Deutsche Lufthansa AG

Yeah. Good morning, ladies and gentlemen.

Welcome to the presentation of Lufthansa Group's 2018 annual results. With me today are Carsten Spohr, our CEO; and Ulrik Svensson, our CFO; who will give you an overview of the group's performance in 2018 as well as present our outlook for the current year.

As always you will have the opportunity to ask questions after the presentation. Carsten, the word is yours.

Well, thank you very much, Dennis. Good afternoon to all of you.

It's now, 2018, which we are looking back to, and as you all know, this is the year where we celebrated basically a 100 years of the anniversary of our crane, our long-time brand symbol. And when we - in spring, refreshed the crane, the entire appearance of Lufthansa and our corporate entity was refreshed.

And we always said and we still say that combining this legacy and tradition with modernizing the company, restructuring as we are doing now for years is in the end the unique position Lufthansa can be in setting us apart from others in our industry. And I think it's fair to say today that our results also last year have lived up to this expectation.

As one of the few companies in our industry, we achieved the financial targets we have set ourselves at the beginning of the year. The group's operating profit amounted to €2.8 billion, which is the second best result in our history.

While sales reached a new record high, we were further able to reduce cost. The modernization of our fleet continued with the reception of 46 new aircrafts, not only upgrading the customer proposition but also improving our environmental footprint.

Capital returned exceeded 10% even after tax, highlighting our strict discipline in allocating cash. However, these achievements should not hide from the fact that our passengers suffered from far too many delays and flight cancellations last year.

And, of course, there are parts of our business where we can and will and need to improve further. But before I will discuss our initiatives in this regard in more detail, I'd like to hand over to Ulrik for a review of our financial performance.

Ulrik?

Thank you, Carsten, a warm welcome from me too. As Carsten pointed in his introduction, 2018 offered highlights and challenges.

The increase of irregularity costs by more than €200 million was one of several headwinds, also including €855 million high fuel cost, as well as the €170 million one-off cost at Eurowings, resulting from the integration of aircrafts taken over from Air Berlin. In some those challenges were greater than we had initially anticipated.

Nonetheless, we achieved our original targets. Profitable growth and our continued efforts to reduce cost meant that we're generating underlying improvements of more than €1 billion.

The group's adjusted EBIT amounted to €2.8 billion in 2018 including €122 million positive effect from a change in the accounting of engine overhaul events. Excluding this effect, operating profit decreased 9% and reached a good €2.7 billion.

Historically, the timing of engine overhauls created significant volatility in our quarterly development of cost and profits. This volatility would have further increased going forward, given that we expect engine maintenance cost to rise because of the growth of our business.

That is why we decided to capitalize the cost for engine overhaul events as a separate component of the aircraft and to depreciate them over a period of 6 years, in line with common industry practice. We are convinced that this change provides a better view on the operation performance of our airlines, because it distributes the cost of engine maintenance more evenly across the periods.

In the long-term, this change will have a neutral effect on EBIT. In the short-term however, this change had a positive impact on 2018 profits.

In contrast, the accounting change lowered the adjusted EBIT reported for 2017 by €4 million. In the further course of my presentation, I will focus on performance excluding this accounting change, so that you can compare our results with our 2018 guidance on a like-for-like basis.

In 2018, regional performance differed significantly, while short haul was under pressure, yields were up in long haul. Performance in Europe was impacted by a tough comparison base related to the short-term demise of Air Berlin last year, which had led to a surge of demand across all airline groups in the second half of 2017.

In the meantime, the capacity that Air Berlin had left has been filled by us and others, so the market has become more competitive again. We respond to this competition by offering high frequency and attractive prices, especially on routes where we are competing directly with low-cost carriers.

This obviously comes at a price, especially when market-wide capacity growth is too high as was the case in short-haul in winter. Rest assured though that even those routes continue to generate profits.

Finally, a good third of the full year decline in Europe was attributable to the mix effect caused by disproportionate growth of the lower yielding Eurowings business. Turning over to long haul, performance on the North American and Asian routes held up well throughout the year.

Weaker performance of Americas in the fourth quarter was entirely due to South America. Yields on the North Atlantic were up 3.5% in the period.

Finally, the Asian routes benefited from moderate capacity growth and a continued healthy demand in all major markets, particularly Japan and China. Full year RASK was down 0.5% across both airline groups, affected by significantly weaker performance in the fourth quarter.

In line with what I just mentioned, the 1.2% RASK decline at the Network Airlines in the fourth quarter was entirely due to the yield pressures in short haul. Nonetheless, strength in long haul supported flat growth of unit revenues in the full year.

Eurowings' performance showed the same pattern. However, the impact from declines in short haul was even larger because of the airline's far greater exposure to the European market compared with the Network Airlines and even more difficult comparison base.

Unit cost reduction largely offset the revenue pressures. Full year CASK ex-fuel were down 1.2% across both airline groups, in line with our original guidance.

Excluding the one-off costs related to the integration of former Air Berlin aircrafts, we would have even reduced CASK by a full 2% in 2018. The CASK improvement of the Network Airlines of 1.7% was primarily driven by cost reductions and productivity improvements at crew level.

In addition, we successfully renewed important infrastructure contracts at better terms and continue to reorganize administrative structures and processes. Ex-fuel unit cost at Eurowings were above the prior year level due to the integration related cost I mentioned before, as well as the inefficiencies created by the diversity of flight operations.

Performance in the fourth quarter was much better supported by the completion of the technical integration at the end of Q3 as well as the non-recurrence of some other acquisition-related expenses incurred in the fourth quarter 2017. Irregularity cost that is cost related to the flight delays and cancellations, affected both airline groups.

In sum, they were up 70% and amounted to €518 million in 2018. Fuel cost came in as expected at the time of our last reporting at the end of October.

In the full year of 2018, fuel cost increased by 16% or €855 million and amounted to almost €6.1 million. €261 million of the increase were due to the capacity expansion without hedging cost would have increased by nearly €700 million more.

Our Network Airlines fully offset the impact of rising fuel costs and [indiscernible]. Lufthansa German Airlines recorded full year profits virtually on par with prior year levels, benefiting from moderate unit revenue growth and cost reductions mainly driven by better crew productivity.

This was the best performing network airline, benefiting from solid unit revenue growth across all traffic regions and cost reductions related to renewal of its long-haul fleet. Austrian Airlines came under increasing pressure over the course of the year, because of the significant capacity growth in Vienna and the resulting yield pressure.

Eurowings recorded an operating loss €178 million in 2018 largely explained by the €170 million of integration cost. In addition, irregularity costs more than doubled compared with the previous year, including the effects from the change in maintenance accounting the adjusted EBIT at Eurowings amounted to negative €231 million.

Our stance on Eurowings has not changed. We are not satisfied with the results of the business in 2018.

However, we regard the last year's losses as a price we have to pay for the unique opportunity to further consolidate our whole market. In 2019, the turnaround of Eurowings will be a major focus for the group.

So Carsten will walk you through the key measures in a few measures - in a few minutes. Turning to our Aviation Services, all operating companies increase the results in the full year.

Lufthansa Cargo continues to lead this industry based on its quality promise that materializes in significant yield premium compared to peers. Supported by further efficiency improvements and ongoing digitalization of its business model, this drew an operating profit increase of 10% to €265 million in the full year.

Lufthansa Technik had a strong finish to the year, so that the full year profits increase to 2% to €425 million. Strong performance in the components business compensated for some challenges in the engine division by spare parts cost inflation and capacity shortages related to long throughput times created some pressure.

Our catering business is making good progress in the transformation of its business model, which focuses on the centralization of the production and logistics setup in Europe and the global expansion of its onboard retail activities. LSG grew its full year profits by 74% to €115 million supported by the fact that we are - that we will incur some transformation costs only in 2019 rather in 2018.

Finally, the results of other business and group functions decreased to a negative €186 million. Performance was burdened by significant cost for the modernization of their IT at AirPlus, the capacity expansion in our flight training operations and group-wide digital project costs as well as non-recurrence of a prior year currency gain.

Turning to the balance sheet and cash flow, investments were broadly in line with the prior year level, excluding the change in maintenance accounting. On a reported basis, investments amounted to almost €3.8 billion, including €470 million related to the capitalization of engine overhauls.

Keep in mind that operating cash flow increases by the same amount. So the net effect on cash flow is neutral.

The location of investments within the group is based strictly on capital return performance. For the group as a whole, return on capital employed after tax declined by 1.3 percentage points to 10.6% in 2018, affected by the decrease in profits as well as the expansion of our capital base.

On a pre-tax basis, capital returns amounted to a solid 14.2%. By segment, capital returns deferred significantly ranging from as high as 26% for Lufthansa to negative 8% for Eurowings.

This is reflected in the allocation of investments, which are heavily weighted towards the highest returning airlines, Lufthansa and SWISS. The disproportionate investment in Eurowings was largely related to the one-off takeover of Air Berlin aircraft slightly lower again in 2019.

The slight increase of investments was one reason why free cash flow declined to €250 million in 2018. More importantly, though, operating cash flow was below prior year level.

This was due to the decline in profits as well as the non-recurrence of prior year working capital effects. This reflects the strong growth and booking situation of our airlines following the market exit of Air Berlin at the end of 2017, which did not repeat to the same extent in 2018.

In addition, outflows increased because of higher variable compensation and tax payments related to the significant profit improvement in 2017. Costs accrued in 2017, the cash out was in 2018.

Because of the lower cash flow, net debt grew 21% to almost €3.5 billion. Pension provisions were up 15%, because of the effect that financial market decline had on the performance of plan assets.

At the end of the year, provisions amounted to €5.9 billion. Nonetheless, our balance sheet remain strong, net EBITDA amounted to 1.8 significantly below our maximum threshold of 3.5.

Our dividend proposal of €0.80 per share follows the group's policy to pay-out between 10% and 25% of the group's EBIT to shareholders. It reflects our commitment to let investors participate in excess of the group, while ensuring that we have sufficient funds to finance future growth.

Turning to our 2019 outlook. Let me start in our home region Europe, where an overheating of the market led to pressure on yields in 2018.

That's why we made the decision already in autumn last year to curve the growth of our airlines in summer 2019 to 3.8%. In the meantime, we have further moderated our expansion plans to just 1.9%.

As expected, peers have followed, so we forecast overall industry to expand capacity only very slightly this summer. Supported by this moderation in growth, we are confident that unit revenues in short-haul will improve in the second half of the year.

At the beginning of the year, however, they will still be under pressure also considering the late timing of Easter, which falls into the second instead of the first quarter this year. Turning to long-haul, current bookings indicated continuation of good demand on the transatlantic route.

Supported by market-wide supply, it is growing very much in line with the current demand. In Asia demand continues to hold up well, too.

We expect performance in Japan to remain particularly strong. Market-wide capacity growth on the Asian route is primarily driven by China where local carriers expand at a significant pace.

In an uncertain environment, it is good to know that we have many measures to bring down unit cost in our own hands. 2019 will be the fourth year in a row, where we reduced unit cost.

Highlighting the fundamental changing cost culture and discipline, the group has undergone in recent years. Let me highlight some key focus areas.

The ongoing modernization of our fleet support significant operating cost reductions. Staff productivity continues to improve in the cockpit and in cabin.

Unit costs at Eurowings will benefit from the non-recurrence of integration costs and the reduction of operational complexity. Distribution cost will be lowered by the increased share of direct distribution.

MRO cost will benefit from the phase out of old engine types and the closure operation between Lufthansa Technik and the airlines. And finally, we are constantly improving our processes by implementing the lean concept throughout the organization.

Taking it all together, ex-fuel unit cost reductions will be key when it comes to mitigate high fuel cost in 2019 and achieving a group adjusted EBIT margin of 6.5% to 8%. This guidance includes a low double-digit million euro negative impact from the implementation of IFRS 16.

We intend to narrow the ranges as the year progresses. The Network Airlines will grow their full year capacity by around 4%.

Unit revenue should develop stable to slightly down, negatively affected by the pressure in short-haul at the beginning of the year. Unit costs ex-fuel and currency will decline by between 0.5% and 1.5%.

Nevertheless, the fuel cost increase of around €550 million will mean that the segments margin declined between 7.5% and 9.5%. Capacity growth at Eurowings will amount to just around 2%, supported by a recovery of short-haul yields as the year progresses and improvements in long-haul, unit revenue should develop stable to slightly up.

We will reduce unit cost by 7% to 9% including the non-recurrence of €170 million prior year integration cost. The Eurowings will achieve an adjusted EBIT margin around breakeven, even assuming €100 million higher fuel bill.

Turning to the non-passenger business, our logistics business should tie in with the good performance in the past two years and record a 7% to 9% EBIT margin on the back of a high-single-digit growth. The MRO business is expected to grow at a mid-single-digit rate and achieve a margin between 7% and 8%, broadly in line with the prior year level.

Catering should generate an EBIT between 2% to 5% - 2% to 4% EBIT margin. And finally the result in other business will decline by around €150 million, primarily because of the continued transformation of the AirPlus business, the expansion of pilot training activities and higher digital investments.

Back to you, Carsten.

Thank you, Ulrik. Ladies and gentlemen, we are operating in a challenging environment.

Ongoing trade conflicts, lingering budget disputes in U.S., deep divides between the different EU member states and the uncertain outcome of Brexit mean that the world economy faces many question marks in 2019. In our industry, many airlines are having financial troubles or have even exited the market in the last few months.

The beginning of the year is clearly going to be challenging for us and for others. Capacity growth in Europe has been too high in winter, so yields in Germany and the rest of Europe will remain under pressure as Airlines are fighting hard for market shares.

However, we expect the situation to improve over summer when supply growth in going to fade as Ulrik outline. Assuming a base case of more moderate global economic growth and no political shocks, solid demand growth will support our performance during the rest of the year.

As an airline group we will always be exposed to the ups and downs of the economic cycle. It is important to have detailed plans in place to react to every possible market scenario and we have them ready.

However, our focus will be on actively building our strength to ensure that we further improve our market position relative to our peers. The group is in good shape to do exactly that.

Our two airline groups, the Network Airlines and Eurowings address distinct customer segments in Europe's strongest economies. They form the core of the Lufthansa Group today and in the future.

All other businesses need to demonstrate that they can create synergies with this core. This is evident with the logistic business, where Lufthansa Cargo uses the bellies of all commercial fleet in addition to their own freighters.

This is also the case our MRO business, which benefits from the access to new technology provided by the airlines in return for its contribution to maintaining a world-class fleet. In contrast, the synergies between the airlines and our catering business are smaller, that's why we are open to pursuing different options for this business.

This process is completely open in terms of its timeline and outcome. We do what is right for the future of LSG's business as well as all stakeholders involved, customers, shareholders and our employees.

With Lufthansa we honor the words strongest aviation brand. Various recognitions do speak a clear language in this regard.

One of the only factor, the strong brand starts with a strong product. According to Skytrax, which rated only us as the only 5-star airline outside of Asia a good year ago, we do have the best product in Europe.

Importantly, customers share this view as the latest Passengers Choice Awards and our measurement of customer satisfactions confirm. It is therefore key to the health of our brand and future economic success to maintain an edge over our competition for offering the best product in the market.

By introducing more than 160 new product elements, services and digital innovations in the next two years, we will make sure that this is the case. As part of our product innovation strategy, we strive to offer an even more individual service to our customers, considering that need differs significantly from customer to customer and from occasion to occasion.

A frequent flyer on the business trip will appreciate other services and aspects of our offer than a family going on holiday that is what we call new premium. Let me outline a few measures we have put this promise into practice.

We have just started a comprehensive renewal of seats and cabins throughout the entire Network Airlines fleet. In a few days, for example, you will start receiving the Airbus 321neo with new economic seats and Internet on board.

Above all, we will launch a new business class and will receive the new Boeing 777-9s in summer next year. We will expand and upgrade our lounges, especially in major hubs.

We will offer more choice in our food and beverage offer, and we invest in digital services along the customer journey. This includes the launch of chat-bots to facilitate the communication with our customers and the expansion of Internet on board.

The modernization of our fleet goes hand in hand with this product drive. In 2018, the short haul fleet received 8 new A320s including 6 neos, and 13 new CSeries, which we put in service at SWISS, 11 used and 6 leased aircrafts primarily related to the takeover of former Air Berlin planes.

The long haul fleet was upgraded by adding 6 new A350s and 2 Boeing 777 aircrafts. The order of 40 new aircrafts announced yesterday is another important step in this regard.

The addition of 20 350s and 20 787s between 2022 and 2027 would allow us to replace inefficient four-engine aircrafts for example. This relates to 340s in particular, but also the 6 380s, which we decided to divest.

Besides the improvement of the customer experience on board, the rollover will drive significant cost and carbon emission reductions. Obviously, the new models will consume around 25% less fuel compared to the aircrafts we are replacing.

In total, we intend to discontinue 7 aircraft types until the mid-2020s, for the complexity of our long-haul fleet will decrease significantly. In the long-term, it will focus primarily on the 350 and 777, and the Boeing 787.

The commercial success of our premium product depends on our ability to convey its benefits and quality promise to our customers. We take great care to make sure that our offer meets the individual demands of our customers.

So we do not compete on just price. The presentation of our offer must adhere to this principle.

We were a frontrunner in the adoption of the new IATA distribution, NDC, of course, we wanted to overcome the limitations of the traditional old GDS based distribution, including its primary focus on price comparison. NDC allows us to offer customer greater choice and a more personalized offer.

For example, NDCs allows us to understand whether a customer travels on his own or with his family, so we could give him the choice of products that will make his life easier, be it lounge access and free WiFi for business trip or extra baggage on pre-booked seats for holiday trip. We expect this to grow our ancillary revenues, which currently accounts for around 8% of traffic revenues.

Thanks to the expansion of NDC, the share of direct distribution has increased steadily over the past 4 years. In the month of December, the number of bookings made through direct channels, our own website such as Lufthansa.com, SWISS.com, et cetera, as well as corporate customers and agents connected via NDC exceeded those made indirectly through GDS for the first time in history.

In the full year of 2018, direct distribution accounted for around 45% of total bookings, up from the 30% in 2015. In 2019, we will further capitalize on this development by further rolling our continuous pricing.

Over the past 12 months, continuous pricing in certain NDC based distribution channels and on certain routes yielded some very positive effects on RASK. We will now expand continuous pricing to drive volumes where price gaps had been too large in the past, due to the GDS implied limitations of just 26 booking classes.

The re-launch of our airline website will be an important step in this regard. We will harmonize the IT backbone of the Lufthansa.com, SWISS.com and Austrian.com websites, so that we can offer continuous pricing and expand the offering of ancillary revenues.

At this moment, we are in the midst of better testing the new SWISS website. It will go live, once we have incorporated all customer feedback then followed by the Austrian and Lufthansa website.

2019 will also mark this year of the Eurowings' turnaround after a difficult 2018. The takeover of 77 aircraft previously operated by Air Berlin, Eurowings made an unprecedented growth step, especially when considering that we did not takeover fully operational airline or the jigsaw of slots, aircraft and crew.

The technical integration of the new aircraft to longer than expected, and Eurowings suffered too many delays and cancellations in summer. This is why our first priority in 2019 is to regain operational stability.

While we don't expect ATC and other external factors to improve materially, we implement a number of measures, which will improve on-time performance. The reduction of irregulation cost is a key element of our ambition to reduce CASK ex-fuel in 2019.

Most important, though, we will improve crew and aircraft productivity significantly. Going forward, we try to operate just one side operation per base, so that we can allocate resources more flexibly and efficiently.

The recent sales of LGW to Zeitfracht, a Berlin based logistics company was another important step in this direction, especially so as the divestiture of all Dash 8 aircraft has greatly reduced fleet complexity. Including the non-recurrence of €170 million of costs related to the technical integration of former Air Berlin aircraft.

We expect Eurowings' CASK ex-fuel to decline to the high-single-digit range in 2019 continuing the progress we made in prior years. Finally, we plan significant changes to reduce long-haul business.

In October, Eurowings will start offering flights to popular leisure destinations such as Barbados, Mauritius and Windhoek from Frankfurt. As a result, the majority of Eurowings' long-haul business will be operated of a Frankfurt and Munich going forward.

Similar to Edelweiss, which successfully served leisure destinations out of Zurich, we expect Eurowings to benefit from the feeder traffic in our two German hubs. Lufthansa will market the Eurowings route and their codeshare agreement, so that we tap the disproportionate growth in leisure long-haul as effectively as possible.

We are confident, they're bringing together the best of two worlds, Lufthansa's sales and marketing power on the one hand and Eurowings competitive cost based on the other hand will improve the profitability of Eurowings long-haul businesses. And Austrian Airlines, we achieved a turnaround already some years ago, and influx of low cost competition at Vienna Airport is now challenging the progress we have made since then.

This is obviously - so this will produce under pressure among all players involved. Austrian Airlines will defend its leading market position by expanding and streamlining its short-haul fleet, adding 10 A320 family aircraft while retiring 18 old turboprop planes, latest by 2021.

On balance, the flight offerings from Vienna will be expanded by more than 10%. Consequently the route network will focus even more of the hub in Vienna going forward.

Routes connecting the provincial capital of Austria with destinations in Germany will be taken over by other group airlines over time. The long-haul network has been realized successfully as part of 2018, 2019 winter flight schedule already, including the discontinuation of unprofitable routes such as Havana, Colombo and Hong Kong.

In turn, the offering to North America was expanded. The strategic program is backed by additional measures to improve cost efficiency, in particular, when it comes to simplifying and digitizing administration and operational processes.

Considering also the closure and the relocation of local basis, I just mentioned, we intend to achieve mid-double-digit million euro cost savings in the next two years. Ladies and gentlemen, tying it all together, we operate in a structurally growing industry.

According to the last IATA forecast, passenger growth should average at around 5% over the next seven years. Growth rate should be similar in our home markets, in which we are as the clear market - which we're the clear market leader.

Increasingly though, this growth is hitting the limits of the European aviation system as we painfully experienced in summer last year. Capacity constraints at airports, air traffic control and in aerospace will inevitably limit the pace of supply growth going forward.

Assuming that existing overcapacities, moderating global growth and fuel price volatility will further propel industry consolidation in the next few years, the Lufthansa Group is well positioned for long-term profitable growth, even more so as we are continuously streamlining our cost base. Thank you for your attention.

I will now be happy to answer your questions.

Thank you and good afternoon, everyone. Three if I may.

Can you just give some more color on your margin guidance of 6.5% to 8%? As you said you narrow the range, but at the moment are you more concerned about the pricing environment or, I guess, your ability to achieve cost targets?

Secondly, just on M&A, obviously, a number of reviews from competitors in terms of what they want to do, some on the tour operator side, some more direct competitors. And, I guess, you said that want to keep the balance sheet very strong to take into account opportunities.

But should these opportunities not result in anything, would you look to give more back to the market? And then just lastly, if you could just give a bit more color in terms of capacity by brand?

I think you've kind of given some flavor, but if you could just give a bit more in terms of SWISS, Lufthansa core, Austrian, et cetera? I think you gave Austrian, so thanks.

Yeah, thanks for the question. Starting with the margin, 6.5% to 8%, indeed, where the risk is on the RASK side, as we indicated we estimate that some of the trends we saw towards the end of the last year is going to continue into the beginning of the year.

When it comes to the cost target, I mean, basically, as you've seen over the last 3 years, we're basically reaching our cost target every year and we expect to do so as well in 2019. On that aspect, we get more and more like a normal engineering business, where you are getting your efficiency out every year, so I feel very happy with that.

When it comes to the M&A and the balance to return funds to the shareholders, no, of course, in the end, if we are not able to consolidate the European market, then obviously, we will at some stage start to have a discussion on how to return money to the shareholders in form of extra dividends or whatever where it might be. I think that will be very sad however if that would be the conclusion.

I firmly believe that the consolidated Europe is going to be a much more profitable market. In terms of capacity growth by brand, overall 4% for the Network Airlines.

Lufthansa is around 4%, SWISS is a bit more and Austrian is a bit less and it's 2% for Eurowings.

Thanks very much.

Good afternoon, gentlemen. I'm just interested in your comments about, first of all, the shift to short haul markets and maybe the revenue environments improving.

Do you see that just from where you see the market capacity growth situation? Is it really you feel probably from peak summer onwards or even going into next winter, given all the problems and failures, Germania, et cetera?

And then the second question would be on Eurowings, I know that you commented the strategic stance is unchanged. And would it be fair to say you still feel that Eurowings is set maybe in the next 2 to 3 years to have a probability level near your prime competitors?

Thank you.

Yeah, so starting on the short haul market, yeah, I think that we are indeed speaking about peak summer. As you remember, we have tough comparisons as well both in the first quarter and the second quarter of this year.

And the question, of course, is when is this reducing capacity growth biting? So I think we are starting to see the biting from a yield point of view in the second half of the year.

Your second question was about Eurowings?

Yeah. So I was just - obviously, you're targeting breakeven this year.

But do you think that the longer-term plan remains that you can get margins up to near where competitors are over a 3, 4 year period?

Yeah, we see no reason why we should not get to the levels of some of our competitors like Eurowings or Vueling. There is a very, very interesting market in our home market, specifically in Germany, of course.

And in the same way, we have a clear cost reduction targets and action going on, on how to get there. So I think the delta between the two should be a margin very much in line with our peers.

And most of that, of course, is within our own hats, when it comes to cost, that's much easier than to change your yields.

Understood. Thank you.

It's very good.

Good afternoon. It's Damian Brewer from Royal Bank of Canada, a slightly different balance sheet.

So two questions please, first of all, coming back to Eurowings, if I strip out the €170 million, here to minus 1.4% margin in 2018, the ambition for 2019 is 0%, so really 140 basis points improvement. What is it that you see beyond 2019 that over a two to three year view would allow you to achieve those sort of 8% to 9% margins of some of the other low-cost airlines?

What accelerates within the process that isn't happening in 2019? And then secondly, and sorry for slightly prosaic question, but I noticed AirPlus in particular was in equivalent of about €62 million EBIT decline year-on-year in the year.

Can you talk a little bit more about what happened there, in particularly, the IT investments? And does that decline in pressure continue into 2019 or does it revert back to its more normal levels of profitability?

Thank you.

Starting with Eurowings and what we are doing there, the majority of the improvements within Eurowings is all about productivity both in aircrafts and in staff, flying staff. Clearly, in 2019 as well there is a swing of having less irregularity cost.

We have a number of the actions to reduce the irregularity cost, which was quite substantial. It was actually €180 million for Eurowings in the year 2018.

Now, in terms of long-term however, as we all know, it will take time for Eurowings to get to basically one base in each - one AOC in each base. Before you do that, there will be a tale of different activities which will only bite one or two years later.

So I'm confident that there are the cost measures to be made to get to the kind of EBIT levels we talk about with earlier question. In terms of AirPlus there will be continuing IT cost going into the business in 2019, so we will not get back to the EBIT levels you saw in 2017 already this year.

Okay. Thank you.

And when do those IT costs roll off?

Into 2020.

All right, thank you very much.

Good afternoon. Two follow-ups on guidance.

For the Network Airlines you're guiding for 7.5% to 9% versus 10.7% last year. Maybe you could give us an idea on the performance by airline, maybe not quantitative, but qualitative, especially Austrian looked pretty bad in the fourth quarter.

Do you expect Austrian to be profitable in 2019? Then one on indebtedness, which obviously went up in 2019, do you expect to reduce net debt over the course of 2019?

And then one last question on regional performance, knowing it's a smaller segment for you, but LatAm performance was pretty bad in the fourth quarter looking at yields, whereas competitors spoke about some signs of improvement. What was the reason there and what do you expect there over the course of 2019?

Thank you.

Yeah. Starting with the Network Airlines, we expect Lufthansa and SWISS to be fairly stable, while Austrian indeed is going to be the operation where we see the largest pressures.

We have seen, of course, the strongest increase of low cost competition in Austria, there are a number of different activities the Austrians are doing to fight the market share. And we believe very much long-term in the Austrian market and we will basically continue to hold our turf there.

So there will be pressures on profits clearly. Indebtedness in 2019 will be not very different from what it is today.

Regional performance, yeah, we see, of course, in Brazil, there is some political pressure. Brazil has, as we indicated earlier, been one of the drivers for the negative yield development in the fourth quarter for South America and that is probably to - going to continue as well, when we go into the beginning of 2019.

And will Austrian be profitable in 2019?

I'm not really indicating anything for each individual airline, but probably it's not going to go up.

All right. Thank you.

Hello. Neil Glynn from Credit Suisse, to put it the right way around.

If I could ask three questions, please. The first one, it hasn't been touched on before, but the margin focus within the group has been ramping up through previous presentations.

But I think, this is the first time you've actually provided guidance in this way on an annual basis, which to me suggests a little bit more kind of ownership of the profitability outcome. But just interested to what extent does this change steering and returns focus within the group to the short conversations and meetings by simplifying your focus, for example?

The second question, again on Eurowings. There's a big long-haul reorientation in Eurowings in 2019 and just interested in your thinking on your ability to achieve Network Airline-type margins with a long-haul, low-cost platform over time?

And can you point to any numerical evidence that suggests this is possible at this point or is it still a bit early to think that way? Finally on distribution, you've mentioned direct bookings over 50% in December.

20% of this shift driven by the German and European markets, and can you provide any detail on how this is actually helping you outside of Europe, which I guess is more difficult to achieve? Thank you.

Thank you. Well, starting with the margin focus.

No, I think, you're absolutely right. Gradually, yeah, we are indeed getting very much more margin and return on capital employed focus, which of course, the reason why we showed it to you as well.

For the first time, how the different return on capital employed is developing per entity. I think, the Lufthansa has over the last couple of years, become much more driven by the classical KPIs.

And I think, this is something we are discussing much more in our different management meeting, and also making sure that we have remuneration tied to it. So I think this will ultimately long-term help.

In terms of long-haul, Carsten, is that something you are happy to answer?

Sure. Because, it's very important, we never called Eurowings a low-cost long-haul operation, because I don't really believe in low-cost long-haul.

But we have there is what we have done successfully many, many years in Zurich, we have the second product line running in all leisure-oriented routes. And we now combine that, as in Zurich, with the market and marketing power of the Network Airlines and the fleet potential with the lower cost operation of Eurowings, obviously, [indiscernible].

Historically, there has been done in Lufthansa by Condor before we sold them. I think, we saw a little gap there the last years.

And now finally, we have the right platform to do it. And basically the best practice at Zurich, Edelweiss, which is in terms of margin, sometimes higher on some routes than the SWISS margins, because you have just much better cost structure.

We're not there yet with Eurowings, but I can see that happening some of the upper end leisure markets like Mauritius and Maldives. If you have a phone there, what the yields on these routes.

Could I just jump in with one of the questions we had earlier regarding financial debt. We indicated the financial debt will not be very different in 2019 compared with 2018.

But I just want to point you to the fact as well that next year - well, 2019, we have the implementation of IFRS 16. And it's one of the backup pages in your presentation.

So with that, we will increase our debt, which is just an accounting thing, it's not a real debt increase of €2.4 billion, and that's of course important to take into account.

Yeah, hi, good afternoon. The first one is on CapEx for 2019.

Clearly, you've talked about 8% to 10% of revenue before just the accounting change. I mean, the 8% to 10% needs to change and also maybe just give us a hard figure for your expect CapEx in the year?

Secondly, just looking the shorter term, obviously, you guided to Q1 being fairly horrific as is everyone. Just looking H1 as a whole, is the current performance of long-haul enough to offset that short-haul, and would you expect RASK for the group in H1 to be down.

And then finally, just - clearly, you've got Investor Day just coming up, I was wondering if you could give us a heads up on some of the themes you expect to talk about, if you can? Thank you.

Yeah. Coming - starting here at the bottom on the RASK, indeed RASK will be much more under pressure in the first half year.

So it's not only Q1 effect, it will be there for the second quarter as well. Why then in the second half of the year, we see a much stronger RASK.

So overall, we have to look at the RASK will be in line with our guidance. There was quite a big split between the two different periods.

Our CapEx number for the 2019 is €3.6 million. And of course, the €500 million we have now in extra maintenance capitalized cost will indeed increase our CapEx numbers going forward.

It will of course have absolutely no impact on our cash flow. It is just an accounting change.

We can go a bit more into the details of the CapEx, when we meet at the Capital Markets Days. What we will give you much more details to when we meet is, of course, how the Network Airline market is develop, but not only short of it very much long-term as well.

How we see the infrastructure both on the air and on ground, how ultimately that will benefit Lufthansa. And of course, the turnaround of Eurowings is a very important topic, which we will cover here then.

Can I just clarify therefore - I mean, I know, there's an accounting move from one slot to another, but in terms of modeling the CapEx, so I should be thinking about €4.1 million, right?

No. Sorry, the €3.6 million was already included in the €500 million.

Okay. Okay.

It's okay, fine. Thank you very much.

Yes, hello. Thanks for taking my questions.

I have three. First one on free cash flow, which has been down last year quite significantly, obviously, you already gave the reasons being trade working capital and also tax payments.

But if I look into your cash flow statement, we have €1 billion hit from changes in other assets and liabilities. Just wondering if you could give some further explanations on that and to what extent this will turn around this year.

And then maybe also give us a rough free cash flow outlook for this year. Given your earlier comments on indebtedness, I guess, free cash flow should be around €400 million, €500 million for this year.

Then secondly, if my math is correct, I think, cargo yields were down 10% in Q4. Obviously, aware of the ambitious previous year base, but any indication you can give us for the trend into the new year would be helpful?

And then lastly, it was reported that Qatar has received full access to the European skies. I think also some discussions that Emirates will get the same rights.

Just wondering how that can be - obviously, that is, I guess, against your lobbying efforts to restrict traffic rights also going forward for the Middle East carriers, so any thoughts on that? Thanks.

Thanks. Yeah, starting with the free cash flow indeed there were a number of different reasons and some of those reasons I mentioned are indeed include in the net, sort to say, changing other assets and liabilities you're refereeing to around €1 billion.

Clearly, we have the change in the variable compensation. And of course, there is an element - there were some one-offs in terms of the cash in 2018, which will not be repeated.

And then there were certain VAT we expected back from the government, which didn't come at the end of the year, will come now in 2019 as well. There were some upfront payments for a build-up of engine and maintenance and so on.

But I mean, I - we don't do free cash flow guidance as most airlines are not. But it's clear that free cash flow we saw in 2017 is not something we are repeating here in 2019.

So if I would give you any guidance, it's more closer to 2018 level compared with 2017 level. That's I think the only guidance that we can give at this stage.

Cargo. Yeah, Cargo had a fantastic 2018, but you're right that the market is now towards the very end and beginning of 2019 is starting to be a little bit weaker.

It's too early to say, as you know, visibility in Cargo business is very, very short. But it's too early to say, are we seeing a trend or this is a temporary dip.

Carsten, do you want to speak about Qatar?

On Qatar, I think, it's important that there is no open skies with Qatar unless the European Commission has assurance that there is a fair freight underneath. Don't ask me how the new commission will judge and measure that, but I promise you that the governments, like the [German] [ph] government and others will make sure that, that rule is enforced.

Because otherwise, things would have been an open sky agreement where only a side had given something, the other side has received nothing. What I hear is that the talks between the UAE and the European Commission have been disrupted, because of the huge gap of interest.

So I'm not worried that there will be open skies with the UAE at all.

Thank you.

Hi, there. Can I ask please about the structure of Eurowings in terms of how it's being steered?

I mean, I think, previously, there was the idea that the short-haul business was being run by Eurowings out of Dusseldorf and the long-haul was being run out of Brussels. But as you move Eurowings' long-haul into Frankfurt and indeed grow it out of Munich.

To what extent is that the structure appropriate? Secondly, can I ask about premium revenue trend, obviously, you seemed fairly confident about trading on long-haul, which would seem to suggest you're happy with the outlook for premium travel, and yet the macro environment is certainly very uncertain?

So how much confident have you got around that. And then, no one else has asked it, but it's fairly obvious, but can you make any comments about what you're thinking is in the context of Condor?

Well, on the first issue, basically what you're saying is still correct. It's not Dusseldorf, by the way, it's Cologne.

So that's where the headquarter of Eurowings is and [long wings] [ph] will be managed out of Brussels. But with the exception of those aircraft who more or less operate on behalf of the main airline, the hub airlines, which even initially includes a wet lease.

In the summer of next year going forward, we have a different commercial model, which is more than model of Edelweiss, where there is no wet lease required, but still the commercial control is done by the commercial team of the hub airlines. And that is, at this point 7 aircraft, can we think about growing those aircraft to a more substantial fleet.

I think that leads to your last question, it will very much depend on the outcome of the Condor disposal. We believe there is usually like a 15% need for leisure traffic out of the hubs, that's what we have in Zurich with Edelweiss, that's what we see in Frankfurt and Munich, if you combine the airplanes of Condor and Eurowings.

So assuming we'll - one way or another to get a whole of Condor, be it through an acquisition, be it through a bankruptcy, that could be the number of airplanes we could end up with Frankfurt and Munich. Outcome of Condor, I cannot tell you.

Is there really somebody who buys it all as they were hoping for? That's not that hard to imagine.

Could buy all of Condor at least, including the short-range, it's very much depend on antitrust concerns. Would the airline be broken up, I have no idea, if somebody would want to do it against us, I think, it's very unlikely, because there is more than 20% fleet on Condor airplanes by Lufthansa short-haul.

So I don't think that anybody could operate that against us out of Frankfurt or Munich, so we are quite relaxed.

Then answering your question on premium revenue trend. Yes, indeed that is holding up well into the long-haul market, so there we have not seen yet any trend of worsening economy impacting travel.

Of course, it could happen, but that's not happened yet.

Okay. Thank you.

Hi, good afternoon and thank you for taking my question. Most of mine were already answered.

But we're already on the topic of M&A. I'm particularly interested to what you obviously could say on the Alitalia rumors or that easyJet-Delta solution might not come through and there might be something local again.

Is it something where you then become active? Or do you generally see it as a preferable option as Italian solution's probably a weaker on then combination with Delta and easyJet?

Well, on this our position hasn't changed whether I read something new in the Italian media every day. So with this, we can only do something with the new Alitalia in a restructured fashion and we don't want to be next to the government, being owners.

I never understood what easyJet and Delta would do jointly. I mean, easyJet want stocks in Linate and Delta wants to protect the joint-venture on the North Atlantic, so I don't understand how that would be a joint offer, creating value.

But it's up for the Italian government to decide. My personal view is with the current government it's difficult to find a rational solution.

So in Italian local solution, if it doesn't fulfill our two requirements, for us it wouldn't make a difference. And it's getting smaller every - so.

Okay. Thanks.

Good afternoon, everyone. Two questions from my side.

One is to come back on the free cash question. Apologies, Ulrik.

But I think it would be a bit helpful when you mentioned the one-off, the - I guess, were effects in the 2018 year. Could you kind of itemize them by size, because, I guess, we're sort of working out - some of these quite large, I guess, such as the inflows from the Air Berlin effects in Q4 2017 that I guess helped with sort of forward booking receivable, trade receivables in that sense or prepayments in that sense?

And I think it was also mentioned earlier this morning that there were one-offs related to pension contributions. And you mentioned the maintenance elements as well.

Is it possible that you can size those in any way just so we kind of understand what that effect will help in terms of the 2019 free cash? And my second question relates to, I guess - it's usually asked, but I don't think we've got there yet, relations with Fraport specifically, particularly in light of, if you move ahead with anything on the Condor side.

Obviously, that sort of potentially increases, again, your share at Fraport specifically. What is the latest outlook with regard to sort of the updates on fees and how that profile might look into the medium term?

Thanks.

Okay, I start with the cash flow. Well, Carsten is actually prepared already for the second, so I'll think about the cash flow while…

Yeah, [indiscernible] right away. Yeah, unfortunately, we have now [indiscernible] 2.5 years above the three topics, cost, quality/punctuality and how can we intensify the way we work compared to Munich.

Stocks are constructive, but very, very slow. That's why we basically took the next decision.

As you know, we announced today to move two more 380s net summer from Frankfurt to Munich. We have decided to replace 744s by smaller 777s.

So we also at this point announced moving ahead with a high number of 777 excess as we have intended before, because we probably move more towards smaller aircrafts for the hubs in Vienna and Zurich and Munich. We are now at a point where growth is basically only happening in the other hubs, but in Frankfurt, with exception of this summer - sorry, this month.

And unless Fraport significantly reduces their fees and improves the quality on behalf of the customers, we will just make it, basically reduce the aircraft size one by one and maintain our slots, of course, in the portfolio. So we even have moved our [Canalair] [ph] to Frankfurt again to save that slot which were formerly flown by 321s, which we have moved to Munich.

So speaking about cash flow, we spoke about earlier the €1 billion which had in - in change in other assets and liabilities. And indeed, in that number that around one quarter, which is an one-off effect, of course, what is impacting the cash flow as well is just the pure fact that the results are lower, our earnings before tax is €375 million lower in 2018 compared with 2017.

And as can be seen in the cash flow statement, the actual higher tax payment is around €280 million higher in 2018 compared with 2017.

Yeah. That's great.

If I may ask just one quick follow-up then, in terms of the overall trade working capital, I mean, a broad expectation for 2019, assuming the growth that you have talked about capacity wise, the expectation would be for that sort of trade working capital development to be more stable as well on a year-on-year basis, because you won't have the one-off effects of the Air Berlin boost?

Well, as we stand here today that would be correct, but of course, I guess, the reason is that none of the airlines are really giving any free cash flow guidance, is that booking patterns can quickly change. And of course, that does indeed change the working capital as we now clearly can see when we compare 2017 and 2018.

But as we stand here at this very second you're absolutely right.

That's great. Thank you very much.

[Liah] [ph], shall we take the next one?

Hi, guys. Just three questions from me.

The first is on the guidance outlook for group revenue to be mid-single-digit growth. Given what you're saying for the Network Airlines and Eurowings between the two, pricing should be down, even more moderate level of pricing.

I'm struggling to get even a revenue growth at mid-single-digit 5% and it looks more to be more 2%, 3%. I'm just wondering is there something I'm missing there or is it being offset by a better performance in ancillary?

My second question then which leads on from that on the ancillary side, you say it's 8% of overall traffic revenues. I'm just wondering what are your ambitions for what this can grow to.

And then secondly on that you say direct consumers are now 52%, with continuous pricing only coming in this year, what are your expected yield benefit from having now over half your customers coming direct to your website? And then the last thing, Carsten, is just your approach to M&A.

I'm just wondering has your thought process changed much from last year, given the hit from Air Berlin, which was €170 million. If we do hear something lumpy on the acquisition side, are we going to hear this asset has or this airline has return on capital employed of, let's say, between 10% to 12% in order to ensure the hit you're taking on one year is actually creating shareholder value the year after?

Thank you.

Let me start with the last one, because just to make sure there is no misunderstanding. Don't forget we paid for Air Berlin €1 actually less.

So another - as you always know, I don't understand your question. If you buy an airline for nothing and you have a €170 million losses of onetime loss in the first year, it's like buying them for €170 million, which we would have paid easily for 77 aircrafts with slots in our whole market.

In the end, I think we all understand the huge market share increase. We are number one on every Germany airport, besides Schönefeld.

That was of course for giving it for free, was basically resulting in onetime cost to invest into the model rather than into a M&A transaction. But that was not the way I should have understood your question.

Please come back when - now, Ulrik will answer the other ones first.

Yeah, so starting on the revenue side, actually there are a number of items there further to be added on so to say. We are thinking about ancillary revenues, there are cargo revenues and so on, which makes the difference to tie up.

When it comes to yield and distribution, well, clearly in the segment of direct distribution, the yield is lower compared with the rest. But the pure fact that we are getting a higher distribution through that channel doesn't mean that our yield goes down, where you're substituting exactly the same kind of passengers basically.

Did you understand your question - please go ahead.

Yeah, that's correct. And just in terms of your ambitions for what the ancillary is expected to grow to have you any targets set for that?

We had actually not made an external target. But that's something we will, the target.

But we will surely discuss what we are doing on that side, when we are meeting in the Capital Markets Day.

Okay. Thank you.

Hi, everyone. Can you hear me?

Sorry, my phone's out last time.

We hear you perfectly well.

Perfect, cool. Thank you.

So I've got a couple from me. Firstly, on the 52% direct distribution number, which you kindly gave us, did I hear you correctly in that, that includes travel agency bookings via NDC?

And if so, can you outline what the current share of bookings is made by your website, because I imagine majority of the increase that we've seen is the result of the new technology? And then secondly, just on the SWISS website launch, can you confirm which quarter you expect this to go live?

And then can you also give us dates for when you expect the websites of Austrian and Lufthansa to be rolled out too? Thanks.

Yeah, so the 52% distribution, yes indeed, that includes the travel agents as well. When it comes to the SWISS side, we haven't given a specific date when that is going to be turned on as with all IT solutions that is very dangerous, but this year it will be turned on.

And your third question was, yeah, the online share.

Yeah, also when do you expect Austrian and Lufthansa websites to be rolled out, if that is this year or next year?

Well, we will firstly successfully launch SWISS before we have Lufthansa and Austrian afterwards. So it's a bit too early to give you an indication of that.

Okay.

Okay.

Yeah, thank you very much for your time today. We'll meet again for the publication of first quarter results at the end of April, and we already look forward to seeing you then at our Capital Markets Day here in Frankfurt at the end of June.

Have a good day.

Thank you.

Thank you. Bye-bye.