CVA is the authoritative measure for value creation


The core management indicator for the Lufthansa Group is cash value added (CVA). This measures the value contribution generated in the reporting period by the Group as a whole and by the individual business segments. Operating indicators and value drivers are derived from the CVA and used to manage operating performance in all business segments.

The CVA is an absolute residual amount. It is calculated by subtracting from the cash flow generated in a year the cost of capital employed expressed as a required minimum cash flow. The CVA is positive and value is generated when the actual cash flow is higher than the minimum cash flow required to cover the cost of capital employed. The following graph shows how the individual parameters are calculated:

Calculation of cash value added (CVA) (graphics)

The minimum required cash flow is the sum of the required return on capital employed, a capital recovery rate and the flat tax rate. The capital base is the total of non-current and current assets less interest-free liabilities. It is measured at historic cost. This makes value calculation and generation independent of depreciation and amortisation. The return on capital is calculated using the weighted average cost of capital (WACC), which includes both debt and equity. The following table shows the factors making up the cost of capital in the financial year 2009:

Return on capital 2009

in %

 

Risk-free market interest rate

4.2

Market risk premium

5.7

Beta factor

1.1

Proportion of equity

50

Proportion of debt

50

Cost of equity

10.5

Cost of debt

5.4

We review these every year and update them as required for the following year’s performance measurement. As the concept is designed to be long-term, expectations of future developments in individual parameters are also factored in. This means that the WACC itself can remain constant, even if individual parameters change over the short term.

Based on our financing strategy, the WACC calculation for the Group and for the business segments assumes a target capital structure of 50 per cent equity, valued at market rates, and 50 per cent liabilities. We differentiate between the costs of capital for the segments by adding beta factors to reflect their different business risks. The betas are also adjusted continuously: they are derived from an external peer-comparison and an internal management survey.

When the individual parameters were reviewed as scheduled in 2009 the WACC was lower than the previous year due to the sharp fall in base rates, which more than made up for higher risk premiums. As interest rates are expected to rise again, we nevertheless decided to maintain the WACC at its current figure of 7.9 per cent this year. The following table illustrates the required return on capital for the Group and the individual business segments.

Cost of capital (WACC) for the Group and the business segments

in %

2009

2008

2007

2006

2005

Group

7.9

7.9

7.9

7.9

8.6

Passenger Airline Group

7.9

7.9

7.9

7.9

8.6

Logistics

8.2

8.2

8.2

8.2

8.9

MRO

7.6

7.6

7.6

7.6

8.3

IT Services

7.6

7.9

7.6

7.6

8.3

Catering

7.9

7.6

7.9

7.9

8.6

The declining value of assets is an additional component of the minimum required cash flow that is measured using the capital recovery rate (economic depreciation). Capital recovery is the amount that we need to put by every year and invest at a rate equivalent to the WACC in order to recoup the amount of the purchase costs by the end of the asset’s useful life. Finally, the expected tax payment is added by applying a surcharge of currently 1.2 per cent of the capital base. This brought the minimum required cash flow for the Lufthansa Group in the reporting period to EUR 3.2bn (previous year: EUR 2.6bn).

The actual cash flow is calculated at Lufthansa as follows: we derive EBITDAplus from the operating result by adjusting for non-cash items. These are primarily depreciation and amortisation and net changes in pension provisions, as well as other items such as the pre-tax results of equity investments that are not fully consolidated and book gains from asset disposals. This means that EBITDAplus contains all cash-relevant items over which management has an influence. In the reporting year Lufthansa’s EBITDAplus came to EUR 2.0bn.

Reconciliation EBITDAplus

in €m

2009

2008

Operating result

130

1,280

Depreciation and amortisation

1,387

1,274

Result from disposal of property, plant and equipment

9

–3

Income from reversal of provisions

187

157

Impairment losses on intangible assets

–84

–15

Change in pension provisions before interests

65

168

Operating EBITDAplus

1,694

2,861

Pro rata pre-tax results of non-consolidated equity investments

178

69

Interest income

117

175

Result from disposal of financial assets

23

28

Financial EBITDAplus

318

272

EBITDAplus

2,012

3,133

In order to obtain the CVA the minimum required cash flow is then deducted from EBITDAplus. This results in negative CVA for the Group of EUR 858m in 2009. The negative figure stems primarily from the sharp fall in cash flow from operating activities as well as a higher minimum required cash flow due to the elevated capital base. The outlook for the years ahead suggests that generating positive value in the current year will also be an ambitious target. Since the management concept was introduced in 2000 the Lufthansa Group has nevertheless generated EUR 2.1bn in value to date.

Value creation (CVA) of the Lufthansa Group and the individual business segments

in €m

2009

2008

2007

2006

2005

Group

–858

654

1 546

552

386

Passenger Airline Group

–691

346

768

317

–53

Logistics

–264

71

59

37

39

MRO

164

188

205

85

121

IT Services

3

29

–16

32

36

Catering

–68

–17

21

–50

–71

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