deploy a significant number of additional Dreamliners in 2024. although we still expect to take delivery of some of them from Boeing before year-end. In the second quarter, we expect to operate at approximately 92% of our 2019 capacity. Unit revenues are expected to decline in the low single-digit percentage range, partly because customers were reluctant to make short-term bookings for April and, to a lesser extent, May, while the labor disputes were being resolved. CASC is expected to increase in the low single-digit percentage range in the second quarter. Suggested EBIT in the second quarter will therefore be below that of the previous year. In the third quarter, capacity is expected to increase further to over 95% of the pre-crisis level. Based on current bookings, we expect unit revenues to exceed the prior year level in the peak summer quarter. We are hence confident that operating profit will increase year on year again in the second half of the year, supporting our outlook for adjusted EBIT to be around €2.2 billion in 2024. Adjusted pre-cash flow is expected to be at least €1 billion. This assumes net capital expenditure of between €2.5 and €3 billion, with higher gross investments partly offset by sale and leaseback transactions in the second half of the year. And with this, Karsten and I are looking forward to your questions now.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star and one. If you wish to remove yourself from the question queue, you may press star and two. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star and one at this time. And our first question today comes from James Hollins from BMP. Please go ahead.

Thanks very much. Two questions. I was just wondering, I think you mentioned it there, Remco. Goodbye, by the way. I know it's a bit early last time. Anyway, I think you mentioned Pratt-Whitney compensation. I was wondering if you could, apologies if I missed it, maybe sort of quantify if you booked some compensation in Q1, maybe your expectations for the full year, and also how it will be booked, whether you're doing a whiz and taking it as a net negative cost or a jet blue and looking more at the balance sheet. And then secondly, probably for Carsten, on ETA, I imagine you're very bored of talking about this, but tough. I was just wondering if you could sort of run us through some of this latest news. It seems to be very much focused on just really looking at remedies at Linarte and whether that might be enough. So any comments would be useful. Thank you.

James, good. It's just good afternoon. Let me take the first question. And Brett and Whitney, we have not yet come to an agreement, so there's nothing booked in Q1. And on your related question that once we will come to agreement, how we'll record it in the P&L, as it stands now, but of course it depends also on the construction of the deal, actually the compensation will be paid out as we incur also the cost over the coming years. So there's a slight throw-up over the last quarter's But in principle, it would match the cost over the coming quarters and probably through next year. I couldn't hear you 100%, but I assume this answers your question. Perhaps, Carsten, you want to take the question on e-town?

Yeah, absolutely, James. Before I come to the challenges, maybe what's feeding my optimism? You all know our rationale with the Italian market playing a huge role for Lufthansa and all that. I don't think I need to go through that again, but I think more and more people also understand this deal is the right thing for the future of ITER. I think now Italy being the third largest economy in the EU needs direct access to global markets out of Italy and only in ITER part of a bigger group can achieve that sustainably. And last but not least, I think it's also we have surfaced more and more that the Italian consumer is very much faced or facing a 40% dominance of one of the local carriers on the one hand, and on the other hand, ITER being able to provide a European offer on the long range towards the big players on the other side of the long range route will require some group membership. And that is now coming also to the challenges we still have to constructively take away with the EU Commission. How do we untangle the dominant situation of Lufthansa Group plus ITER in VDATA, where obviously the answer can only be that we give up a certain amount of slots? How do we ensure competition on those routes where currently only Lufthansa and ITER operate, which I think is a fairly normal challenge in these discussions? And last but not least, how and i think the eu commission and we are aligned here in our interest to ensure the long-term long-range viability of a european carrier out of rome which obviously is eta thinking about the us against those three mega carriers in the us delta american and united so that is the three elements of remedy discussions which we're having and these talks are constructive i think it was Between the three of us, the government of Italy, the EU Commission, and us agreed that we need a little bit more time, which is the reason news you received. But I think also everybody understood that Lufthansa needs to create value for its shareholders by this transaction. So, of course, we cannot just move along with anything. And that, I think, limits the solution space. And I'm still optimistic we find something within that solution space before the summer.

Perfect. I mean, is that extension, I mean, logically, human nature, whatever you want to call it, would suggest that means you're quite close to an agreement, or am I reading that wrong?

Well, it's not up to us. It's between the three of us. Yes, I am optimistic that these constructive talks, which we now needed to extend, will end up in agreement, yes. Okay, cool. Thanks a lot.

The next question is from Jamie Robotham from Deutsche Bank. Please go ahead.

Morning, gentlemen. Two questions from me. First, could you talk a bit about the interplay between new aircraft and capacity growth? You showed a slide at the full year results, slide seven, I think it was, with over 30 new planes expected this year, including over 13 Dreamliners. But in those closing comments, Remco, I think you said that to deliver the new 10% capacity growth this year, you now don't need any Dreamliners. Is that correctly understood? And perhaps alongside that, you could comment on Airbus deliveries, the narrowbodies and the A350s. Second, you've talked about what sound like emergency measures to strengthen the results at the Lufthansa mainline, reducing operating costs, stopping new projects. Could you expand a bit on what's happening here? What projects are being stopped? Why the actions are suddenly being deemed necessary? And if you don't mind, why they weren't being taken anyway? Thanks very much.

Jamie Remco here. Good afternoon. With the reduction of the capacity from 1994 to 1992, we assume a lower level of Dreamliners to come in, so about half of the 15 we originally planned. In the original planning, the 15 were always phased in the second half of the year. The remaining seven would come in Q4. If they wouldn't come at all, it would have a bit of impact still on the 1992, but not a material number overall. So already in the 94%, we had assumed a little bit of delay later in the year, and this is now a bit lower. But it's part of the 94 going down to 92, and therefore we don't expect if this further delays any impact for this year. On the Airbus 350, as it currently stands, we expect one per month, eight in total between now and the end of the year. So that is on track. The 320s are also still coming this year. They're planned also in the course, mostly I think mid this year. It's delayed from the original planning, but we don't see much risk remaining here. So therefore, the capacity growth and the new planes, it's in an acceptable range as it currently stands, notwithstanding the fact, of course, that all these delays have an impact on the efficiency of particularly the main airline because the training of pilots and crews and the hiring of of course, starts much, much, much earlier, and that, of course, causes a bottleneck where the efficiency is a bit impacted. At the main airline, correct, yes, of course, actions are taken, also considering the current results and the efficiency. To talk now suddenly as a course correction from left to right with emergency actions, that is also not correct. There's a very clear action in terms of the growth, the new planes coming in, the movement in efficiency, which is a bit delayed in the mainland, and that's impacting us. But, of course, you continuously look at actions. But with the results a bit lower this year, of course, you have to look again. Are there certain projects you cannot or you have to delay a bit to find a little bit better balance? But don't take it as a black and white. We're going left to right with the steering wheel. That would, of course, be stupid.

Understood. Thanks a lot, Renko.

The next question comes from Alex Iving from Bernstein. Please go ahead.

Hi, gentlemen. Hope all is well. Two from me, please. First, on your recent agreements with unions, great to see these deals signed. Following these, how do you expect staff costs to evolve on a unit and on an absolute basis? And then my second question is for an update on corporate travel, please. Some of your US peers have been quite vocal about a real recovery in the first part of 2024. Where are you now back to on a revenue and volume basis as of 2019, please?

Alex Remco here again. With the agreements with the unions, As you have read as well, for most unions, we have come now to an agreement which gives clearly some stability in the system for the coming years, which we're very happy with. With regards to the cost, there's some work to do on our end to deal with this. If you look at the cost increases for this year, it's around 7%, which we also assumed originally. So therefore, in the guidance of the CASC, you don't see much difference. difference. If you look at 25 and 26, what has been agreed, it's somewhere between 3.5% and 5%. Next year, probably more in the 5% of what is agreed for 26 goes down to a low single-digit number. With the increase of capacity over these years as well, we think we can offset that again with the efficiency and both the increase of capacity and the leverage of the fixed cost. Notwithstanding that, it's quite an increase overall, and it requires work on our end to make it all work. It also comes back to the whole strategic discussion on the other airlines other than the main airline, Lufthansa, and how we're going to divide the pie in terms of where the flying is going to happen. We've chosen their strategic direction, and we will stick to that to make sure that we leverage the different airlines we have. On the corporate travel aspect, We ended in Q1 at around 65%, a similar level as Q4. We still expect that corporate travel towards the end of the year to still move to a level of around 70%. We have to see how that moves with the bookings. So nothing different than what we originally told you early March. I hope that answers your question, Alex.

Absolutely does. Thank you very much.

The next question comes from Stefan Furlong from Davie. Please go ahead.

Afternoon, gentlemen. I was wondering, I know at the end of last year or at the start of this year, you did expect unit cost inflation, maybe mid single digit type of rate. So with the labor deals and general tax increases, et cetera, I mean, does the 8% margin plan just have a different shape require more, better, you know, revenues, or just as I said, a different shape on the kind of mitigation measures on the cost side. So it's just another way of asking the previous questions. And then the second thing, maybe just talk about the MRO business. The general supply chain challenges, would you see that as a positive for the MRO business Obviously, it helps you have that in the context of the Pratt & Whitney issues. So just maybe talk about the interplay of MRO with the airline and the external airlines that you have. That would be great. Thanks a lot.

Stephen Remco here. I will take the question on the unit cost, correct? Yeah, we said indeed mid-single-digit increase, correct? You have also to see that in the context of all the discussions we have with the unions, correct? What does this mean towards the 8%, correct? So it means, on one hand, a further growth of capacity so we can leverage the fixed cost in the right way and keeping the fixed cost in terms of people stable. It means, too, that the efficiency or the inefficiency we currently have in the system is disappearing out, correct, of the system. And, of course, that the yields, correct, are at least staying on a stable level or have a slight increase over the years to come. Then the 8% is possible. That's currently in our plan. We see strategically also no logic why that wouldn't happen. It's too early to comment whether that is in 2025 or in 2026. That has to be seen as well, particularly how quick the efficiency can be put in. And that depends again then on the new airplanes coming into the fleet and how that can be organized. But there is no deviation from the 8% margin call from the companies.

Sorry. Hi, Steven. It's Carsten. On the supply chain question, also in regard to Lufthansa Technik and MRO, I think we see three effects here, one negative, two positive. On Lufthansa Technik, surely the effect is positive because margins are going up. Nevertheless, even in Technik, we have volume restrictions. There are certain demands from the markets, customer inquiries. We cannot satisfy just to the lack of parts. and partly labor, but those jobs we accept, those contracts we sign, usually show some very nice margins, so I definitely see a positive element here. Operationally on the airline, obviously, there's negative impact, which requires us to fly older aircraft longer, as Remco was referring, as even having wet lease deals, which we wouldn't need otherwise if we had enough supply for our own aircraft. But the third element, and maybe the most positive element, is the strategic impact on the industry. Different to other industries, the lack of the supply chain over years cannot be compensated within a few years. So if a car company lacks production of cars, they can make it up in double shifts, night shifts, weekend shifts. That will not work neither in Seattle nor in Toulouse. So these airplanes not being produced right now will be lacking for many years in the industry. And in my view, will have a very healthy impact on the number one formula of success for our industry, which is demand versus supply. And I just met with my counterpart from United a few days ago. We fully aligned here the positive element impact of this development for the airline industry will be positive for many years. And that even leaving Lufthansa Technik aside. But again, Lufthansa Technik offers additional opportunities for a group like Lufthansa. As a matter of fact, we are looking for a new facility in Europe where we maybe are able to close a little bit more next week at our AGM, which will allow us to tap even more this very healthy market from the MRO side, adding to the positive effects I just mentioned on supply and demand. Nevertheless, not ignoring, of course, operational challenges we have short term.

That's great. Very clear. Thanks, Karsten. And thanks for your help, Remco. Best of luck. And also to Dennis. Best of luck.

The next question comes from Ruxandra Haradao Deza from HSBC. Please go ahead.

Yes, good afternoon. Thank you for taking my questions. Remco and Denis, congratulations on the performance over the last year. Thank you very much for your help. It has been a big pleasure, and I wish you all the best for the future. Two questions, please. First, you highlighted a strong balance sheet, investment-grade ratings. You have a high liquidity. Remco, you mentioned during the last conference call that you considered the valuation of the stock cheap. So why don't you consider share buybacks? And second, you mentioned that China is not performing well. And will this have some consequences on capacities to China over the next quarters? Thank you very much.

Hello, Rukhsanda Remco here. Thank you for your question. Yes, I still think that the share price is very cheap, correct? The market cap is below our equity correct so if you in any way look at this i find it personally very very disappointing that i have not been able to help the company with a better share price than it currently has i don't think the company deserves that with regard to the balance sheet i'm a very strong believer that you need to have a very strong fundament when you're in a company particularly when it's an airline so to have a healthy balance sheet is essential At this point in time, to start with share buybacks, while the company is in full need actually to renew its fleet in order to be also successful for the next decade, this requires a lot of money to invest. And I think actually that's a much better investment as it stands also vis-a-vis the current status of the balance sheet. And I hope that the investors accept and respect that decision. Karsten, do you want to say something on China?

I'm thinking about some private share buybacks, but my wife limits the volumes here, so the financial markets might not feel it. On China, we have some optimism because a little bit, I think, under the surface of the daily media, the investments of German companies into China have reached a record high in 2013. Put all politics aside, companies are investing, and, of course, investment means travel, means cargo moving both ways. Especially cargo ex-China is feeding our optimism for Lufthansa cargo, e-commerce being very strong, and that, of course, very much fed by China. When it comes to mainland China and passenger traffic, I think we see some bright spots, which is Shanghai and Hong Kong, which are very strong. The smaller cities that we all know small in China means, whatever, 20 million and below. The smaller places we have been flying to for many years are definitely coming back more slowly. Also, demand out of China is recovering on our airplanes a little bit slower than we thought because with two hours less flying times going through Russian airspace, some local Chinese prefer the Chinese carriers, whereas Western passengers prefer to stay out of Russian airspace and actually like our product, which we see in some nice yields. Nevertheless, we see additional recovery coming for the second half of the year. out of mainland China, and we already have reached our number one as of Europe, of European operators from China, and we're looking at adapting to the increasing demand over the course of the year. But it surely is more slow than we all expected.

Thank you very much.

Thanks. The next question comes from Ruairi Kulinan from RBC. Please go ahead.

Raleigh, we can't hear you.

Hi, is that better?

Yes, it is.

Yeah, okay, thank you. Yes, quite notable, the 13.8% decline in RASC on Asia-Pacific routes. We've discussed China weakness as a Anything else worth highlighting there? And then secondly, a question on MRO. Even strike adjusted, MRO margins did decline in Q1. Should we just think of 2023 margins in this business as at the sort of upper end of what we can reasonably expect going forward? Thank you.

Yeah, Remco here. On the APEC situation, I think everything in Asia is moving as originally planned, except China. So there's nothing else. I think we additionally have to say what Carson already mentioned before. On the MRO, for the full year EBIT margin, we expect a flat margin and perhaps a slight decline of the margin. That's yet unclear where it ends. Last year, we had a very good year. Of course, we hope that the margin stays at the current level, but we can't confirm that yet. It might also be a slight decline. Overall, of course, Technique is, as you see on the top line, it's well-performing, it's growing. So the absolute amount will certainly move up. So we're in a very good place with Technique.

Going to the next question, which is from Gerard Castle from UBS. Please go ahead.

Thank you. Good morning, everyone. And as others have stated, thanks, Remco and Dennis, for all the help. Just sticking on CFO, just be interested anyway in getting some thoughts on update in terms of a permanent position for CFO, both either internal or external. And then... I guess it's coming up to a year ago where Ryanair won the case in terms of state aid being unlawful for Lufthansa. Since then, it's had a bit of a mixed result for certain other companies. I think it wasn't ruled against Brussels, but they did get a ruling against Air France. So has anything transpired in a year just because they won? Has anything changed or is it a mute point now? Thanks.

Jared, it's Carsten. We don't take applications for the CFO anymore because they're very close to an announcement as we have made our choice or made our decision. Indeed, we will, as indicated by our chairman, go for an external expert. Again, we'll be giving out more details soon. On the state aid case, I think it really much turns into an academic question. As you all know, we not only have paid back all the Money was not state aid in the first case. It was just credit lines to the German government with a significant profit for the German taxpayer. And therefore, I think it's more for academics in the legal world to now deal with this challenge of the European court decision. So I think between the court, the EU Commission, the German government and ourselves, lawyers are indeed debating details, but it will not have an impact on our business, again, since the money is paid back and nobody expects that. Is that your question or answering your question?

Yeah, perfect. Okay, thanks a lot. So, yeah, again.

The next question comes from Satish Sidrakumar from Citi. Please go ahead.

I got two questions here. So first is around the CASC assumption. In your CASC guidance, do you actually factor in productivity compensation? And yeah, if you could just help us understand that. And then as part of the CASC assumption, what are the productivity arrangements that you, as part of the wage scale that you're factoring in as we go into quarter two, quarter three and quarter four? And the second one is around the infrastructure bottleneck, right? So obviously the disruptions are one of related to labor agreements, but the other one is the bottlenecks are your three key hubs, right? Frankfurt, Munich, and Zurich. How should we think about going forward in terms of capacity allocation? And where are you seeing, like, if you have to rank these three hubs, which are the hubs that have seen a significant improvement in terms of service, reliability, and also what's your expectation on tariffs at these three hubs. Thank you.

Hello, Satish. Remco here. Very detailed question, but let me try to answer them as good as I can. For the CASC, for the remaining part of the year, of course, we expect that there is some Brett and Whitney compensation coming here to offset the remaining part of the cost, correct? We hope to come to an agreement in Q2. And with that also that the additional cost we have in Q2, 3 and 4 will be offset. And I think Fred and Whitney should also do that. And I think we have to come to a conclusion here. Productivity improvements. We do not expect many productivity improvements yet in Q2. As said before, there's still quite a ramp up which needs to take place. also towards the high season, which will be similar in Q3, unfortunately. As of Q4, we hope that there will become a bit more material change. It doesn't mean that in Q2 and Q3 we don't do anything, correct? There's a lot of work in the background to stabilize, to make sure for our customer all the stability in the system is in a much better place, and that has the priority. In the meanwhile, we do a lot of work in the background, and hopefully as of Q4, the productivity improvements can then take place. Also linked to your last question in the bottlenecks in the hub, if you grow still around 10%, it means also in all the hubs and all the related activities also need to grow with 10%. Of course, we would come much better in organizing ourselves together with the hubs and, of course, the related airports and catering and everyone else involved to get in a better place. That clearly has our focus. Henzo's the answer before. It's not productivity in Q2 and Q3. It's really making sure that we get... the whole system working well. We think we are ready for the summer to get that in the right place. Some airports are better prepared than others, but we count on that the airports do the utmost to make sure that the customer has a really, really good flight experience with us this summer.

Was that your question, or is the question more towards the strategic long-term growth plans?

Yeah, these three are like... in terms of considering the bottlenecks that you are facing at these hubs. Okay, so the question is answered. Good. Yeah, yeah. Thank you. Again, thanks, Jim, for all the best, and thanks, Dennis, as well. Thank you. Thanks, Carson.

The next question comes from Harry Gowers from JPMong. Please go ahead.

Hi, gents. Yeah, thanks for taking the time. First question, just on the XFUEL guide for Q2 on the cask, which is now up a few percent. I mean, your X-Strike cask in Q1 was down 2%, I think, and presumably a lot of that disruption cost falls away. So maybe you could give us a little bit of extra color on the Q2 XFUEL guide and the moving parts or the pressure there. Romko, I think you just mentioned on the productivity points. And then second question, you know, the full year outlook for your EBIT guide means you're seeing a stronger profit performance in H2. And you mentioned on the slides that's based on higher capacity and strong bookings. I guess the capacity you can have reasonably good line of sights on, although there might be some more delivery delays in the system. But how much visibility or confidence do you have on the bookings across H2 right now?

Thank you. Harry, good afternoon. I think the overall clear target we have is to keep the cost flat for the full year, excluding, say, the one-off strike costs we have in Q1. That in Q1, we ended on a slight decline, and Q2 on a slight plus, with some of the seasonal patterns to do in the Q2 part of the ramp-up. We keep our eye really on the full year altogether. And if it's 1-2% down, 1-2% up from one quarter to the other quarter, I wouldn't pay too much attention to it because there are also seasonal patterns which influence it. For the full year on the cask flat, with the capacity and the cost and the agreements on the unions, there is a good visibility to come to this number. Of course, it's not a guaranteed outcome, but there's a good visibility on it. On the second half of the year, we have good visibility on the bookings for what we can see versus historical pattern. But as you know, there's still a significant part open for July, August, or September, which we still have to work on in the coming months to organize. But as it currently stands, we see for Q3 a flattish kind of yield, perhaps a little bit up. Around 40% is booked, so 60% still has to come for Q3. But if we compare it to what we have historically seen, you can hear about the optimism which we have so far.

Thank you very much, Remco, and Dennis, best of luck on the new roles. Thank you.

Next question comes from Connor Dwyer from Morgan Stanley. Please go ahead.

Hi, guys.

Hi, sorry. Hi, guys. Thanks very much. Most of my questions have been answered. So I just had the one. It's around the strike. So obviously quite a substantial cost, and now the pay deals are done, and that should ease operations over the next year or year to two years. But I'm just wondering, you know, what is to kind of prevent, say, in two to three years, staff are potentially then unhappy with pay again? What's to prevent substantial strike action again? are there any measures that can be taken to kind of limit the level of cost that's been seen in the kind of four months early this year? Thanks.

Yeah, Conor, Carsten, I think this recent strike action, not only in Lufthansa, but to be honest, across the German infrastructure industry, was very much fueled by the very specific situation of high inflation and full employment. As we all learned in university, that usually doesn't go together. But we experienced that. I think there was a window for unions which they took advantage of or tried to take advantage of. So I don't think we'll see the same thing in three years on that macroeconomic environment. When it comes to Lufthansa in general, as you probably know, we are growing our young airlines at lower HR or lower labor costs. Think about Discover. Think about Lufthansa City Airlines. So I think there will be a different mix of AOCs three years down the road than what we have been through now, which might also have an impact on strike activity. But I think it's mainly the macroeconomic environment, which was very unique. And for German standards, we hadn't seen strike like this, I think, in decades. Think about the German rail system. Think about Lufthansa, unfortunately. Think about the German airports. This was a very unique situation. I don't think we'll see reappearing in three years or hopefully ever.

Wonderful. Thank you very much.

Next question comes from Andrew Lobenberg from Barclays. Please go ahead.

Oh, hi there. Can I just follow up on that last answer from Karskan about the importance of the younger AOCs of your discoverers and city? As you see these large pay increases at the traditional airlines, To what extent are you confident that you can keep a big pay gap to these other airlines? Because I don't think you've got settled and they need to be negotiated. So to what extent are you confident that you can keep that major cost gap to these? To what extent are they going to have their pay terms dragged up by the higher market rates elsewhere? and then separately uh just on on the balance between the hubs between frankfurt and munich uh there's obviously big delivery problems for the seven eight the 350s are coming through more reliably does that not mean that we end up with more more capacity in munich rather than than frankfurt or are you finding some way to balance out and putting uh other long-haul machines to frankfurt to fill out the missing seven eight thanks oh and For the second time, yeah, Dennis and Remco, we will really miss you. Thank you. Maybe we should all turn out to the AGM so we can do it three times.

They're both smiling, Andrew. Thanks for your kind words to them. Whenever I leave, I want to hear the same from you, please. No, more serious, Andrew, on the first question. I think we proved that just this very morning. We signed with Eurowings on a 42-month deal for the pilots exactly in the same pay increases as we signed basically with all the other unions. 7% this year, 5% next year, 5% the year after. So I think the TLA is very much moving parallel. Of course, we have increases also at the lower cost AOCs, but we don't see a closing of the gap, which I think is your main question. Because let's not forget, both for cabin crew but even more for pilots, the number of aircraft in an AOC is driving careers. So there is an individual interest of the unions, of the workers' council, but also of the individual staff members to keep the perspective of the respective AOC. And that kind of keeps the balance, which allows us to move, at least this time, as you can see, in parallel. Up balance, Munich, Frankfurt, we use the Airbus 346 to solve that problem. The Airbus 346 is a wide body which operates on both hubs, Frankfurt and Munich, and we're now shifting more towards Frankfurt to close the gap of the 787 deliveries there, and we will... partly allow that by operating the 380s throughout the winter at a higher productivity and flight numbers per week than we were planning to because partly because the depreciated 380 is not the perfect aircraft in the winter. We were thinking about putting them on the ground, some of them, for some time. Now moving the 346 to Frankfurt, we'll need to continue to lose the 380 also in the winter, at least most part of the winter in Munich. So in short, it's an Airbus 346 fleet which we move around to balance.

Makes sense. Thank you.

The next question comes from Johannes Brown from Stiefel. Please go ahead.

Yes, thanks for taking my question. So first one will be on the German aviation tax, which obviously is increasing from tomorrow onwards by I think 20% or so. Question would be how you deal with that. I read that Ryanair apparently is asking passengers to pay up even for already booked flights to compensate for the tax increase. Don't think you will do that, but are you confident to pass that impact on in the future to your passengers? And then secondly, just on the MRO segment, I was wondering if you could share some more insights into your kind of midterm ambitions there. I think last year when you took the decision to not sell the minority, you said that you intend to double the EBIT of that segment by 2030. So I was wondering if you can share some more details where you stand there. Will it be back-end loaded, front-end loaded? And how do you think about the relation between those strong top-line trends on the one side, but also the strong cost inflation regarding spare parts and so on in that industry? And, of course, Ramco, and then it's all the best.

Herr Braun, Johannes, on the aviation tax, obviously we don't follow the example of one of the low-cost carriers, and we estimate the impact to be around $20 million that we now need to bear the additional tax for those tickets we already sold. That was your question. So that's what I'm going to call the financial way to deal with this, But of course, it's a much bigger impact for German aviation in general. I think German aviation is lagging behind in growth, as you well know. We are below 90% versus 2019 in German to and from and domestic traffic. A company like Lufthansa can compensate by flying more internationally, but for some parts of Germany, this means decreased connectivity. So I would think that German government has woken up understanding there's additional burdens coming next year with the airport security charge and also with soft landing mandates in 25. So I would hope that we also see a turning point of putting additional burdens on German aviation, not so much to the interest of Lufthansa, but due to, again, parts of the German, you know, non-hub airports being either cut off completely like Friedrichshafen or at least with reduced connectivity. On MRO, we stick to our target, doubling revenue and doubling the absolute adjusted EBIT. I would think with the recent development in MRO that becomes, I wouldn't call it easy, but it becomes more likely even than it was before because the MRO industry does very much turn to our favor as the largest MRO provider of the world. Adding another European facility will help us to tap also European markets at lower cost than operating in Germany. We're also looking at growing our business in the U.S., where we see very strong demand for our Puerto Rico facility, which basically reaches its limits. So our optimism on Lufthansa Technik, I think, rather increased again after we last talked to you, then decreased. And let's not forget, even though it's unfortunate, the Ukraine situation very much changed the view of the German governments on the defensive. business in aviation, and there's more and more help needed also on defense contracts for airplanes of the German Air Force or of air forces of befriended countries. So we'll see also more business coming down that end.

Okay, thank you.

Ladies and gentlemen, that was the last question, and I would like to hand back to Dennis Weber for closing comments.

Thank you very much for listening to the call today. Let me also take this opportunity to say goodbye. Thank you for the great cooperation in the last few years. I truly enjoyed working with you. I guess I'll still have some of you on the call on the phone later today. Looking forward to that. And having said that, over to Remco for a few words as well.

Thank you all very much as well for the cooperation over the last three and a half years. It was quite a ride to go through. If I have one wish, correct, to convey, correct, to help Carsten and the new CFO to at least come to a better share price, I think if there's one thing I'm not very proud of over the last three and a half years that we handled on the current share price, I think it's always a great opportunity from here to move on. But your help for the investor community to better understand what Lufthansa is also on the consistency, I really hope you would help us Karsten and a new CFO to guide Lufthansa to a better share price level. With that, thank you very much.

You'll be working for a rich company in the future in pharmaceuticals. Maybe you can do some investments in aviation. It's a hobby there. Now, it was a pleasure to work with them both, but their final appearance on stage will be our AGM next week. So if you want to see them once again live, please dial in. And on that, thanks. to you for the good years, both of you, but thanks for dialing in today and your good questions and listening in. See you soon. Thank you.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.