Deutsche Lufthansa AG (LHA.DE) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Virtual Investor Conference, dbVIC. This is Zafar Aziz from the Deutsche Bank team. I'm pleased to welcome our next presentation by Lufthansa from Germany. Before I introduce our speaker, a few points to note. Please click on the questions box to ask a question. All of today's presentations are recorded and can be accessed by the Deutsche Bank website, www.adr.db.com. I'm happy now to hand over to Lufthansa.

Yes. Thanks for your interest ,a very, very warm welcome from my side. My name is Marc Nettesheim, I'm heading Investor Relations at Lufthansa Group, the European Airline Group, which I want to present today to you. I think -- I want to give you a quick run through three topics. Number one, Lufthansa at a glance, who are we? What differentiates us from our competitors and what are the main value leaders to create shareholder values over the next years; number two, then talk a little bit about the current trading and Q3 results, which we just published last week and also the full year outlook for 2025; and finally, give a glimpse on our midterm targets, which we communicated in our Capital Markets Day by end of September, that will be the agenda for today. And to start with. So who are we and maybe you're not too familiar with us. We are by capacity, the largest airline group in Europe, #4 in the world after the big U.S. carriers. Every 20 seconds, a Lufthansa aircraft is taking off somewhere in the world. And we are transporting 130 million passengers at 16x the whole city of New York. We do that with the help of 100,000 employees. And with that, we generated EUR 38 billion of revenue. We do have different brands. They're usually in their home markets, the #1 brand and you might know that in Europe, there is a strong brand attachment also in the different countries with the national carriers. So that's an important asset that we have. Allow me to dig one level deeper and to see how the group is structured. So it's basically resting on four pillars. So the ones that you see here on the left-hand side, the two Hub airlines and point-to-point airlines, those are the two pillars, including traditional passenger airlines, and they make up roughly 70% to 80% of the total group revenue so it's the largest part. From the very left-hand side, the hub airlines, they are different brands, Lufthansa Airlines, Swiss, Austrian, Brussels Airlines and then also since this year, ITA, in Italy and out of those Lufthansa Airlines, which is also probably to you the most known one is making up 40% of our production capacity in terms of available seat capacity. So you can see already from that slide that our strategy is generally to be an airline group with a focus on that core passenger airline business. And aside from that, we only own business units with a clear synergy proposition. So a couple of years ago, that slide looked quite differently. We used to own a big catering division, we used to own a credit card business. We divested all of those in order to reduce complexity and focus on, as I said, airlines and clearly synergistic business units. And those are the two ones on the right-hand side, it's logistics. That means air freight and it's MRO, maintenance, Repair and Overhaul. That's our division called Lufthansa Technik. And by now going one level deeper into those four pillars, I will start on the right-hand side with our MRO division. So Lufthansa Technik is a EUR 7 billion company. It's a market leader in a growing market. It's the biggest independent MRO player ahead of MTU and StandardAero. And out of this EUR 7 billion of revenue, 2/3 is external third-party revenue that means much for Lufthansa Group aircraft. So the market as a whole has EUR 100 billion of volume, and that's the same amount that's being spent each year on aircraft purchases. So the aircraft OEM market is as big as the aircraft MRO market. And in this market, Lufthansa Technik has 5,000 aircraft under contract, and that's roughly 20% of our commercial aircraft in the world. So from a group perspective, Lufthansa Technik brings us, well, stability because it relies on long-term contracts. They have a strong order book, which is locked in for a long period into the future. And it provides us with a decent margin, roughly 8.5% right now. But Lufthansa Technik is not only good for stability, but it's also good for growth. So they had embarked on a growth program, it's called Ambition 2030, and that will bring them up to EUR 10 billion volume of revenue and a 10% EBIT margin by 2030. And they will achieve this by three pillars. Number one is geographic expansion. So they are expanding in Portugal and in Canada where they are building new facilities right now. They are digitizing the core business. So there are new business opportunities in the digitalization; and number three, they are diversifying into other segments and the main one is here, defense. So they are very promising contracts with the German Air Force already today. Now for this very stable business coming to the second pillar, that's Lufthansa Cargo, our air freight division. And as I said, Technik is stability and air cargo and air freight is a very dynamic and short-term business, highly cyclical, but right now also quite profitable. You should take away three things from Lufthansa Cargo, number one, what the big passenger airline hubs are like Dallas and Atlanta in the U.S. This is Frankfurt basically for air freight in Europe. So we are really sitting out of Europe in a unique position that helps them a lot. Number two, Lufthansa Cargo has a very high number of freighter aircraft that gives us flexibility and independence, 22 freighters. For example, last year, passenger business to China was horrible, but airfreight business in China was booming so they could devote the whole freighter fleet, send to China and bring goods to Europe. So that gives them a competitive advantage over other players. And number three, they -- even though I said it's a dynamic and short-term business, they are now entering into relatively long-term contracts, mainly with Chinese e-commerce players that gives them also stability more than in the past. Right now, we are sending 10 weekly freighters to China based on that long-term contract. And with that, you see on the right-hand side the had come a long way already. They moved from #8 position in the market now to #4, and it's their objective to become #3 in the years to come. Point-to-point business. I mentioned it before, it was the third color, the purple one on the first picture, maybe to look at key takeaways also on this side. So it's not a low-cost player like Ryanair, there are ways that you would know in Europe, we are not competing on the cost side, but we are a value carrier. So the objective here really is to maintain market leadership in our home market in Germany, also outside our hubs. Our Frankfurt and Munich. You can see on the right-hand side, they are not leading the other cities, Cologne, Hamburg, Dusseldorf, Stuttgart. So that's the objective of the airlines. Number two, key takeaway for you is they have a very strong market position, Leisure. Leisure is a very booming market now in aviation. So this is where they have a strong foothold, and they even want to expand that. They founded a new company going into the tour operator business. They want to become one of the top 10 players in Germany in that segment. So that's number 2 message. And number three, within our group. Eurowings is the role model for flexibility and also for successful turnaround. You can see on the right-hand side, they managed to come from a minus 5% margin to plus 7%. And this is something many in the group can learn a lot from this is what we also do. Now coming to the Passenger Airlines business, which is, as I described, the main pillar in the hub airlines that I talked about. And maybe to start out with what's different between us and other European players like IAG and Air France. And I think the difference here is really the geographic condition that you find in our home market. We do not own any mega hub like London or Paris and Madrid. We never did. So while it's easy to fill an aircraft in London with people flying from London to New York, that's not so easy in Frankfurt. In Frankfurt, we have 70%, 7-0, 70% of connecting passengers in our long-haul aircraft. So there's a lot of coordination required integration to get the system up and running. So number 2 difference is our hubs are close to each other. I mean, there's not a passenger would be competed for in London or in Madrid at the same time, but maybe with Brussels and Frankfurt both for the passenger in the middle in Dusseldorf. So that means we have a lot of integration and coordination necessary. That's our strategic answer to this different geographic outset. And that's also, to be honest, a very big source of synergies. And you can see on that picture, what that means because we are doing things out of one hand. There's one person sitting in Frankfurt who is doing the network planning for the whole intercont network of the group. That means that you don't have the biggest hubs but we do have the strongest connectivity. And we take the essence passenger, for example, he can travel to New York 14 times a day. And every time it's through our hubs, through our own airlines and spread across the whole day. So we have a huge connectivity advantage through that multi-hub system that we created and coming out the necessity that we have a different geographic condition. We did develop this into proficiency that now gives us a competitive edge. And the network planning is just one example out of several and that applies to many different functions. And here, you can see already today, we are more integrated, more unified than most European network airline peers. I just said that for network planning. We are now moving into that direction even further on the right-hand side. Already today, we have for all the airlines in the group, only one sales function, only one revenue management, of course, only one fleet purchasing. We have one app for all the different airlines. And now we are moving even more integrated position. We are now integrating continental network steering that's also out of one hand in the future. We have one IT platform in the future. We have -- we're integrating further service functions. And by that, also achieving further synergies. So the balance here is really to use the power of being one big group, combined with the local champions with strong brands. If the customer pays for it, we do things differently. A Swiss person would love to see the Swiss cross at the tail sign. where you have a different Swiss product, but on the things that the customer doesn't pay for it, we'll do things the same way across the whole group and thereby increase synergies and earnings. Talking about earnings levers. What's another big earnings lever? That's fleet. On fleet, we have to say that we are lagging behind our peers. We are at roughly 20% of new generation aircraft. Many of our peers are at 40% already. We wanted to be at 40% as well, but you have read about the delivery delays at Boeing and Airbus at certain suppliers in the past and that's massively impacting us or it has impacted us in the past years that is changing right now. So since this year, we keep receiving new generation aircraft. And by this, we are completing the most fundamental fleet renewal project in our history, 240 new aircraft on order book. And by 2030, we will have a next-generation share of 60% to 65% in the group. So that will be a significant increase, and it's not only about having modern aircraft, but it's also about being less complex, you see that here, we have 13 different aircraft types in long haul that will be reduced down to 6. So it's roughly half of it. That will, of course, also drive further efficiency gains and cost improvements on the airline side. Why is that so important? Shown here new aircraft, what does it mean? Every new aircraft means for us, up to 30% less fuel consumption compared to the old aircraft. It means 20% to 30% less maintenance cost. It means a higher crew productivity. It means also bigger bellies, bellies meaning more cargo revenues, I described it before. And one thing that's not on that slide here. Of course, you also have a new onboard product in terms of seats in all booking classes, first business, premium eco and economy. That means a clearly higher revenue potential because it has a higher quality. And here, we talk about 15% higher yields that we expect to achieve. Now what about further earning levers? Fleet is one of them and then achieving efficiencies and the turnaround in our mainline business is another. Our Mainland business, Lufthansa Airlines was mostly affected by aircraft deliveries that we have seen by a lagging Asian business because they had a large Asia exposure. Now we have to fly around Russia, and that costs us money and time. They were mostly affected by lacking crew and aircraft productivity, and this is something we are tackling by a massive turnaround program that you see here on this slide, we're looking at the gross earnings impact of EUR 2.5 billion by 2028 by next year and EUR 500 million by this year. And I can tell you that for this year, we are well on track. So we have filled all the 700 measures with lights and necessary to achieve the earnings improvement and overall, we talk about 1/3 revenue measures. I talked to you about the new product and the higher yield and higher ancillary revenues and 2/3 of cost reduction, we mainly talk about increased productivity and improved stability. So where do we see that in the numbers? We see it mainly in one or I must say on this slide here in one figure, and that's irregularity cost. You see on that slide in the middle, the word, operation stability. Last year, we had massive issues on EUR 840 million of irregularity costs due to air flight cancellations due to a system that was too much under pressure, and we build buffers into the system and have to stabilize it. And the stabilization that is really already to be seen in the numbers. We could reduce irregularity cost by 1/3 already in the first nine months of this year. Also in the third quarter, we are confident that we will see a similar number in the fourth quarter. And here you see our Q3 figures and out of the -- apart from this EUR 100 million savings in irregularity cost, you can see that we achieved EBIT roughly on last year's levels. Let me highlight that there is still ongoing cost inflation. You see the plus level on the right-hand side. It's an increase in material cost ex fuel. That's also driven by location costs here in Germany. Fees and charges is in there. So those are cost inflation that we are facing. But we were quite happy with our Q3 results and maybe to dig one level deeper into this one. On the bottom of that page on the left-hand side, you see the plus 0.5%. That was the unit cost increase in the third quarter. That's a really low figure, and that's partly the success of our turnaround program. So that compares to a plus 3% and plus 4% in quarter 1 and 2. Now it's down to 0.5%. It was a very good message. And the not so good message of the third quarter was the demand environment. You can see up there the yield, minus 5.4%. We saw a demand weakness on the transatlantic in our European continental business, you had over the Atlantic, a 9.5% yield decrease in the third quarter. It was partly offset by a stable Asian business but still it couldn't fully compensate. So that was the good and the bad for Q3. But also here, there is a good message to the demand environment. The softness that we saw in demand looks like it was only temporary. So the outlook for the fourth quarter is much better. You see stable load factors. It's in the bubbles on that slide for the months to come. You see higher bookings, and you see yields still a bit below last year, but to a far lesser degree than in Q3. And putting all that together, if you look at the full year '25, we could confirm our full year guidance. We expect to see an adjusted EBIT significantly above last year for a group. That means more than 10% up so we are confident for the fourth quarter to see flat yields versus prior year and also a rather low increase in unit cost. And we also gave a glimpse into next year. So also for '26, we envisaged a disciplined capacity growth of roughly 4% with a clear focus on intercontinental routes and low growth on the Continental business because intercont, that's where we make the money. And overall, as I said, we are delivering on what we promised so far, and we are confident to achieve the guidance for the full year. Even though we highlighted 2025 as a year of transition. And the same holds true for 2026. That will also still be your transition. Main reason here is the fleet delivery. The good news is we start getting new aircraft, but this will continue also through next year. So both years are transition years. But then looking ahead we gave out the guidance for midterm targets, 2028 through 2030. So we intend to achieve a margin of 8% to 10% adjusted EBIT coming for a 4% to 5% region right now. we are envisaging a 15% to 20% adjusted ROCE. That's a pretax figure and EUR 2.5 billion of adjusted free cash flow, we have a framework. We have a very stable balance sheet already today. Very low indebtedness. So we intend to achieve a solid investment grade rating and the liquidity buffer of EUR 8 billion to EUR 10 billion. Right now, we are above that at almost EUR 12 billion partly because we shifted some CapEx. The dividend, we have a policy of 20% to 40% payout ratio out of our net income and the value levers, how to achieve this are put on the left-hand side. As I said, it's partly growth, but it's really about realizing synergies across the group. It's about our transformation program, mainly in the main airline and about the cargo and MRO business so that's the value bridge, how to get up to that margin targets. And with that, I pause, I think, 20 minutes up. We have 10 minutes left for questions, and I'm looking forward to those.

So then let me check, I saw there were questions coming in. Already. Okay. Maybe I'll start with the one on IT. ITA is our youngest acquisition in Italy. It's a hub carrier as well. The question is, can you discuss the plans for ITA, what synergies have been identified and the timing of expected tangible impact? Are there plans for a further increase in the stake? So maybe to start with plans for a further increase in the stake. Yes, there are plans. We currently own a 41% stake. We do have core options to increase that stake first to 90% and then 200%. We can do so once a year up until 2033. So we can take our time and see and wait, but we can also exercise them as early as next year in June, and we will do so depending on synergies and also on the financial KPIs that are underlying right now, we are quite happy with the earnings contribution. So ITA is providing a positive earnings impact. And right now, we are still waiting for antitrust approval in the U.S. for inclusion in our Transatlantic joint venture. And this is where the government in Italy is still helping us, our core shareholder once we achieve that, that might be a good time to exercise the call option, but that will -- it remains to be seen. In terms of synergies, there are, manyfold, different categories and we are working to achieve them since the closing of the transaction, which happened this year in January. We're looking at 10% to 15% of ITA revenues as synergies. And also so that's a number, 10% to 15% of 2024 ITA revenues. And the good news is that we can achieve a large part of those already now that we are a minority shareholder because a large part is really network optimization. We integrate both loyalty programs. We are marketing big cargo bellies, belly capacity of Lufthansa Cargo. We have moved into terminals to make it easy to connect. We have co-chairs. So there is a large part, 70% to 80% of those synergies that we can realize before owning the company in full. So further question. Again, an M&A topic, it's on Air Baltic. Here own a small stake, a minority share of 10%. And here the question is for full control, we want to be a majority shareholder to read correctly, so here the clear answer is no. Air Baltic is a wet lease provided to us, a very close cooperation partner, and we wanted to strengthen that partnership by acquiring that small equity stake. We have a board seat there, but it's only a financial invest and also to make the partnership closer. That was the idea. We will not increase that share. For the question here, on premiumization initiatives such as cabin upgrades and digital experience translating to higher margins or market share, what KPIs do you monitor most closely? I so think the KPIs that we monitor is the Net Promoter Score, NPS, where we have seen significant improvements over the past or through of this year, I have to say. On the one hand, due to more stable operations, on the other hand, due to the progress we make on more modern fleet and more modern progress. And that's translating to higher margins. Yes, it does. As I said before, due to a new product and the newer products called Allegris, we have up to 15% higher yield that we can achieve, and we also do have significantly higher ancillary revenues because in that new product, in the normal new premium product you have in the business class, five different seat configurations. If you are a very tall person, if you're a person who wants to look -- is looking for more privacy in the business class. If you're looking for a seat together with your partner, you can deliberately pick and choose those seats when booking your -- making your booking and then checking in, this is where you, again, generate ancillary revenues. And this is something that's being boosted by the premiumization initiatives such as cabin upgrades. And also in digital experiences, yes, there has been a double-digit increase in the, I think, the first quarter this year just because we switched something around in the app and made it more convenient and easier to book ancillaries that we could see a variable impact on ancillary revenues. What are your priorities for cash deployment in 2026? Yes. Look, so I mean, that's an easy one. I said 240 aircraft that are -- include our new fleet delivery program. We are in the middle of it. So the most of the CapEx will clearly go to your fleet. And bear in mind, we cashed out. It also means increase in margin because I told you what the impact of new fleet on our earnings. So that's an important step in our margin walk. And also, if you think about free cash flow, yes, there will be the CapEx peak in the two years to come. So in that sense, there will be -- the cash flow will be impacted negatively. But we will also increase our share in lease fleet. So that means we will also do sale leaseback transactions. And by that, we will buffer that cash out by getting cash back in by selling aircraft and leasing it back over the next two years. Next question, could you shed a light on the demand we see in Q4, especially Christmas also in due to 2026, a little of intra-Europe and APAC being quite solid. What could be the drivers for that? Yes. Look, so in Q4, I think I highlighted it before, we see a clearly more positive demand environment than in Q3. We see a recovery in all traffic regions. That's not only in Europe, but it's across the board. It's a much more stable environment. So that makes us confident with regard to Q4 and also to January. I think Christmas, it's similar to last year. And also in 2026 was a question. We think -- what we can tell is what I shared on the slide where we showed the January perspectives that is promising and further out into the year, we don't have any very limited visibility, obviously, because as you know, when you book a flight, not one year ago, or half year ago, but usually a couple of weeks before the start of the flight. So therefore, there's limited visibility further down the road. Next question, any labor concerns for 2026? So I start with this one and then there's a question on fuel hedging. On the labor front, so look, one of the main levers of the turnaround program that I described before is that we want to shift capacity in aircraft internally from one AOC, from one group airline to the other. We do have two airlines in Frankfurt and Munich operating, they are called City Airlines and Discover, and they are operating on a much lower and more cost-effective base than Lufthansa Classic, which is operating in a higher cost base. We are shifting and we're growing those cost-efficient AOCs. And this is something unions don't like. We are having discussions on that with the unions. They are not too -- not allowed to go and strike against this growth for legal reasons, it could go on strike for open tariff agreements or with CLAs. So there are ongoing labor discussions that we see. Can I rule out any strikes this year or next year? No I can't. [indiscernible] likelihood to that? No neither. But all we can say is that we are confident to be on the right path to growing these more cost-efficient AOCs. And in that sense, we're having constructive discussions with the union and also hoping to find a constructive solution for this. And I think that's what we can comment today. And then also on fuel hedging, that's the next question. So yes, we do have a fuel hedging strategy in place. That means to provide protection against increasing feed prices. At the same time, it leaves the opportunity to take advantage of decreasing fuel price. So we do that by hedging through options and no other contracts which gives us the flexibility to also leave options on the table, not exercise and a few parts are decreasing them. The target hedge ratio is 85% and that relates to a flight, which is taking off six months from now. We hedge 50% of gas, oil and 35% of brand and it only applies to the passenger airline business because of the cargo business, we can pass through our fuel cast, in the cost and there is no matching needed. Further questions. I think there's one left on engine negotiations. I think I quoted that before, mainline pilots are asking for pension increases. These are ongoing discussions. I think pensions are already at a very high level. So it's difficult to go on strike and there also have limited support in the workforce at the contract for this one. So again, also here, we're not commenting from a content point of view where negotiations stand, I think it will be difficult for them to go on strike. And there's no timeliness for the ongoing pension negotiations, we just have to wait and see what the results are bringing. And with that, we are at 5:30 here in Frankfurt. So half an hour is over. I think the questions that remarked as prioritized, I've answered all of them. Thank you very much for your attention. I hope convey some key messages and building blocks of our strategy. And if not, we are always here to help. Investor Relations team is always available to jump on phone or also answer your questions after the call also via e-mail. Thanks a lot.