We are preparing for the environment to remain unstable
The year 2011 showed how little reliance there can be on general assumptions made at the beginning of the year as regards the operating environment that will prevail during the course of the year and what a pronounced effect changes in these conditions can have on the earnings performance of the airline companies. At the beginning of the year we assumed that demand and earnings would start modestly and pick up over the course of the months. In actual fact, they were stronger than predicted in the first half-year, although the unforeseeable events in Asia and Middle East/Africa had a negative impact too. In the second half of the year the escalating euro crisis depressed the whole economy and our earnings development.
Given such imponderables, only flexibility and sound foundations can keep the Company on track under all conditions in a low-margin industry like the airline sector. In 2011 Lufthansa again demonstrated its mastery of these principles. The final result is much better than that of many competitors, but it is also much worse than originally planned.
At present we must assume that the uncertainty affecting macroeconomic conditions will persist. The first few weeks of the current year have already confirmed this assumption.
The oil price is rising to new heights due to the escalating political crisis in the Middle East and the strike by apron controllers in Frankfurt is causing considerable disruption to flight operations. In 2012 Lufthansa and its operating segments will therefore continue to rely on proven experience in dealing with this incertitudes.
We are therefore confident that we will again be able to demonstrate our leading role in the industry in 2012. There are nevertheless considerable challenges to be overcome. Oil prices for one, which have a crucial impact on the Company’s cost base. There are also internal challenges, however, such as the forthcoming collective bargaining, for instance. Demands for improvements in pay and conditions vie with the need for structural adjustments and efficiency gains. As always in such negotiations, the situation may escalate. Neither is the impact on Lufthansa limited to disputes in its own back yard, as was amply demonstrated by the apron controllers’ strike in Frankfurt in early 2012. The necessary steps to increase efficiency will be pursued in all of the Lufthansa Group’s business segments and supplemented by the new Group programme SCORE.
It is not possible to quantify the forecast for the operating result at present
From today’s perspective we believe that it will be possible to increase Group revenue year on year in the financial year 2012. The fuel costs that inflate expenses will have to be recouped. To what extent this will be possible depends largely on the strength of market demand and the further direction of oil prices. At current price levels the hedging effect of the transactions we have already closed is very limited. Lufthansa would benefit strongly from a fall in prices, however. A price increase would cause additional expenses, but Lufthansa would also realise increasing hedging profits and therefore cost advantages compared with unhedged competitors.
All in all, it is currently expected that the 2012 operating result for the Lufthansa Group will be in the mid three-digit million euro range. If the operating environment evolves very favourably in terms of revenue and costs, it may also be possible to beat last year’s result. On the basis of today’s parameters this seems very ambitious, however. Should the key variables evolve unfavourably, the comparatively high earnings stability of our service companies will form an important earnings cushion and downside buffer.
The acuity of forecasting for 2013 is even more limited in the current environment. On the assumption that the market will recover, we are currently forecasting a further increase in revenue and another operating profit.
Structural earnings improvements are needed – SCORE is going after them
Although it will only be possible to put a more precise figure on the result in the course of the year, it is already apparent that earnings – for 2012 at least – will make meeting our own targets for value creation an ambitious proposition.
In order to take part in the growth opportunities offered by our industry and to shape events proactively, we therefore have to make lasting structural improvements to our operating margin. To this end we launched the Group programme SCORE in early 2012. With the support of project owners in all the business segments, a central project team will develop and coordinate ideas for improving the Group’s structural profitability. An additional focus of this programme, alongside contributions from all companies, is to make greater use of synergies by intensifying the collaboration between the airlines and the business segments.
SCORE aims to increase the Group’s earnings sustainably by at least EUR 1.5bn. The programme is scheduled to run for three years, which means its full potential will be seen in the Group’s result for 2015.
Improvement in net profit expected
The sale of bmi decided on at the end of 2011 will also bolster the Group’s earnings performance. As it will additionally relieve the Group of heavy losses, we are assuming that net profit for the period and earnings per share will improve in 2012 which should also be mirrored in the result for the year in the Company’s individual HGB financial statements. This is relevant for the conditions for paying out a dividend defined in our dividend policy.
Lufthansa preserves its solid foundations
Given expected gross capital expenditure of EUR 2.9bn, the generation of a free cash flow is not guaranteed in every scenario. In all events, the defined minimum liquidity of EUR 2.3bn will be maintained. Lufthansa’s assets are likewise still sound and the majority of the fleet is owned and unencumbered. While the equity ratio will remain high, it will probably still be below the medium-term target of 30 per cent. The debt repayment ratio will probably also not reach its target of 60 per cent in 2012. However, we expect gearing to remain within the target range of 40 to 60 per cent.