CVA is the authoritative measure for value creation


The Lufthansa Group uses cash value added (CVA) as its main performance indicator. It measures the value contribution generated in the reporting period by the Group as a whole and by the individual business segments.

The CVA is an absolute residual amount, which is calculated by subtracting the cost of capital employed, expressed as the minimum cash flow required to conserve value, from the cash flow generated. If the cash flow generated is greater than the minimum cash flow required, the CVA is positive and reflects the corresponding value creation. 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, the capital recovery rate and the flat tax rate. The capital base is in turn defined as 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 the depreciation and amortisation applied. We calculate the return on capital 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 2010:

Return on capital 2010

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 factors every year and update them as required for the following year’s corporate planning and performance measurement. In doing so we bear the long-term orientation of the concept in mind and try to smooth short-term fluctuations. As a result the WACC can remain constant in some years even if individual elements change at short notice. This was the case with the regular review of individual parameters for 2010, where the sharp fall in base-rate interest more than offset the effect of higher risk premiums, resulting in a lower figure for WACC. As interest rates were expected to rise again, we nevertheless decided to maintain the WACC at its current figure of 7.9 per cent. It has since been recalculated for 2011 and reduced to 7.0 per cent.

On the basis of our financial strategy a target capital structure of 50 per cent equity at market value and 50 per cent debt is used to calculate the WACC for both the Group and the business segments. We factor in the different segment risks by means of individual costs of equity, and therefore total costs of capital, in order to ensure that the allocation of capital to projects in the business segments is risk-adjusted. These costs are applied by means of beta factors, which are reviewed every two years.

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 %

2010

2009

2008

2007

2006

Group

7.9

7.9

7.9

7.9

7.9

Passenger Airline Group

7.9

7.9

7.9

7.9

7.9

Logistics

8.2

8.2

8.2

8.2

8.2

MRO

7.6

7.6

7.6

7.6

7.6

IT Services

7.6

7.6

7.9

7.6

7.6

Catering

7.9

7.9

7.6

7.9

7.9

The minimum required cash flow includes what is known as capital recovery (economic depreciation), in order to reflect the depletion of the Company’s non-current assets in the production process. It is derived from depreciable non-current assets and represents 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. The resulting minimum required cash flow for the year 2010 came to EUR 3.2bn (previous year: EUR 2.9bn).

In the Lufthansa Group the cash flow effectively generated is represented by EBITDAplus, which is made up of an operating and a financial component. We derive the operating portion of EBITDAplus from the operating result by adjusting it for non-cash items. These are principally depreciation and amortisation, income from the write-back of provisions and net changes in pension provisions. Then the financial portion of EBITDAplus is added, comprising pro rata pre-tax earnings of non-consolidated equity investments, interest income and earnings contributions from the disposal of financial investments. This ensures that EBITDAplus includes all significant cash-relevant items. In the reporting year Lufthansa’s EBITDAplus came to EUR 3.3bn (previous year: EUR 2.0bn).

Reconciliation EBITDAplus

in €m

2010

2009

Operating result

876

130

Depreciation and amortisation

1,609

1,387

Result from disposal of property, plant and equipment

36

9

Income from reversal of provisions

234

187

Impairment losses on intangible assets

–82

–84

Change in pension provisions before interests

54

65

Operating EBITDAplus

2,727

1,694

 

 

 

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

181

178

Interest income

175

117

Result from disposal of financial assets

189

23

Financial EBITDAplus

545

318

EBITDAplus

3,272

2,012

In order to obtain the CVA the minimum required cash flow is then deducted from EBITDAplus. For the Group this resulted in a CVA of EUR 71m for 2010. With this, we have again created value in the first year after the crisis. The clear improvement on the previous year’s figure (EUR –858m) is largely due to the higher earnings, which more than offset the opposing effect of a higher minimum required cash flow. We intend to achieve this again in the current financial year. The outlook for the years ahead has indeed picked up substantially along with earnings development. We will then be able to proceed from the total value of EUR 2.1bn created since the concept was introduced and intend to increase it further.

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

in €m

2010

2009

2008

2007

2006

Group

71

–858

654

1,546

552

Passenger Airline Group

–198

–691

346

768

317

Logistics

233

–264

71

59

37

MRO

172

164

188

205

85

IT Services

–23

3

29

–16

32

Catering

–28

–68

–17

21

–50

Performance of Lufthansa Group – Cash value added (bar / line chart)

We have a number of further financial targets in addition to value creation that are described more closely in the following chapter and in the “Financial strategy”.