Cash value added measures the value contribution


The Lufthansa Group uses cash value added (CVA) as its main performance indicator. CVA is based on the return expectations of all investors and lenders and 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 as the difference between the cash flow generated in a given year and the minimum required cash flow. If the cash flow generated is greater than the minimum cash flow required, the CVA is positive and reflects the corresponding value creation. The individual parameters are calculated as follows:

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 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 required return on capital using a widely recognised formula that determines the weighted average costs of debt and equity for the Lufthansa Group and for the individual operating segments (weighted average cost of capital – WACC). In the financial year 2011 these were based on the input variables shown in the following table:

Return on capital 2011

in %

 

Risk-free market interest rate

3.7

Market risk premium

5.4

Beta factor

1.1

Proportion of equity

50

Proportion of debt

50

Cost of equity

9.6

Cost of debt

4.3

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. In the course of the regular review of the individual parameters for 2011 it became apparent that given consistently lower base rates and much lower risk premiums it was necessary to reduce the WACC for the Lufthansa Group from 7.9 per cent previously to 7.0 per cent. The review for 2012 did not result in any changes.

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 Lufthansa Group and the individual business segments:

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

in %

2011

2010

2009

2008

2007

Group

7.0

7.9

7.9

7.9

7.9

Passenger Airline Group

7.0

7.9

7.9

7.9

7.9

Logistics

7.2

8.2

8.2

8.2

8.2

MRO

6.7

7.6

7.6

7.6

7.6

IT Services

6.7

7.6

7.6

7.6

7.6

Catering

7.0

7.9

7.9

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 0.6 per cent of the capital base. The resulting minimum required cash flow for the year 2011 came to EUR 3.0bn (previous year: EUR 3.2bn).

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 3.1bn (previous year: EUR 3.3bn).

In order to obtain the CVA the minimum required cash flow is then deducted from EBITDAplus.

Reconciliation EBITDAplus

in €m

2011

2010

Operating result

820

876

Depreciation and amortisation

1,663

1,609

Result from disposal of property, plant and equipment

29

36

Income from reversal of provisions

163

234

Impairment losses on intangible assets and property, plant and equipment

–76

–82

Change in pension provisions before interests

138

54

Operating EBITDAplus

2,737

2,727

 

 

 

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

168

181

Interest income

177

175

Result from disposal of financial assets

–30

189

Financial EBITDAplus

315

545

EBITDAplus

3,052

3,272

Value contribution of EUR 99m in 2011

For the financial year 2011 the CVA for the Lufthansa Group was positive at EUR 99m. Alongside the decision to sell bmi and the adjustments made to the WACC, reducing the financial capital base had a positive effect on value creation and made up for the decline in cash flow.

Calculation of cash value added (CVA) (graphics)

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

in €m

2011

2010

2009

2008

2007

Group

99

71

–858

654

1,546

Passenger Airline Group

–122

–198

–691

346

768

Logistics

202

233

–264

71

59

MRO

152

172

164

188

205

IT Services

23

–23

3

29

–16

Catering

–25

–28

–68

–17

21

Performance of Lufthansa Group – Cash Value Added (line chart / bar chart)

Experience shows that it is difficult to give a forecast for future value creation. The current macroeconomic outlook makes achieving a positive CVA look ambitious in 2012. We nevertheless stand by our intention of generating sustainable value over the course of the air transport cycle. In the last ten years for example, the Lufthansa Group has generated a positive value of EUR 2.3bn.

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”.

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