Deutsche Lufthansa AG

Andreas Hagenbring – Head-Investor Relations Ulrik Svensson – Chief Financial Officer

Neil Glynn – Credit Suisse Jarrod Castle – UBS Oliver Sleath – Barclays Michael Kuhn – Société Générale. Damian Brewer – RBC James Hollins – Exane Andrew Lobbenberg – HSBC Johannes Braun – MainFirst

Thanks, Emma, and good morning, ladies and gentlemen. Welcome to the analyst call for the release of the Q1 numbers today.

I have our CFO, Ulrik Svensson, with me, who will give you an overview on the numbers. Afterwards, as Emma already said, you will, of course, have the opportunity to ask some questions.

I would like to add that we have a broader setup today. We welcome also media and journalists on the call.

In case you have any questions, we will take those, are happy to take those once the analysts are done. And with that, over to you, Ulrik, the floor is yours

Thank you, Andreas, and good morning, ladies and gentlemen, We have seen a good development in the first quarter. A lot of the result improvement we have seen actually comes from non-operating effects.

But, and this is what matters to me, even without those positive effects, the adjusted EBIT would have improved. The total adjusted EBIT has increased by EUR 78 million to EUR 25 million.

This is the best result of the first quarter we have seen since 2008. For the EUR 78 million improvement, the recovery of cargo has contributed 52 million.

Lufthansa Technik saw strong growth and a profit improvement of EUR 50 million. The result of LSG was basically flat with an improvement of EUR 2 million.

And others and consolidation account for another EUR 58 million of the increase. The network and Point-to-Point Airlines saw a deterioration of their result by EUR 84 million.

This was mainly due to the good unit revenue and the not so good unit cost performance. We, of course, like the good rest of development, even though it is amplified by non-operating elements and may not be sustainable on this level for the full year.

We like to see that the service companies are now supporting the profit development of the group again, as it had been the airlines that have driven the improvement in the last 2 years. We also like that the Passenger Airlines kept their result virtually flat, even normalized for higher fuel costs and the positive one-off effect at Ocean Airlines in the first quarter 2016.

What we really do not like is the cost performance of the Passenger Airlines. There are some good reasons for such development, like higher passenger volumes and more variable cost than expected.

Although a tough comparison, we are reporting against in the first quarter last year. But this is clearly something we do need to focus on even more.

Looking ahead, we can see that the good forward bookings for the second quarter are pushing cash flows to very strong levels. The volumes for the month up to June remain on a good level.

But visibility into the peak summer months is still limited and the economic and political environment remains volatile. Hence, we see no reason to change our guidance for the full year.

The favorable trading environment has been visible in our monthly traffic statistics. The first quarter saw unit revenue grow month by month and even turn positive in March.

Over the entire period, and including the consolidation of Brussels Airlines, constant currency unit revenue was down 1.1% on a capacity growth of 9.5%. The best-performing traffic region was Asia, where capacity growth was small and demand has been strongly, due to the uptake of leisure travel into the Europe compared with last year.

The North Atlantic also performed well. In particular, this U.S.

demand into Europe was supported by the strengthening of the U.S. dollar.

On the South Atlantic, where the economic environment is still weak, strong capacity actions had a positive impact on load factors, thus supporting unit revenues. Europe was more stable and had a positive impact from the Easter shift into April, which helped on pricing.

Solid demand allowed to increase load factors as well. Africa and Middle East continues to be our smallest traffic region and therefore, experiences the highest volatility.

The region is marred by political instability in some of the countries. Nevertheless, we were able to increase load factors also here.

Overall, the demand situation in Q1 has allowed us to fill the aircraft earlier and to focus on discriminating pricing on shorter-term bookings, which was beneficial for our yields. Product bookings indicate good volumes for the months up to June.

But visibility into the peak summer months is still limited and economic and political environment remains volatile. Non-fuel unit cost developed plus 1.4%, less favorably in the first quarter.

As I've said before, we report against a strong performance of minus 4% in the first quarter of 2016. But in particular, higher maintenance cost and additional variable costs from the increase in the seat load factors have additional burden for development this year.

These unit costs and unit revenue trends, together with higher fuel cost of EUR 139 million, that includes the fuel cost of Brussels Airlines, causing the Passenger Airlines result to come down by EUR 84 million to minus EUR 172 million. The aviation service companies performed strongly.

Including the other segment and consolidation, they have increased their result by EUR 162 million to EUR 197 million. In total, the adjusted EBIT of the Lufthansa Group increased by EUR 78 million to EUR 25 million in total.

EBIT is only slightly different from adjusted EBIT at this stage. This will change once we complete the legal agreement with a pilots' union Vereinigung Cockpit, in the course of this year.

The net result came in EUR 60 million below last year. The operating cash flow improved by 50% to EUR 1.6 billion.

As part of the improvement in the operating result, this was also driven by good forward bookings for the second quarter. Free cash flow improved despite higher net investments and almost doubled compared with the first quarter last year to now EUR 1.1 billion.

The positive development in cash flow has driven the reduction in net financial debt compared to the first quarter last year by EUR 821 million and to a similar amount compared to the end of last year to now below EUR 2 billion. The pension deficit has remained virtually stable compared to year-end on the 0.1 point reduction in discount rate to now 2%.

In these numbers, the contribution of EUR 1.6 billion into the defined contribution pension fund for the flight attendants is not yet accounted for. We have done the necessary investments already, but we see still reflected on the balance sheet.

This will then shorten the balance sheet total by some 4% when this happens later in the year and improve the equity ratio accordingly. In the first quarter 2017, the balance sheet was expanded by the first-time consolidation of Brussels Airlines, the promissory note we have issued and the increase in liabilities from unused flight documents from the good forward bookings.

These 3 elements together added some 9% to the balance sheet total of total group compared to year-end. All of the service segments and the point-to-point airlines have improved their margins.

It is good to see that after the Passenger Airlines had driven the good result improvement in the last 2 years, now also, the Aviation Services add to further profit development of the group. This shows the strength of the broad setup of the group.

The results of Network Airlines corresponds to the record result last year, minus the positive one-off effect at Austrian Airlines at the time and the higher fuel cost in this segment this year. Constant currency unit revenues increased by 1.2% in this segment, but higher fuel costs and the unsatisfactory cost performance prevent for a better profit development.

Some of the cost development was driven by higher MRO cost in particular. The Point-to-Point Airlines also showed a good revenue development.

This was mostly on the back of capacity growth and the first-time consolidation of Brussels Airlines. Constant currency unit revenue came down by 13.4%, partly due to the mix effect.

Costs came down accordingly as the result remains stable. The logistics segment benefited strongly from the recovery of the demand for airfreight.

Lufthansa Cargo has seen a recovery across all regions, translating to strong revenue growth and positive leads. First positive contribution of the ongoing cost reduction program has also driven the improvement in adjusted EBIT by EUR 52 million to EUR 33 million total.

Lufthansa Technik has increased their external revenue by more than 10%. The result has developed much better than this, which was partly from seasonal capacity utilization in aircraft overhaul and successful cost reduction.

Adjusted EBIT increased by EUR 50 million to EUR 137 million. The margin increased by 2.7 percentage points to 9.4%.

LSG is making progress with its transformation program with the start of the centralized production in a pilot plant in the Czech Republic. The restructuring comes initially with costs, which weighted on the result in the first quarter.

Nevertheless, adjusted EBIT was up EUR 2 million to minus EUR 2 million total. The other segment, which already showed an initial recovery last year after the extraordinary bad result in 2015, saw another improvement.

The result improved due to exchange rate and consolidation effect by EUR 58 million to EUR 29 million total. What matters to me is that even without the nonoperating improvements, some other segment and consolidation effects, the underlying adjusted EBIT would have improved by EUR 20 million.

On the back of this, we leave our 2017 guidance unchanged. The fuel headwind, excluding Brussels Airlines, has reduced to EUR 200 million according to our current forward rates.

We see most of this headwind actually in the second quarter. Together with Brussels Airlines, we expect the fuel bill increase by EUR 500 million.

The unit revenue guidance remain unchanged. What we can see today, trading in Q2 will remain strong.

We have still little visibility into the peak summer. But other than in the first half year, we then see a less favorable yield development as we will be adopting a volume strategy with the higher share of leisure tickets sold early.

We continue to strive for clear unit cost reduction. However, I should say that the target to achieve a similar reduction for the full year as in 2016 is becoming more ambitious.

This is partly because of the increase in the first quarter, but also as we continue to see higher passenger volumes, which are causing more variable costs than we had anticipated. On top of things, the delay in aircraft deliveries may lead to a less good cost performance.

With this, I come to the end of my speech. Thanks for your attention so far, and I'm looking forward to your questions.

If I could ask three quick ones, please. The first question with respect to cost control.

There does seem to be an element of genuine surprise with respect to the cost performance in the first quarter, notwithstanding the load factor and the maintenance effects. And Ulrik, you also mentioned the delay in aircraft deliveries negatively impacting unit costs for the year.

Just interested as your time at Lufthansa develops, have you identified more areas of improvement in terms of the transparency of cost control within the Company and should we expect improvements in that? Second question, you touched on adopting a more leisure-oriented, volume-focused strategy.

Your partner, United Airlines, mentioned lead bookings with pricing down 10% on Star joint venture routes into the summer. Just interested, can you corroborate those numbers and is that something to be concerned about as we get into the summer months?

And then the final question, as ever, there's a lot of press coming out of Italy on the future of Alitalia. Just interested in terms of whether you can confirm or deny has the Italian government actually approached you to help out with a solution for Alitalia?

Yes, Neil, yes, starting on the cost side. We clearly are disappointed about the CASK development.

But I think it's important to say that some of these problems are indeed luxury problems. We have seen substantially higher seats in practice and as you know, there are always a cost of credit cards, passenger fees at the airport, catering and so on, which are only variables which, of course, are negatively impacting the CASK.

Maintenance cost increases, which have been increased in Austrian and in [indiscernible] back home here at Lufthansa classics. Yes, that is a little bit of surprise to me.

But I think readily, we will get control over those as well. There are no higher amount of maintenance on engines, that's why the costs have gone up this year.

But we should, of course bear in mind that a minus 4% cost reduction we had in Q1 last year is indeed a very high comparison. On the leisure side, no, we do not actually see the same trend.

So I cannot really comment on what they are saying. But we see a different development here.

In terms of Alitalia, no, I have absolutely no comment to Alitalia. But we are clearly not in there to buy Alitalia, in the rumors in the press.

Understood. Many thanks.

Three as well, if I may. You said that up until June, you've seen good forward bookings.

Can you give any commentary just in terms of maybe something on yield? And specifically also just related to the North Atlantic yield, there has been a bit of concern about some pressure on that, although having a look at your Q1, it looks like a good performance.

And then just also cargo seems to be doing nicely in terms of pricing as well. So are those trends continuing going forward?

And then just lastly, as the third, just MRO, does the pipeline still look very strong for the rest of the year in terms of the orders?

Starting with the deal side. No, the deals will probably not have a good development in the bookings as it did in the first quarter.

You have a little bit, of course, the Easter effect. But clearly, volumes will be better than last year.

At least it looks better than last year now when we look into the bookings. So I think that is very helpful.

Cargo, yes, we continue to see the trend we have done. We already spoke about when we met last time, cargo is indeed seeing a continuing very strong market.

So that helps both deals and the load factors on the cargo business. But as you do know, we have a very short visibility on the cargo market, which is most, more 2, 3 weeks.

So it's indeed very difficult to say that positive trend will continue into the full year. On maintenance cost, well, on the maintenance cost, we are – well, I think your question is maybe more related to how Technik is doing in total more than maintenance cost.

Yes, that's right.

And on Technik, we are indeed seeing a very good first quarter. But I think it's too – it's indeed too optimistic to say that, that trend will continue for the full year.

And Jarrod, I think you also had a question on North America continuing from year 1 onward.

That's right.

Yes, and there is no change in that development. I think we had a yield decline of only 0.8% in North America, sorry, in the Americas for the full first quarter.

And in North America, it was actually going up. So I think that's contrary to all the questions we received, where we met around six weeks ago.

So I think that positive trend is continuing.

Thank you very much.

Three questions, please. Firstly, it strikes me at the moment on your RASK that there's quite a lot of dilution effects going on from, for example, France growth of Eurowings, Air Berlin where it leases, in consolidating Brussels Airlines as well, which I guess is a structurally lower RASK entity.

And that therefore, your minus 1% that you reported on an underlying basis could well be positive. I just wondered if you have any sense for the magnitude of the impact on RASK from the dilution of these lower yield entities.

Second question, just on Asia. Again, very encouraging performance there.

Do you have any sense for how much of that is demand getting better, annualizing terrorism, et cetera, versus you potentially benefiting from capacity changes in the market, and especially the Middle East carriers slowing down their growth rates? And then finally, just on the pilot union deal.

I wondered if you have any sense on the timing for when you're expecting to kind of get the ink dry on that and reflected in your reporting? Is it likely to be within Q2 or perhaps more a Q3 event?

Yes, starting with the dilution effect. The increase we see in the Eurowings segment point to point is approximately 1% in dilution effect.

If we look into Asia, there indeed, we have, of course, the strong leisure demand rebound, which we already spoke about in a couple of weeks ago, which is continuing. So I think that is very helpful.

There is, of course, an element of capacity reduction as well into Tokyo. How the Middle East carriers are affecting it, as you mentioned, is very difficult to say.

In terms of pilots, we expect to close the deal with Vereinigung Cockpit in the second half of this year. But a detailed timing of that is very difficult to say.

There are a lot of legal details to sort out and I cannot really give you any detailed guidance on that.

Okay. Thank you.

And could I just check on the 1% you mentioned for the Eurowings dilution and there might be some more from Brussels Airlines as well, but you don't have an estimate for that or...

No, that is the Brussels effect.

Good morning also have one on guidance. So you leave your adjusted EBIT guidance unchanged, which makes sense that early in the year.

Still with a lower fuel build guidance now, the guidance looks more conservative. Is that due to some, let's say, lower expectation in terms of cost savings?

Or is it just broadly more cautiousness of building bit more kind of a buffer? And then you already asked about Alitalia.

Obviously, there's a second struggling carrier with Etihad in the background, which is Air Berlin, where you've got a long-term lease agreement. So there is an interest to keep that carrier alive and flying.

What could you mention in terms of further deals with Air Berlin going forward?

Yes, starting with the guidance. I mean, it was only six weeks ago, we gave our guidance.

So I think indeed, it is too early to speak about something else. And we have to remember in this industry, that we make most of our money in the third quarter and that we have very little visibility.

In terms of Air Berlin, we – I think we have three different ingredients, which makes an absolutely mess and a hurdle for us to do further consolidation with Air Berlin. Of course, the first one being hotel issues; the second one that there is a lot of debt in Air Berlin; and thirdly, we have to have the right cost levels.

So it's not an easy project.

All right. Maybe just one follow-up.

On the interest expense line, that was up quite substantially year-on-year. Any special effect you can point out here?

In 2016, we had a one-off gain of hedging. That's the reason why the total financial costs look substantially higher this year.

So there is nothing special with that.

Okay. So the reported number is like a good indication for the run-rate?

It is, indeed.

Okay thank you.

Good morning, everybody. Three questions again.

That seems to be the fashion this morning. First of all, just coming to the other consolidation costs.

Clearly, about 3/4 of your EBIT progression was from the change in EBIT there. Could you elaborate a little bit more on the changes there and whether they will continue through Q2 to Q4, whether there's anything to look out for there?

Secondly, in your prepared remarks, you already mentioned about the MRO costs in the Network Airlines. So we get a feel, could you give us an idea of how much more of those were than on a sort of normal seasonally adjusted basis?

And then whether that run rate of maintenance and both airframe and engine repair costs will continue into the further quarters or whether this is just a timing effect where more of the MRO and ARO activity was done in the winter rather than the summer? And then the final question just sort of following on from that.

In the Lufthansa Technik business itself, are you seeing any trends in terms of change of focus of activity into the quieter winter season? Or is it becoming a more winter profit focused business or is this again just a one-off?

Thank you.

Yes, starting on the consolidation effect and others, which indeed is an improvement compared with the first quarter last year. There are exchange rate effects.

But basically, in the consolidation, there are many small effects and there is no one really sticking out. We will not see that going forward every quarter.

So you have to see that as a one-off. In terms of maintenance cost, it's between EUR 10 million to EUR 20 million in Austrian and around the same level at the Lufthansa Sasha.

In terms of maintenance cost in – for Technik, so as you put it like here, the Technik's revenue, there is not really a change in its seasonal pattern.

And just to come back on the network airlines, the EUR 10 million to EUR 20 million in Austrian, similar in Lufthansa Passenger Airlines, is that the timing effect for the year? Or should we expect to see up to another EUR 40 million per quarter in costs going through the remaining quarters of the years as well, i.e., is this just timing or are some catch up or just inflationary issues in there?

No, this is just due to basic as you have quite a large number of engines going into the top and going into the shop at that very quarter. So it is indeed a coincidence.

You can put it like that.

Okay thank you. That is great.

Yeah good morning. Two for me.

Just following up on North America. If I look at your comps into Q2, I think they're relatively similar comp against Q1.

Is your best estimate that you can do another sort of plus 1.6 in Q2, particularly with the move of Easter year-on-year? And the second one, just I'm trying to sort get a bit more feel for where your disappointment on costs come from?

I mean, yes, they are disappointing. It feels like maintenance is partly due to timing and obviously, as you said, volumes are a good thing, but will have some impact on cost.

So where -- which particular part of the cost line and which particular area, I assume you're talking about Lufthansa itself, is disappointing as you see it as the new-ish CFO?

Starting on the quarter numbers, we don't really give any guidance in terms of how it looks in the next quarters. We only give you guidance on the total year.

So no, I think that, indeed, would be difficult. Well, as you know, on the cost side, I'm the -- taking on myself to be the cost general in this company.

And I indeed hope that we can have an ambition to have the total costs being more reduced in Lufthansa. And there's no one particular line on that.

You could say that we now have a little bit of coincidence that a lot of engines were in the first quarter in the engine shop, and that is indeed the case. But in terms of cost reductions, overall, we have a lot more to do.

Okay thanks very much.

Good morning Ulrik and good morning Andreas. I wanted to ask about the execution of the Air Berlin wet lease deal.

We've seen quite a lot in the press about very challenging operational situations at Air Berlin with the remaining operation. How calm and efficient is the transition and their delivery of the wet lease?

And indeed, how has it gone with converting the aircraft? I'd also be curious to hear what you guys are saying at the moment about your relations with your lovely base airport.

There's been stuff in the press that you're kissing and making up. But I don't know whether that's progressed or not.

That'll do.

Thank you. Yes, regarding Air Berlin, it has gone very, very well.

We have more than 30 aircraft now, which we have taken over in the wet lease agreement. And operational, there has been a very smooth handover.

So we are very happy about that. In terms of Fraport, we are in the middle of those discussions.

So I would not like to comment upon that. But as I said, when we met last time, ultimately, an airport and its largest customers will come to some kind of an agreement.

Fair enough.

Now coming to the last question we are seeing in the system.

Most of my questions have been answered already. But maybe just one on your target to cut EUR 500 million in the management costs by cutting out 1 management level by 2019.

So far, the guidance posted we will see EUR 100 million this year and then of the rest of them the next – over the next 2 years. Any update on the phasing of these savings?

Might they come in earlier or later?

No, that program is indeed working according to plan. So we will see approximately EUR 100 million saving of that in the course of 2017.

Yes, we have to say thank you as well. This was the last registered question, both from the analysts as well as from the media where we haven't seen any questions.

So thank you very much for attending the call today and looking forward to catching up in the coming weeks and months.

Thank you, everybody.