Frank Hülsmann - Head of Investor Relations
It is the first conference, where our new CEO, Christoph Franz will present the results together with Stephan Gemkow, who is obviously more familiar to you. We will have the same procedure as every year starting with presentations of the CEO and CFO and then we are happy to answer your questions and please be so kind to put your mobile phones on mute as usual.
While the motto of the CS Annual Report is visioned and with that we should refer to a rather farsighted approach in our directions was sad enough to us to learn this morning that in contrast the London airports are still dominated by low visibility. So that’s why the ATC canceled the flight from London City to Frankfurt and while we also took some participants to Heathrow by taxi who will join us then later on. Some will follow us via dial-in number and via telephone, and of course, I also would like to welcome them. But now, let’s get started and I would ask Christoph Franz to give his presentation to you.
Christoph Franz - Chairman of the Executive Board and Chief Executive Officer
Yeah, ladies and gentlemen, welcome to our conference, my first as a Chairman and CEO of Lufthansa. Stephan Gemkow has been up here a little bit more often and is the experienced guy among us. Together, we will today present you the report of the past business year. As always, we will also cast the glance into the future with our forecast for the Group’s development in the first two months of 2011 and give some opinion about the further development of our business.
There are surely many adjectives that come to my mind when referring to the last year, but worrying [ph] certainly is not one of them. The earlier part of the year was still affected with the after effects of the financial and economic crisis and we faced the hard winter across the pilots strike and then the eruption of the Eyjafjallajökull volcano on Iceland, with a subsequent airspace lockdown here in Central Europe. And this clearly dampened our hopes in the beginning of the year for a positive development of the business. But the business environment changed and we seized the opportunities offered to us by the recovery of the economy.
Today, we are able to present to you figures that no one could have expected at the beginning of last year. Not even my predecessor, Wolfgang Mayrhuber, who I would like to specially thank, because it was him who was largely responsible for driving the Group forward and he took a particular role in steering our steep climb during the second half of 2010.
Ladies and gentlemen, and now some of the key figures for the 2010 business. Here Stephan will later on go into more details. The most important one clearly the operating profit was posted at €876 million and marks a more than fivefold increase in comparison to the previous year’s figure.
The development of the Group result was also extremely positive. We had a negative result in 2009 and were able to close 2010 with a positive result of around €1.1 billion, which is I admit also due to positive one-off tax effect of €400 million. The number of passengers during the past year rose to a new record level, with over 91 million passengers being flown by the Group’s airlines.
These record figures are even without the consolidation effects of having 12-month ownership of Austrian Airlines and bmi in our consolidated group. We also set new records with our revenue growth and operating result in the Cargo business segment. And we continued to invest into the future of our company 2.3 billion of investment in 2010, most of which around €2 billion investments into aircraft.
The fact that we continued to consistently implement our fleet strategy paid off. And it is clearly this ability of the Lufthansa Group on the one hand side to have a long-term vision as it is also marked on our business reports, but on the tax side, it is professional crisis management. And this is clearly correct arising the success of Lufthansa, professional crisis management, short-term focus, knowledge to implement necessary changes and grab opportunities in the market, and on the one hand side, having a vision for the future long-term development of the Group and continuously following this strategy.
We were able last year to take our first four A380s into service in time at least referring to the revised timetable to cope with the increased demand in passenger traffic. And as things stand currently, we will receive our next four A380s in the current year. Two of them will be delivered in the month of March.
In summary, we can conclude that Lufthansa ended the past year on a far better note than initially expected, which can essentially also be attributed to the major improvements in the results of the Passenger Airline Group and the Cargo business segment. Of course, the noticeable recovery of the market was very helpful and provided us with the necessary tailwinds, but this was not everything. Our experience as a crisis tested and proven airline help this. Our ability to react to market changes quickly and flexibly, our solid strategy financially and operationally, and last, but clearly not least, our excellently functioning and highly motivated team of employees and management staff.
Ladies and gentlemen, the upward trend at Lufthansa in 2010 was also visible in the development of the share price. The value of the Lufthansa share recorded a rise of around 39% during the past year and increased almost twice as much as the DAX in what was a good year at the stock exchanges. That is the first piece of good news for our shareholders. The second piece is that the Executive and Supervisory Board of Lufthansa shall be proposing to the general assembly the dividend payment of $0.60 per share on May 30th General Meeting. As you are aware, this step could not have been justified economically a year earlier. However, we are pleased that the overall economic situation and the largely positive development of our business places us in an altogether different position this time around.
Ladies and gentlemen, what do the figures and developments of the last year tell us? Lufthansa has emerged from the crisis even stronger. We have proven that we are able to grow and widen the gap to our competitors even during and after times of crisis. Lufthansa has significantly improved its market position and developed a far greater earning power during the upswing. Lufthansa has equipped itself well to deal with the industry’s future growth. We have saved costs, invested in the future, and made provisions at all the same time.
Our business model with five distinct business segments and the passenger group and cargo airlines is our core business has proven to be robust and solid. That is also confirmed by the development of the Group’s individual business segments, which all closed the 2010 business year with a positive result and contributed to our very good overall result. The altogether positive development of Lufthansa Passenger Airlines first had to overcome the obstacles at the start of the year. The airspace lockdown alone resulted in revenue and profit losses in the triple-digit millions. The impressive climb that followed in the second half of 2010 was therefore all the more pleasing. With the total number of 59 million passengers, Lufthansa Passenger Airline has set a new record.
The recovery of the market was especially noticeable in the premium segment, which is the core segment of our passenger business. Our operating result enjoyed a marked improvement compared to the previous year, and the same could be said for the development in revenue, which was supported by the development in the global network.
The cornerstones of our success were the focus on the management of our corporate customers, the systematic expansion of high-value market segments, the continued development of growth markets, such as the United States, China and India and the realization of sales synergies within the Airline Group.
On the whole, Lufthansa continued to expand its position in intercontinental traffic and secured new market shares. One milestone here is the expansion of the route network to North America, which has gained substantially in momentum since the launch of our Atlantic Plus Plus transatlantic joint venture.
And as you might remember, Lufthansa is not - this is not the first joint venture we have. We have already invented more or less this form of cooperation among airlines with our bilateral joint ventures with United Airlines in the past or with SAS on the German-Scandinavian markets. So we have a lot of experience how to make these kind of joint ventures successful in the market.
Now, we have created a close cooperation of Lufthansa Passenger Airlines with its partners Air Canada, Continental and United Airlines, means that we are together currently able to offer around 280 transatlantic flights to 61 destinations per day. Atlantic Plus Plus already has a market share of 29%. And this figure will increase further this next year with the full integration of all our Group partners, SWISS, Austrian Airlines, bmi in this joint venture. It should be completed by the end of the year.
Following the very successful start of Atlantic Plus-Plus, we will now also become active in other regions. The preparation for a joint venture with our Japanese Star Alliance partner, All Nippon Airways, ANA were going according to plan. We intend to maximize market shares in traffic between Europe and Japan through joint capacity planning and coordinated sales strategies. The approval of the competition authorities in Japan was expected around the middle of the year, but I think we are all aware that this might change now due to the current developments.
The natural disaster in Japan has left us all in deep shock and we are in constant touch with our employees there. I just gave a phone call to our sales head in Asia some 10 minutes ago and he gave me some feedback from the markets and we are also in touch with our partner ANA and we have offered our help wherever they need it. We are grateful that according to the latest reports no Lufthansa staffs were among victims of the catastrophe. But as everybody else, we are extremely worried about the situation and the magnitude of this tragedy.
We have - for now up until the weekend put together a special flight schedule. What is important not only to us as an operator, but also to our customers in Japan is a reliable schedule. A schedule which is not dependent on the change of win situations who might bring areas into trouble which so far have not been too heavily affected by the tsunami and the earthquake. That’s why we will be redirecting all Tokyo flights from Frankfurt and Munich to Osaka and Nagoya with a stop in Seoul. As a precautionary measure, we have also been having the aircraft returning from Japan scanned for radioactivity by experts. So far fortunately, all results are negative.
We have offered a special Lufthansa Cargo flight and which will leave tomorrow or the day after tomorrow to bring urgently needed goods in the crisis area of Northeastern Japan in order to help the victims of the tsunami. As you know, Lufthansa is offering the broadest capacity offer between Europe and Japan and it is our clear intention independent on short-term changes of the situation to provide stable and reliable connectivity between Japan and Europe also during the next days have - as we have provided it during the last week.
I beg your pardon, but there is not a very elegant bridge now, because the Japan issue is clearly occupying all of us quite a lot, but I will continue now on the issue of capacity and our route network expansions.
We have also been able to expand capacity in Asia, which is clearly one of the prime growth markets in the next years and in South America. Started to fly, Bogota will continue to offer our services in 2011 by opening or more or less reopening in historic dimensions the nonstop fly to Rio de Janeiro. In Africa, we started to fly to Pointe Noire in Democratic Republic of Congo, which is all destination completing our so-called oil portfolio.
However, we did not only invest into the expansion of our fleet and route network. Lufthansa Passenger Airlines also continued to consistently improve its on-board and ground products, by investing in quality that benefits to the customer directly, for example, into new Economy Class seats, into Business and First Class products, and in the improvement of our cabin fittings and furnishings, and our lounges on ground.
The highlights include the reintroduction of FlyNet, our on-board Internet system, where Lufthansa was the number one innovator of the industry, but we had to stop this offering when our supplier closed down and now we have found a new supplier and we are on line again and I think many of you working on-board of our aircraft will appreciate that you are able to use Internets with your IT devices.
The new First Class has been introduced in the A380 last year and we get an excellent feedback from our customers above this significantly upgraded product. The Economy Class product has also been developed further and now we are offering personal in-seat screens not only in the A380, but we will refurbish all existing long-haul aircraft to provide this service and improve at the same time our extensive inflight entertainment system.
The remaining fleet will be refitted in 2010 and the next years by and by. What we will also do in 2010 and ‘11 is to introduce a new flight cabin interior in our Continental European fleet which will give a new and very smart, nice interior of the aircraft, lighter seats and will enable us to offer more seats on-board of our aircraft.
Now turning to the ground products, we witnessed the number of changes. We opened a new Senator Lounge in Munich doubling the capacity and we also opened up a new Senator Lounge here in Frankfurt, with a very first integrated Jets Friends area for children, for all of you with kids don’t miss to go there. It’s really a nice area. And we will continue with this kind of investment.
I may remind you that, yesterday, the Supervisory Board of Lufthansa has given its approval for additional investment. We will order 30 A320neo Engine option aircraft for Lufthansa Passenger Airlines and 5 B777-200 freighter aircraft for Lufthansa Cargo.
We have of course also saved and are continuing to review, and where necessary, correct our processes and our cost base, despite, or maybe rather, especially in order to secure the financing of our considerable investments throughout the next years. The Climb 2011 program to safeguard earnings at the Lufthansa Passenger Airlines continues to be implemented as planned, and looking at it today, we will achieve the projected sustainable reduction of costs by $1 billion as of 2012.
The phasing out of the 50-seater aircraft segment is essentially completed and the realignment of the regional airlines of the Lufthansa Passenger Airlines, CityLine, Eurowings and Air Dolomiti will also result in a sustained reduction of the unit cost position of Lufthansa in this segment. These steps will allow us to considerably improve our competitive market position in the hard-fought continental segment. And I’ll come back to that later on, because we all feel that at this point in time everybody is suffering from overcapacity in that market. In addition, the personnel unit costs will be reduced by 10% and the joint projects with external and external suppliers to optimize processes and reduce costs also implemented in the planned dimension by the end of 2011.
Ladies and gentlemen, the development of business at the Group airlines varied as expected. SWISS can look back on a successful business year. Over 14 million passengers and the tripling of operating profit represents a very strong performance, the increase in demand and significant upward trends in the intercontinental and freight segments, the effective cost management, and a strong domestic market in Switzerland, including its recovery as a financial center. This played a decisive role in recording this success. The success story at SWISS continues and you can imagine that this is especially pleasing for me given my professional past at this airline.
Austrian Airlines is continuing to work intensively on the restructuring and reorganization of the airline. The early successes are already visible and reflected in the result. In the meantime, they were also able to benefit more from the synergies of the Passenger Airline Group. The significant recovery in long-haul travel has helped and the improving corporate customer business has contributed to that positive development. The airline has also succeeded in further consolidating its market position at the Vienna hub.
On May 1st, 2011, Thierry Antinori, my former colleague in the Passenger Airlines Board will assume the position of Chairman of the Executive Board at Austrian Airlines. He takes over after spending more than a decade in charge of marketing and sales at Lufthansa Passenger Airlines. He is going to set the future course of the airline together with Mr. Malanik, Mr. Bierwirth, and steer it towards profitable growth. Austrian Airlines is in the air, but it has not yet reached its right flat level.
The restructuring measures are also starting to show early successes at British Midland. The implementation of all the staff-related measures was already completed during the course of the past year. In total, we had to reduce 800 jobs, a bitter and painful step, but one that was economically necessary. A further measure on the cost side was the adjustment of the fleet’s capacity, which has resulted in a significant increase in its productivity.
On the whole, bmi was, however, not able to profit from the global upswing in intercontinental traffic as its route network is limited to the short and medium-haul routes. We are, however, able to significantly reduce the losses as with Austrian Airlines.
Germanwings, the Group’s low-cost subsidiary remains on its successful course. This is also reflected in the countless awards that it received in different categories. Although it was able to continue on its course of growth, it did, however, post a negative result in 2010 due to certain one-time special effects, such as the pilots strike and airspace lockdown that both hit Germanwings especially hard. Despite implementing the necessary measures to safeguard earnings, the airline was unable to fully compensate the losses.
Inner-European traffic continues to be especially hard-fought and only generate low average yields. The market remains a difficult one and this is not only true for Germanwings, I think it is true for all Lufthansa Airlines and it is true for all European Airlines being in that business segment, including our low-cost competitors. It is difficult to imagine that anybody is able at this low yield level to show a profit in European traffic.
The market remains a difficult one and we are therefore also looking at solutions across the airline boundaries and increasing cooperation with the other airlines in the Lufthansa Group. One such solution of generating synergies is that customers at Germanwings have now been able to collect miles for the Miles & More program on all Germanwings flights since the 1st of September 2010. The same conditions apply for miles as on Lufthansa flights.
Ladies and gentlemen, let’s turn to Lufthansa Cargo. This airline has had to work especially hard to hold the course during the financial and economic crisis and showed great foresight in doing so. The structures remained intact and Lufthansa Cargo mastered the market changes successfully with cost and capacity flexibility.
Our freight business segment was consequently able to post a record operating result for the 2010 business year. Lufthansa Cargo has therefore succeeded in realizing an impressive turnaround following the crisis-related loss of 2009. Of course, this result was to a large extent also due to the rapid upswing of the global airfreight market. However, it remains a strong performance nonetheless. One major cornerstone of the past year’s success was the integration of the Austrian Airlines freight segment into the Lufthansa Cargo Group, which enabled Lufthansa Cargo to expand its capacity further, particularly with regard to Eastern Europe. Our customers there have been able to benefit from an even denser network since the summer of 2010.
Lufthansa Technik, our MRO business had to sustain some revenue losses during the first half of 2010. It was the last business segment of the Lufthansa Group to be hit by the global economic crisis and it was hit very late. As expected, Lufthansa MRO was not able to maintain its operating result at the high level of the previous year, but it remains a distinctly positive one. Lufthansa Technik caught up more and more during the second half of the year and continued on its path to growth with a strong fourth quarter, and looking forward, we are optimistic that this will be the case also for 2011.
Lufthansa Systems, our IT business was faced with a difficult economic environment in 2010. It was a year marked with declining sales figures at airlines and great restraint when it came to investments. But despite this decline in revenue, Lufthansa Systems still managed to again contribute a positive operating result to the Group result in 2010.
During the second half of the year, the company launched Jetzt!, an extensive restructuring and cost reduction program, with which it plans to achieve a short to medium-term improvement of its revenues and results. On the whole, our IT business segment intends to accomplish a leaner corporate structure and secure its long-term competitiveness.
LSG Sky Chefs has now been the world’s market leader for airline catering for over a decade. Its customers include more than 300 airlines from around the world. We maybe in competition with many or the 300, but when it comes to catering, we have also the same provider. The acceleration in demand in the aviation industry has also seen the demand for catering services rise again. The LSG Sky Chefs Group was consequently able to not only increase its revenue during the 2010 business year, but also more than double its operating profit in comparison to 2009. This is a highly pleasing development, especially as the previous year’s result also included a positive one-time effect.
Ladies and gentlemen, now let’s turn to an outlook for 2011. For the year, 2010 showed that Lufthansa can successfully master bad weather and it is immediately ready to profit when the weather turns around again. Our finances are stable, our quality fulfills the high Lufthansa standards, and our customer satisfaction levels remain on a high level. Lufthansa is a driving force of innovation in our industry and a company focused on long-term success and profitable growth.
The new management crew has now been at the helm for almost 100 days. Carsten Spohr, who previously headed Lufthansa Cargo, is the newest member of the Group’s Executive Board and now my successor as the CEO for the Lufthansa Passenger Airline business. Together, we have all set ourselves some major objectives for the future, for we are aware that 2011 will not – will be no walk in the park.
Many uncertainties lie ahead of us. For example, the European competition, which will remain extremely hard-fought and price pressure will continue to increase. This is not only true for our European business, but also true for long-haul traffic, particularly to Asia and Africa.
The untamed growth of the state-owned Gulf carriers is another aspect that should be viewed with very critical eyes. They are currently building the largest long-haul fleet in the world and their aim is to shift the global passenger flows from our hubs to their hubs in the Middle East and replace the European hubs as economically important centers.
Europe is therefore in danger of losing its role as one of the logistics centers of the world. Tens of thousands of jobs could be lost with the corresponding consequences for the economy, but also major consequences for the environment. Detours would have to be flown on many routes, resulting in significantly longer flight times and up to 40% more emissions, for example, on the routes from Europe to Asia.
The German air traffic tax, which was unfortunately introduced in January, only in Germany, not EU-wide, is another uncertain factor whose true implications we are currently not yet able to assess. How this tax will affect the booking figures on the entire year remains to be seen? However, it is a fact that it will hit our customers where it hurts and it will also hit us, because we are unable to pass the whole amount of this tax on to our customers given the current very severe competitive situation in Europe. So Lufthansa must bear a significant portion of it in our company’s result.
A further aspect is the fact that the tax affects European airlines will be much more serious in the future than the effect on non-European airlines. As a result, European air traffic could become even more detached from global developments when next year the emissions tradings of the EU will be introduced.
Another point of criticism is the speed how the Single European Sky, the largest environmental project in the EU is moving forward. We think that we should definitely increase the speed of implementation and also set tough efficiency targets for the different ATC institutions we have in Europe. It is a fact that American carriers in the U.S. are paying half of ATC charges as we have to pay here in Europe.
Ladies and gentlemen among the many uncertainties that we will face this year are the catastrophe in Japan as well as the political unrest in North Africa. A different topic, but also on our list of uncertainties for 2011 are of course the kerosene cost. Oil prices are currently extremely volatile. Lufthansa continues to implement its fuel hedging measures and we have the financial basis to do so. They enable us to compensate increasing prices, at least for sometime when they peak, but I will let speak Stephan Gemkow about more details on that one. With all these developments in view, our strategy to also not make any compromises in our fleet modernization program during times of crisis has proven to be right.
That is also the case when we look ahead and when we look at the environment. Our industry has set itself ambitious goals when it comes to lowering the burden on the environment and Lufthansa also assumes a pioneering role in this area, where the use of the latest technologies is our most effective weapon. Only they have allowed us to reduce the specific kerosene consumption by over a third during the past two decades within Lufthansa Group and consequently not only lower the burden on the environment, but also the burden on our budget.
Ladies and gentlemen, this is still far too early to attempt sound forecast. However, we remain confident despite the mentioned uncertainties and the economic forecasts remain pleasing. Our confidence is also motivated by the medium-term growth forecasts. The number of passengers worldwide in air traffic should increase by 5.9% per year until 2014, whereby the growth is especially based on the strong demand development in China. And according to the latest forecasts, airfreight will also increase by 6.4% per year until 2014. We, of course, also want to benefit from this development.
For Lufthansa and the 2011 business here, we expect our revenue to continue to grow and our operating result to increase further that is also why we plan to employ 4,000 new staff as announced at the beginning of the year. We also want to create value again in 2011. We do not want to grow for the mere purpose of being a giant, but rather to achieve profitable growth in an industry that is marked by price pressure, losses, and crisis, particularly in Europe.
Ladies and gentlemen, let me now conclude my report and pass on to Stephan Gemkow who will provide you with some more detailed figures on the 2010 business year. I thank you for your time and I’m looking forward to answering your questions afterwards. Thank you very much.
Stephan Gemkow - Member of the Executive Board and Chief Financial Officer
Good afternoon everybody. I’m, of course, also pleased to welcome you all to the presentation of our annual figures for 2010. A year ago on this occasion I talked about the coming year of the Tiger in the Chinese horoscope and the characterization of the Tiger includes on the one hand mistrust and the courage to take risk, but also a powerful urge to succeed. And I know that some of you smiled last year, but the Chinese were right, we have plenty of reasons for mistrust in 2010. We still overcame all the unusual events and risks and in the end closed the financial year with great success that is and Christoph laid it out how we want to continue in 2010. However, given what we have been experiencing already, I doubt that we will be able to rely again on the Chinese horoscope this year, where the Year of the Rabbit stands for gentleness, harmony, and pleasure. Even though I would like to do so, but I think the events in Japan and North Africa, Arabia really speak a different language and it’s clear that our thoughts are not fully concentrated around our annual results, but also that our thoughts are with many who are suffering from these events currently including, of course, our (indiscernible) to handle the crisis.
Let me turn to the key figures of the Group first. In 2010, we increased Group revenue by 22.6% to €27.3 billion. Of course, this is partly due to the fact that Austrian Airlines and bmi were consolidated for the whole year for the first time. Adjusted for this effect, growth nevertheless still came to 14.4% and the real driver, which will be seen later was traffic revenue in the passenger and freight business, which was up by 26.5% or adjusted for consolidation by 16.2%.
As we all know, the Group generated an operating result of €876 million, and our so-called adjusted operating margin improved by 2.7 percentage points to now 4.1%. EBIT came to 1.3 billion, which is a sevenfold increase over the previous year. Also the previous year’s net loss of €34 million was transformed into a very pleasing profit of more than €1.1 billion. This includes a positive one-off tax effect of around 400 million from the financial restructuring in the Catering segment.
Operating cash flow leapt by 54.4% to a record €3.1 billion, which was well above gross capital expenditure of 2.3 billion, despite the purchase of 47 new fuel saving aircraft. This surplus over our capital expenditure and the very strong net profit had of course a very positive impact on our balance sheet figures. It enabled us to reduce our net indebtedness to 1.6 billion, and as a result, our gearing is now at 50% right in the middle of our non-target corridor between 40% and 60%. The equity ratio at the same time climbed by a total of 4.9 percentage points to now 28.4%, and it is also true that in the first year after the crisis, Lufthansa managed to create value, again on the CVA amounted to €71 million.
However, I think the Group’s performance - the great performance of the Group only becomes really visible when you see under what conditions it was achieved. This is because the year 2010 had two halves and two aspects. One was the exceptionally dynamic top-line recovery, with growth rates in passenger and freight that were well into the double-digits. And this of course also began in the first half and the second quarter, to be precise, of the last year already.
Nevertheless, several unforeseen events meant that the potential of this market recovery is at the end not fully reflected in the result. And Christoph has already discussed the individual factors. In total, these sliced out around €340 million off the bottom line. It should be added that on top of that in 2010 we sustained considerable operating losses of €211 million from Austrian Airlines and bmi, which are still in the restructuring mode. This clearly shows how strong the annual result for 2010 really is. It manifests the structural improvements of all the business segments, which overcompensated the adverse events.
Since all business segments made a distinct contribution to this performance, it is clear that most of the momentum came from the Passenger Airline Group and the Logistics segment. But the service segments MRO, IT Services and Catering too contributed more than €350 million to the operating result. And this enabled the Lufthansa Group to extend its lead not only during the crisis, but also in the 2010 year of recovery. And I think it’s really important to note and it shows that a stable crisis-resistant business and outstanding results do not rule each other out.
Let us return to the analysis of the annual financial statements. Revenue growth of 22.6% stemmed largely from the airborne companies. Other revenue mainly composed of external revenue from our MRO, IT and Catering segments went up by 8.1% to €5.1 billion, while traffic revenue from the passenger and freight businesses soared by €4.7 billion, or 26.5% to €22.3 billion.
Greater sales volume accounted for almost 1.3 billion of the increase, and at the same time, our airlines were able to charge higher ticket prices and freight rates, which added revenue of €761 million. Exchange rate movements here were also in our favor, adding another 808 million, and finally a further 1.8 billion in traffic revenue came from the consolidation of Austrian Airlines and bmi for the full year.
The structural improvements mentioned earlier and our continued cost management can be seen by looking at the different expense items. All cost items all went up significantly less than revenue in 2010. Total expenses climbed by 16.7% to €28.9 billion or by 8.3% after adjusting for consolidation effects. For this increase, the higher oil price is largely responsible. If we adjust expenses for fuel costs too, they were just 4.6% higher in 2010 than in the previous year. The cost of materials and services rose by 21% to 15.4 billion. And as fuel costs account for large proportion of this item, I’ll go into more detail later as you know.
Fees and charges are another major driver of the cost of materials and services. They went up by 21.8% to €4.6 billion or adjusted for consolidation by 6.9%. Staff costs went up 11.1% to €6.7 billion, which reflects the 4.2% rise in staff numbers due to consolidation. On an adjusted base, the workforce grew by 2.2% and staff costs were only 4.4% higher than in the previous year. I’m not even sure if this is correct, I thought the workforce shrank by 2.2% adjusted for consolidation. We’ll find that out that’s – I was just curious. This was due to higher contributions to pension provisions triggered by lower interest rates and higher variable profit share payments and exchange rate effects.
Depreciation and amortization is strongly influenced by our ongoing fleet modernization and the restructuring of the short-haul fleet. Altogether, depreciation and amortization increased by 14% to €1.7 billion. And adjusted for consolidation, the increase came to 5.2%, 96% of depreciation and amortization were scheduled write-offs and went up by almost 200 million due to aircraft deliveries and the enlarged group of consolidated companies. Around €72 million represents impairment charges, largely for planes that were phased out step-by-step were sold as part of our Climb 2011 program. Additionally, we made impairments of €16 million on aircraft that are still up for sale largely the 50-seater small or regional jets.
Other operating expenses went up by 13% to €5.2 billion. Adjusted, the figure was just 5.1% and this was principally due to exchange rate movements. In particular, the stronger U.S. dollar compared with 2009 led to a €276 million rise in exchange rate losses out of a total of around €1.1 billion recognized here. These exchange rate losses correspond to exchange rate gains of approximately €1 billion in other operating income, so that these items largely balance each other out as usual. Furthermore, ongoing cost optimization had a positive effect on other operating expenses, leading to lower costs for marketing and electronic distribution systems as well as other staff-related costs.
Now, we come to the detailed breakdown of fuel costs. They went up by a total of €1.5 billion to €5.2 billion. The additional capacity only accounted for €68 million of that and I think this is remarkable, because it really reflects the use of the larger more fuel-efficient aircraft creating more capacity, but at the same time, not creating more fuel burn, which is of course twice important because of the fuel cost and the emission certificates we need in the future.
The main factor driving the cost up was the oil price, which rose by 27.8%, setting the Group back €795 million. Thanks to our well-known systematic hedging. We were nevertheless able to mitigate this rise slightly by €21 million. The stronger U.S. dollar increased our purchasing costs further by €261 million. However, I should say that in 2010 we also realized approximately €65 million income from U.S. dollar hedges that can be clearly and directly attributed to the fuel exposure. So in total, our hedge is basically had a value of between 80 and €90 million. Last but not least, the expansion of the Group accounted for a further €410 million.
In spite of higher fuel expenses, the Lufthansa Group improved its profit from operating activities in line with IFRS by €969 million to 1.2 billion in 2010. As you know, we always adjust this figure for several factors in order to facilitate the comparison with previous years.
In 2010, these necessary adjustments added up to €364 million. Alongside the usual corrections, such as income from write-backs of provisions or impairment losses, in 2010 they include book gains of €181 million on the sale of financial investments. As part of this, we eliminated income of €67 million from the sale of a part of our Amadeus stake in the course of the IPO as well as €94 million from the transfer of the Fraport shares to our pension fund. Other non-operating book gains of €65m resulted from aircraft sales.
After all these corrections, we arrive at the well-known operating result of 876 million, which represents an increase of 746 million compared with 2009. Overall, exchange rate movements had a positive effect of €204 million on the operating result.
As not all our competitors adjust their results in the same way, we also calculate the so-called adjusted operating margin in order to enable the best possible comparison between our results and theirs. It includes income from write-backs of provisions again and this figure rose to 4.1%, an improvement of 2.7 percentage points.
EBIT also performed well. It’s €1.3 billion it was €1.1 billion higher than the previous year. It includes the result from equity investments, which improved by 46 million to 104 million. This increase stems partly from losses of €11 million at bmi in the first half of last year of 2009, which 2009 were still accounted for at equity, as well as from what was in some cases substantially higher income from subsidiaries, joint ventures and associates in the Logistics and MRO segments.
The improvement in other financial items to now minus €9 million is principally only a major base effect from the previous year. In 2009, you might remember that we had a impairment loss of €140 million on our Fraport stake. Adding depreciation and amortization of €1.7 billion back to the EBIT results and EBITDA of €3 billion, which is 1.2 billion higher than in the previous year.
We then calculate net profit for the period by subtracting net interest, income taxes and minority interests from EBIT. And at €1.1 billion, the figure is 1.2 billion up on the previous year. This corresponds to an earning per share of 2.47.
Net interest of €357 million was 32 million lower than the previous year. The reason here of course was the expansion of the Group and the borrowings we undertook in 2009 as a precautionary measure. The fact that net profit is much higher than expected is due to a tax effect in connection with the financial restructuring in the Catering segment, as I said in the beginning. We carried out the restructuring in order to make the balance sheet for the segment more transparent, as this is dominated by a very large number of small entities and small operations. For this purpose, the Deutsche Lufthansa AG and the LSG Holding AG waived claims in favor of the LSG Sky Chefs Group in the USA. The corresponding accounts receivable, however, had already been impaired in the previous years going back number of years after 2001, 2003 and other crisis we’ve already had. As a result, fiscal loss carry forwards that so far had not been activated and where we did not see a chance to activate them, because of the less of operating results in the same magnitude could now be capitalized and thus provided for this nice tax result.
Altogether the effect from the restructuring added up to around €400 million deferred tax income, so that instead of the tax expense that would have been expected given the positive pre-tax earnings, we’ve recorded a tax income of €165 million. We’ve also had a tax income the previous year, I’ll slowly get accustomed to tax incomes, I should say.
The performance demonstrated in 2010 means that the basic requirements have again been met for a dividend payment, so that the Supervisory Board will be able or was able to propose a distribution of €0.60 per share at the Annual General Meeting. This is in line with our dividend policy. The payment equals 31% of our operating result and based on the closing price of our share at the end of last year, it represents a dividend yield of 3.7%. As of today, I guess it’s a little bit more.
Let us now move on to cash flow and the Group’s liquidity. Cash flow from operating activities rose by 54.4% to a record €3.1 billion. The increase is predominantly due to the improved operating result. While depreciation and amortization remained roughly stable, the growth in business volume led to an improvement in working capital, which increased cash flow year-on-year by €346 million. Negative effects, for example, came from the income tax payments of 110 million.
Cash flow from operating activities stood against net capital expenditure of 1.5 billion, so that despite the ongoing fleet modernization program, the Group generated a free cash flow of €1.6 billion. This is of course available for further capital expenditure or for interest of principal repayments. Group’s liquidity went up substantially as a result. At year-end, it came to a total of €5.6 billion, almost 1 billion more than at the end of 2009.
Ladies and gentlemen, let me now turn to the performance of the individual companies and segments. All of them made a positive contribution to net profit, but at the same time, they are at different stages of the upswing. The main driver for our Group, the Passenger Airline Group, participated fully in air transport’s dynamic upswing. Revenue was up by a quarter, climbing to €20.9 billion in total.
Adjusted for the first full year consolidation of Austrian and bmi, the increase came to 13.3%. Despite the non-recurring expenses mentioned earlier, the Passenger Airline Group earned an operating profit of €436 million in 2010. A year ago, we were still at a slight loss of 8 million. I will examine the contributions of the individual companies in this segment further on. The segment’s adjusted operating margin improved by 2.2 percentage points to 3%. EBITDA increased to 2.6 billion.
As expected, CVA in the segment was still negative, but at minus €198 million, it was much better than the previous year’s figure of minus 691 million. We expect the Passenger Airline Group to increase both its revenue and its operating result in 2011.
However, the best horse in the stable in 2010 was the Logistics segment. Thanks to the farsighted measures to safeguard earnings in the crisis. Lufthansa Cargo was able to get its services to market again quickly in 2010 when the global economy recovered and German exports unexpectedly boomed, taking a clear lead over its competitors. Revenue soared by 43.3% to €2.8 billion as a result. The segment then completed an impressive turnaround, reporting an operating profit of €310 million, and this came after an operating loss of 171 million the year before.
The adjusted operating margin came to 11.4%, beating the average for the aviation industry. Lufthansa Cargo benefited not only from price increases and higher sales volumes, but of course, also from the ongoing cost-cutting measures. And as a consequence, EBITDA climbed from minus 28 million the previous year to 445 million. Under these circumstances, it was possible to create value again in 2010 and the CVA came to an impressive €233 million. Lufthansa Cargo is also optimistic for this year. If demand remains strong and everything looks like it so far, revenue is expected to rise even further.
Cost management measures will also continue. Another substantially positive operating result will therefore be recorded in 2011 as well, although we do not really expect repeat of last year’s record result, which reflects a great deal of catching up in the economy and a very scarce capacity. So this was an unusual situation.
The MRO segment was yet unable to benefit fully from the upswing in 2010. As a late-cycle player in the airline industry, Lufthansa Technik still recorded a drop in revenue in the first half of 2010, but was then able to pickup again sharply again in the second half, with revenue rising overall by 1.4% to €4 billion. By contrast and as expected, the operating result was not able to keep up with the previous year’s strong figure declining by 15.2% to €268 million.
At 7.4%, the adjusted operating margin for Lufthansa Technik was again sound. EBITDA came to €412 million and the CVA was again substantially positive at €172 million and even slightly improved year-on-year. In view of larger aircraft fleets worldwide, Lufthansa Technik is expecting the MRO market to grow again in the years ahead. For 2011, the segment is already predicting an increase in revenue and operating result again.
For the IT Services segment, the year 2010 was marked by a challenging environment. Despite the airlines incipient recovery, their willingness to invest is still low, dwindling revenue and the industrial customers was the result.
Overall, revenue fell by 1.7% to 595 millions. Lufthansa Systems then responded to the changing market conditions and launched the already mentioned extensive [ph] revenue and profits in the short-term and set the company up, so that its profitability is durably secured. This caused restructuring expenses of €9 million in 2010, which of course depressed the operating result accordingly. Lufthansa Systems reported all-in-all an operating profit of €10 million, a fall of 37.5%. The adjusted operating margin contracted by 1 percentage point to 1.8%.
CVA and the first time of IT came to minus 23 million, compared to plus 3 million the year before. In 2011, the revenue for Lufthansa Systems is forecast to go down again in the course of the restructuring measures, but we nevertheless expect to reverse the earnings trend that is we expect higher operating results. After a modest start, the Catering segment increasingly benefited from the sharp revival in demand over the course of the year, with growing passenger numbers in particularly higher demand of the premium segment. This resulted in an revenue increase of 7% to €2.2 billion, from which LSG Sky Chefs generated an operating profit of €76 million.
Adjusting the previous year’s figure of 72 million for the well-known one-off payment of €40 million from a D&O insurance shows that the operating result more than doubled, improving by €44 million. The adjusted operating margin of 3.4% nearly matched the previous year’s figure. By contrast, EBITDA went up by 45% to €174 million. CVA improved to minus 28 million and in the previous year was still up minus 68 million. For the 2011 financial year, LSG expects current market trends to continue and revenue and operating profit to improve again as a result.
Let us now take a deeper look at the development of the traffic regions in the Passenger Airline business. The global economic recovery is also reflected in these figures. Traffic revenue in all regions went up at double-digit rates. Despite additional capacity, the passenger load factor improved in all regions as well. A look at average yields reveals the known familiar picture. Intercontinental traffic saw a strong recovery in premium demand and therefore in average yields, whereas pricing in European short-haul traffic was still down on the depressed level of the crisis year 2009 fundamentally due to a structural shift of passengers from the premium cabin to the back of the airplane.
Overall, average yields rose by 8.4% and together with a 13.3% increase in capacity and an improvement of 1.4 percentage points in the load factor, traffic revenue grew by 24.9%.
An important indicator for Lufthansa Passenger Airlines is their share of First and Business Class revenue in total long-haul revenue. And compared with 2009 - and despite - in the course of this fleet roll-over which we have mentioned, we registered a rise in this ratio of 1.2 percentage points to 48.7%.
Please allow me a little remark here, when you look at the traffic data in the Annual Report, you will see a slight deviation from the figures reported in our traffic figures for December, for example, 91 million passengers instead of 90 million passengers. This is because we have now consolidated Edelweiss Air and the SWISS traffic numbers. And we have decided that going forward we will also include Germanwings in our reported traffic figures. You will find the figures reflected in our monthly report starting with the following release for March 2011. I hope that by eliminating the exclusions, we can contribute to make your analysis easier.
Lufthansa Passenger Airlines were able to use the positive environment to their advantage, increasing revenue by 13.4% to €14 billion. After recording a negative operating result of minus 107 million the previous year, they earned an operating profit of now 382 million in 2010. Further improvement in revenue and the operating result is expected for 2011.
SWISS too had a very successful year, generating revenue of 3.5 billion, which represents an increase of 24.9%. And even in the crisis in 2009, SWISS was able to earn an operating profit of 98 million, which then was more than tripled in the last year to 298 million. For 2011, SWISS is aiming for a moderate further improvement in earnings. Both Austrian and bmi profited enormously from their restructuring activities and collaboration in the airline group. I will come back to the current status of these activities later.
Austrian Airlines closed the books with revenue of €2 billion and reduced its operating loss to €66 million. A return to profitability is as you know planned for 2011. Bmi generated revenue of €896 million during its ongoing restructuring process. The operating loss was reduced to 145 million for the financial year 2009. We had calculated a pro forma figure as it was only consolidated in the second half of approximately minus €225 million. For 2011, bmi is expecting the operating result to improve, but of course still be negative.
Germanwings, one of the winners in the crisis year 2009, reported revenue growth of 8.6% to €630 million. However, for our low-cost airline the year 2010 was also marked by numerous non-recurring factors which the programs to safeguard earnings could not fully erase. And I should say, but of course, the ash cloud and the pilot strike and the winters in January and September have affected Germanwings particularly and they had no compensation with the long-haul traffic obviously. As a result, Germanwings closed the year with an operating loss of €39m. Revenue growth and an improvement in the operating result are expected for 2011.
Coming back to the already mentioned state of affairs in the restructuring and cost management measures, they are all progressing at all companies. Climb 2011 at Lufthansa Passenger Airlines made an earnings contribution of 230 million last year. For 2011, we expect further savings of at least €350 million. And therefore, we are now also confident of reaching the target of €1 billion in sustainable earnings improvements. The full potential of which is to become visible in the financial figures next year. One of the main drivers is cost reduction in the loss-making decentral traffic. By exchanging smaller aircraft for larger more fuel-efficient models, we were able to increase the average body size in decentral traffic from 76 to 91 seats, which has already reduced unit costs significantly. The new so-called Europe cabin will bring further improvements here.
Austrian Airlines achieved savings of €250 million in 2010 as part of its Austrian Next Generation program. Alongside the planned reduction in staff capacities, the company managed to significantly increase productivity in the cockpit and the cabin. What it has achieved so far confirms our conviction that Austrian Airlines will soon be profitable again. Greater synergy potential, which we now estimate at about €130 million per year, has also been identified in the course of further integration.
Bmi also realized the savings planned for 2010. The necessary reconfiguration of the company was continued. This entailed the kind of capacities by 25% and the kind of staff numbers by 20%. These cuts also enabled aircraft productivity to be improved significantly. And it’s clear to say that the restructuring is continuing and that further measures are in preparation.
Synergies, which we now put at €30 million per year will also help to improve the results. I should also mention that, of course, bmi is in a very difficult environment currently as you at least those of you come from the UK know, the UK market was the only market last year, which has seen a reduction in the number of passengers only in the UK was this case and a number of governmental cost-cutting is underway and the environment is really difficult and those of you who follow bmi more closely also know that their main – one of their main traffic areas is into the Arabic countries and North African countries, which of course are currently also no easy territories to serve, but as I said, we are very satisfied with the progress that we faced there, but we, of course, have to recognize that the environment is very different than what it has been a year ago.
But again and on top of this, there is of course also a server lying at the horizon, because 2011 is the year in which Austrian Airlines, bmi and SWISS are scheduled to become part of the Atlantic Plus-Plus joint venture, which for us is a Lufthansa core business has proven to be extremely beneficial.
After this extensive look back at 2010, let us now turn to the current year. Lufthansa is still enjoying strong sales growth, both in short and long haul passengers and in airfreight. As expected, there is no recovery in the pricing environment in European traffic, however, particularly on decentral routes.
In intercontinental traffic, we still see an intact market environment. The Asia-Pacific traffic region in particular is showing rapid growth rates. Yields on long-haul routes are still improving slightly overall as was expected. And let me also say, as we are just talking about Asia that our Japanese operation continues to operate of course, just about 4.5%, 4.6% of our total capacity and flights are full in both directions. So in terms of revenue on profit, the Japanese situation so far has not had any impact on our figures yet.
In the Cargo business too, demand is still progressing well. Substantial capacity increases due to the fully reactivated MD-11 fleet and the additional capacities provided during the last year from Austrian Airlines and AeroLogic, whose fleet now counts eight Boeing 777 freighters, go hand in hand with ongoing sales growth. And it would really be interesting to see if Lufthansa Cargo this time is not again an early indicator, which it has been before. So as long as they continue to operate strongly, this is fueling our optimism for the year 2011.
At our last conference in October 2010, the pace of the global economic recovery had already contributed to a notable price increase of oil and kerosene. However, the first few months of 2011 have seen escalating unrest in Libya, which alongside Nigeria has the largest oil reserves in Africa, and this caused oil prices to reach their highest level for more than two-and-a-half years.
We are able to reduce the effects of price rises with our systematic hedging policy. The break-even price for hedging transactions for 2011 is currently US$91 with a hedging cover of 70% for this year and 32% for next year.
And as you can see from the well-known yellow curve, the current pricing environment really gives us substantial benefits from our hedging, which will significantly increase over the pervious year’s hedging results. On the basis of current futures prices, we are anticipating fuel expenses now of €6.8 billion for 2011. And compared with fuel expenses of €5.2 billion for 2010, this represents a rise of another 30.8% or €1.6 billion. Lufthansa Passenger Airlines, the other companies in the airline group and Lufthansa Cargo have responded to these developments with adjustments to their fuel surcharges and will continue to monitor oil price movements closely and you should not be surprised to see fuel surcharge increases.
Ladies and gentlemen, at this point and as indicated by the title of this year’s annual report, we traditionally try to sketch a vision of the months ahead as difficult as it maybe. Even though those predictions are famously difficult, from a current perspective, we are assuming further economic growth, particularly in Germany, which will result in positive demand trends, and of course, then also corresponding revenue growth. But we still have to go a long way until the end of the year and as with every long-haul flight, there is always the risk in business that some turbulence may occur.
Therefore, severe weather conditions cannot be ruled out, particularly in the form of future further oil price hikes, intensive competition and also upcoming collective bargaining. Although we are a little bit more relaxed in that regard as then we have been some months ago. The extent to which the air traffic tax will lead to a downturn in demand is also still difficult to predict. In order to maintain our leadership in terms of profitability, we will pursue our activities to increase efficiency in all segments.
Our flexibility in cost and capacity management will help us as well. Thus equipped, we therefore expect further improvements in our operating results in the 2011 financial year. The strong performance that is forecast will also be visible in net profit for the period. It is not possible to quantify this at present, but as of today, we assume that the conditions for paying a dividend will be met in 2011 as well. And as we know, our ambition is to increase results and also to move up the pay-out ratio. So that is something we tried to achieve.
A good year will also benefit our financial profile. And despite capital expenditure of €2.6 billion mainly for new aircraft again, we expect to generate free cash flow again in the current year and to create value. Thank you very much for your attention and now I’m happy to take your questions with Christoph.
Christoph Franz - Chairman of the Executive Board and Chief Executive Officer
Great. Thank you very much. And we are now happy to take your questions as usual. Please be so kind, raise your arms, and then wait for joining the colleagues with a microphone also as a courtesy for those who follow us by phone or later on in the webcast.
By
Monika Jain
It is the first conference, where our new CEO, Christoph Franz will present the results together with Stephan Gemkow, who is obviously more familiar to you. We will have the same procedure as every year starting with presentations of the CEO and CFO and then we are happy to answer your questions and please be so kind to put your mobile phones on mute as usual.
While the motto of the CS Annual Report is visioned and with that we should refer to a rather farsighted approach in our directions was sad enough to us to learn this morning that in contrast the London airports are still dominated by low visibility. So that’s why the ATC canceled the flight from London City to Frankfurt and while we also took some participants to Heathrow by taxi who will join us then later on. Some will follow us via dial-in number and via telephone, and of course, I also would like to welcome them. But now, let’s get started and I would ask Christoph Franz to give his presentation to you.
Christoph Franz - Chairman of the Executive Board and Chief Executive Officer
Yeah, ladies and gentlemen, welcome to our conference, my first as a Chairman and CEO of Lufthansa. Stephan Gemkow has been up here a little bit more often and is the experienced guy among us. Together, we will today present you the report of the past business year. As always, we will also cast the glance into the future with our forecast for the Group’s development in the first two months of 2011 and give some opinion about the further development of our business.
There are surely many adjectives that come to my mind when referring to the last year, but worrying [ph] certainly is not one of them. The earlier part of the year was still affected with the after effects of the financial and economic crisis and we faced the hard winter across the pilots strike and then the eruption of the Eyjafjallajökull volcano on Iceland, with a subsequent airspace lockdown here in Central Europe. And this clearly dampened our hopes in the beginning of the year for a positive development of the business. But the business environment changed and we seized the opportunities offered to us by the recovery of the economy.
Today, we are able to present to you figures that no one could have expected at the beginning of last year. Not even my predecessor, Wolfgang Mayrhuber, who I would like to specially thank, because it was him who was largely responsible for driving the Group forward and he took a particular role in steering our steep climb during the second half of 2010.
Ladies and gentlemen, and now some of the key figures for the 2010 business. Here Stephan will later on go into more details. The most important one clearly the operating profit was posted at €876 million and marks a more than fivefold increase in comparison to the previous year’s figure.
The development of the Group result was also extremely positive. We had a negative result in 2009 and were able to close 2010 with a positive result of around €1.1 billion, which is I admit also due to positive one-off tax effect of €400 million. The number of passengers during the past year rose to a new record level, with over 91 million passengers being flown by the Group’s airlines.
These record figures are even without the consolidation effects of having 12-month ownership of Austrian Airlines and bmi in our consolidated group. We also set new records with our revenue growth and operating result in the Cargo business segment. And we continued to invest into the future of our company 2.3 billion of investment in 2010, most of which around €2 billion investments into aircraft.
The fact that we continued to consistently implement our fleet strategy paid off. And it is clearly this ability of the Lufthansa Group on the one hand side to have a long-term vision as it is also marked on our business reports, but on the tax side, it is professional crisis management. And this is clearly correct arising the success of Lufthansa, professional crisis management, short-term focus, knowledge to implement necessary changes and grab opportunities in the market, and on the one hand side, having a vision for the future long-term development of the Group and continuously following this strategy.
We were able last year to take our first four A380s into service in time at least referring to the revised timetable to cope with the increased demand in passenger traffic. And as things stand currently, we will receive our next four A380s in the current year. Two of them will be delivered in the month of March.
In summary, we can conclude that Lufthansa ended the past year on a far better note than initially expected, which can essentially also be attributed to the major improvements in the results of the Passenger Airline Group and the Cargo business segment. Of course, the noticeable recovery of the market was very helpful and provided us with the necessary tailwinds, but this was not everything. Our experience as a crisis tested and proven airline help this. Our ability to react to market changes quickly and flexibly, our solid strategy financially and operationally, and last, but clearly not least, our excellently functioning and highly motivated team of employees and management staff.
Ladies and gentlemen, the upward trend at Lufthansa in 2010 was also visible in the development of the share price. The value of the Lufthansa share recorded a rise of around 39% during the past year and increased almost twice as much as the DAX in what was a good year at the stock exchanges. That is the first piece of good news for our shareholders. The second piece is that the Executive and Supervisory Board of Lufthansa shall be proposing to the general assembly the dividend payment of $0.60 per share on May 30th General Meeting. As you are aware, this step could not have been justified economically a year earlier. However, we are pleased that the overall economic situation and the largely positive development of our business places us in an altogether different position this time around.
Ladies and gentlemen, what do the figures and developments of the last year tell us? Lufthansa has emerged from the crisis even stronger. We have proven that we are able to grow and widen the gap to our competitors even during and after times of crisis. Lufthansa has significantly improved its market position and developed a far greater earning power during the upswing. Lufthansa has equipped itself well to deal with the industry’s future growth. We have saved costs, invested in the future, and made provisions at all the same time.
Our business model with five distinct business segments and the passenger group and cargo airlines is our core business has proven to be robust and solid. That is also confirmed by the development of the Group’s individual business segments, which all closed the 2010 business year with a positive result and contributed to our very good overall result. The altogether positive development of Lufthansa Passenger Airlines first had to overcome the obstacles at the start of the year. The airspace lockdown alone resulted in revenue and profit losses in the triple-digit millions. The impressive climb that followed in the second half of 2010 was therefore all the more pleasing. With the total number of 59 million passengers, Lufthansa Passenger Airline has set a new record.
The recovery of the market was especially noticeable in the premium segment, which is the core segment of our passenger business. Our operating result enjoyed a marked improvement compared to the previous year, and the same could be said for the development in revenue, which was supported by the development in the global network.
The cornerstones of our success were the focus on the management of our corporate customers, the systematic expansion of high-value market segments, the continued development of growth markets, such as the United States, China and India and the realization of sales synergies within the Airline Group.
On the whole, Lufthansa continued to expand its position in intercontinental traffic and secured new market shares. One milestone here is the expansion of the route network to North America, which has gained substantially in momentum since the launch of our Atlantic Plus Plus transatlantic joint venture.
And as you might remember, Lufthansa is not - this is not the first joint venture we have. We have already invented more or less this form of cooperation among airlines with our bilateral joint ventures with United Airlines in the past or with SAS on the German-Scandinavian markets. So we have a lot of experience how to make these kind of joint ventures successful in the market.
Now, we have created a close cooperation of Lufthansa Passenger Airlines with its partners Air Canada, Continental and United Airlines, means that we are together currently able to offer around 280 transatlantic flights to 61 destinations per day. Atlantic Plus Plus already has a market share of 29%. And this figure will increase further this next year with the full integration of all our Group partners, SWISS, Austrian Airlines, bmi in this joint venture. It should be completed by the end of the year.
Following the very successful start of Atlantic Plus-Plus, we will now also become active in other regions. The preparation for a joint venture with our Japanese Star Alliance partner, All Nippon Airways, ANA were going according to plan. We intend to maximize market shares in traffic between Europe and Japan through joint capacity planning and coordinated sales strategies. The approval of the competition authorities in Japan was expected around the middle of the year, but I think we are all aware that this might change now due to the current developments.
The natural disaster in Japan has left us all in deep shock and we are in constant touch with our employees there. I just gave a phone call to our sales head in Asia some 10 minutes ago and he gave me some feedback from the markets and we are also in touch with our partner ANA and we have offered our help wherever they need it. We are grateful that according to the latest reports no Lufthansa staffs were among victims of the catastrophe. But as everybody else, we are extremely worried about the situation and the magnitude of this tragedy.
We have - for now up until the weekend put together a special flight schedule. What is important not only to us as an operator, but also to our customers in Japan is a reliable schedule. A schedule which is not dependent on the change of win situations who might bring areas into trouble which so far have not been too heavily affected by the tsunami and the earthquake. That’s why we will be redirecting all Tokyo flights from Frankfurt and Munich to Osaka and Nagoya with a stop in Seoul. As a precautionary measure, we have also been having the aircraft returning from Japan scanned for radioactivity by experts. So far fortunately, all results are negative.
We have offered a special Lufthansa Cargo flight and which will leave tomorrow or the day after tomorrow to bring urgently needed goods in the crisis area of Northeastern Japan in order to help the victims of the tsunami. As you know, Lufthansa is offering the broadest capacity offer between Europe and Japan and it is our clear intention independent on short-term changes of the situation to provide stable and reliable connectivity between Japan and Europe also during the next days have - as we have provided it during the last week.
I beg your pardon, but there is not a very elegant bridge now, because the Japan issue is clearly occupying all of us quite a lot, but I will continue now on the issue of capacity and our route network expansions.
We have also been able to expand capacity in Asia, which is clearly one of the prime growth markets in the next years and in South America. Started to fly, Bogota will continue to offer our services in 2011 by opening or more or less reopening in historic dimensions the nonstop fly to Rio de Janeiro. In Africa, we started to fly to Pointe Noire in Democratic Republic of Congo, which is all destination completing our so-called oil portfolio.
However, we did not only invest into the expansion of our fleet and route network. Lufthansa Passenger Airlines also continued to consistently improve its on-board and ground products, by investing in quality that benefits to the customer directly, for example, into new Economy Class seats, into Business and First Class products, and in the improvement of our cabin fittings and furnishings, and our lounges on ground.
The highlights include the reintroduction of FlyNet, our on-board Internet system, where Lufthansa was the number one innovator of the industry, but we had to stop this offering when our supplier closed down and now we have found a new supplier and we are on line again and I think many of you working on-board of our aircraft will appreciate that you are able to use Internets with your IT devices.
The new First Class has been introduced in the A380 last year and we get an excellent feedback from our customers above this significantly upgraded product. The Economy Class product has also been developed further and now we are offering personal in-seat screens not only in the A380, but we will refurbish all existing long-haul aircraft to provide this service and improve at the same time our extensive inflight entertainment system.
The remaining fleet will be refitted in 2010 and the next years by and by. What we will also do in 2010 and ‘11 is to introduce a new flight cabin interior in our Continental European fleet which will give a new and very smart, nice interior of the aircraft, lighter seats and will enable us to offer more seats on-board of our aircraft.
Now turning to the ground products, we witnessed the number of changes. We opened a new Senator Lounge in Munich doubling the capacity and we also opened up a new Senator Lounge here in Frankfurt, with a very first integrated Jets Friends area for children, for all of you with kids don’t miss to go there. It’s really a nice area. And we will continue with this kind of investment.
I may remind you that, yesterday, the Supervisory Board of Lufthansa has given its approval for additional investment. We will order 30 A320neo Engine option aircraft for Lufthansa Passenger Airlines and 5 B777-200 freighter aircraft for Lufthansa Cargo.
We have of course also saved and are continuing to review, and where necessary, correct our processes and our cost base, despite, or maybe rather, especially in order to secure the financing of our considerable investments throughout the next years. The Climb 2011 program to safeguard earnings at the Lufthansa Passenger Airlines continues to be implemented as planned, and looking at it today, we will achieve the projected sustainable reduction of costs by $1 billion as of 2012.
The phasing out of the 50-seater aircraft segment is essentially completed and the realignment of the regional airlines of the Lufthansa Passenger Airlines, CityLine, Eurowings and Air Dolomiti will also result in a sustained reduction of the unit cost position of Lufthansa in this segment. These steps will allow us to considerably improve our competitive market position in the hard-fought continental segment. And I’ll come back to that later on, because we all feel that at this point in time everybody is suffering from overcapacity in that market. In addition, the personnel unit costs will be reduced by 10% and the joint projects with external and external suppliers to optimize processes and reduce costs also implemented in the planned dimension by the end of 2011.
Ladies and gentlemen, the development of business at the Group airlines varied as expected. SWISS can look back on a successful business year. Over 14 million passengers and the tripling of operating profit represents a very strong performance, the increase in demand and significant upward trends in the intercontinental and freight segments, the effective cost management, and a strong domestic market in Switzerland, including its recovery as a financial center. This played a decisive role in recording this success. The success story at SWISS continues and you can imagine that this is especially pleasing for me given my professional past at this airline.
Austrian Airlines is continuing to work intensively on the restructuring and reorganization of the airline. The early successes are already visible and reflected in the result. In the meantime, they were also able to benefit more from the synergies of the Passenger Airline Group. The significant recovery in long-haul travel has helped and the improving corporate customer business has contributed to that positive development. The airline has also succeeded in further consolidating its market position at the Vienna hub.
On May 1st, 2011, Thierry Antinori, my former colleague in the Passenger Airlines Board will assume the position of Chairman of the Executive Board at Austrian Airlines. He takes over after spending more than a decade in charge of marketing and sales at Lufthansa Passenger Airlines. He is going to set the future course of the airline together with Mr. Malanik, Mr. Bierwirth, and steer it towards profitable growth. Austrian Airlines is in the air, but it has not yet reached its right flat level.
The restructuring measures are also starting to show early successes at British Midland. The implementation of all the staff-related measures was already completed during the course of the past year. In total, we had to reduce 800 jobs, a bitter and painful step, but one that was economically necessary. A further measure on the cost side was the adjustment of the fleet’s capacity, which has resulted in a significant increase in its productivity.
On the whole, bmi was, however, not able to profit from the global upswing in intercontinental traffic as its route network is limited to the short and medium-haul routes. We are, however, able to significantly reduce the losses as with Austrian Airlines.
Germanwings, the Group’s low-cost subsidiary remains on its successful course. This is also reflected in the countless awards that it received in different categories. Although it was able to continue on its course of growth, it did, however, post a negative result in 2010 due to certain one-time special effects, such as the pilots strike and airspace lockdown that both hit Germanwings especially hard. Despite implementing the necessary measures to safeguard earnings, the airline was unable to fully compensate the losses.
Inner-European traffic continues to be especially hard-fought and only generate low average yields. The market remains a difficult one and this is not only true for Germanwings, I think it is true for all Lufthansa Airlines and it is true for all European Airlines being in that business segment, including our low-cost competitors. It is difficult to imagine that anybody is able at this low yield level to show a profit in European traffic.
The market remains a difficult one and we are therefore also looking at solutions across the airline boundaries and increasing cooperation with the other airlines in the Lufthansa Group. One such solution of generating synergies is that customers at Germanwings have now been able to collect miles for the Miles & More program on all Germanwings flights since the 1st of September 2010. The same conditions apply for miles as on Lufthansa flights.
Ladies and gentlemen, let’s turn to Lufthansa Cargo. This airline has had to work especially hard to hold the course during the financial and economic crisis and showed great foresight in doing so. The structures remained intact and Lufthansa Cargo mastered the market changes successfully with cost and capacity flexibility.
Our freight business segment was consequently able to post a record operating result for the 2010 business year. Lufthansa Cargo has therefore succeeded in realizing an impressive turnaround following the crisis-related loss of 2009. Of course, this result was to a large extent also due to the rapid upswing of the global airfreight market. However, it remains a strong performance nonetheless. One major cornerstone of the past year’s success was the integration of the Austrian Airlines freight segment into the Lufthansa Cargo Group, which enabled Lufthansa Cargo to expand its capacity further, particularly with regard to Eastern Europe. Our customers there have been able to benefit from an even denser network since the summer of 2010.
Lufthansa Technik, our MRO business had to sustain some revenue losses during the first half of 2010. It was the last business segment of the Lufthansa Group to be hit by the global economic crisis and it was hit very late. As expected, Lufthansa MRO was not able to maintain its operating result at the high level of the previous year, but it remains a distinctly positive one. Lufthansa Technik caught up more and more during the second half of the year and continued on its path to growth with a strong fourth quarter, and looking forward, we are optimistic that this will be the case also for 2011.
Lufthansa Systems, our IT business was faced with a difficult economic environment in 2010. It was a year marked with declining sales figures at airlines and great restraint when it came to investments. But despite this decline in revenue, Lufthansa Systems still managed to again contribute a positive operating result to the Group result in 2010.
During the second half of the year, the company launched Jetzt!, an extensive restructuring and cost reduction program, with which it plans to achieve a short to medium-term improvement of its revenues and results. On the whole, our IT business segment intends to accomplish a leaner corporate structure and secure its long-term competitiveness.
LSG Sky Chefs has now been the world’s market leader for airline catering for over a decade. Its customers include more than 300 airlines from around the world. We maybe in competition with many or the 300, but when it comes to catering, we have also the same provider. The acceleration in demand in the aviation industry has also seen the demand for catering services rise again. The LSG Sky Chefs Group was consequently able to not only increase its revenue during the 2010 business year, but also more than double its operating profit in comparison to 2009. This is a highly pleasing development, especially as the previous year’s result also included a positive one-time effect.
Ladies and gentlemen, now let’s turn to an outlook for 2011. For the year, 2010 showed that Lufthansa can successfully master bad weather and it is immediately ready to profit when the weather turns around again. Our finances are stable, our quality fulfills the high Lufthansa standards, and our customer satisfaction levels remain on a high level. Lufthansa is a driving force of innovation in our industry and a company focused on long-term success and profitable growth.
The new management crew has now been at the helm for almost 100 days. Carsten Spohr, who previously headed Lufthansa Cargo, is the newest member of the Group’s Executive Board and now my successor as the CEO for the Lufthansa Passenger Airline business. Together, we have all set ourselves some major objectives for the future, for we are aware that 2011 will not – will be no walk in the park.
Many uncertainties lie ahead of us. For example, the European competition, which will remain extremely hard-fought and price pressure will continue to increase. This is not only true for our European business, but also true for long-haul traffic, particularly to Asia and Africa.
The untamed growth of the state-owned Gulf carriers is another aspect that should be viewed with very critical eyes. They are currently building the largest long-haul fleet in the world and their aim is to shift the global passenger flows from our hubs to their hubs in the Middle East and replace the European hubs as economically important centers.
Europe is therefore in danger of losing its role as one of the logistics centers of the world. Tens of thousands of jobs could be lost with the corresponding consequences for the economy, but also major consequences for the environment. Detours would have to be flown on many routes, resulting in significantly longer flight times and up to 40% more emissions, for example, on the routes from Europe to Asia.
The German air traffic tax, which was unfortunately introduced in January, only in Germany, not EU-wide, is another uncertain factor whose true implications we are currently not yet able to assess. How this tax will affect the booking figures on the entire year remains to be seen? However, it is a fact that it will hit our customers where it hurts and it will also hit us, because we are unable to pass the whole amount of this tax on to our customers given the current very severe competitive situation in Europe. So Lufthansa must bear a significant portion of it in our company’s result.
A further aspect is the fact that the tax affects European airlines will be much more serious in the future than the effect on non-European airlines. As a result, European air traffic could become even more detached from global developments when next year the emissions tradings of the EU will be introduced.
Another point of criticism is the speed how the Single European Sky, the largest environmental project in the EU is moving forward. We think that we should definitely increase the speed of implementation and also set tough efficiency targets for the different ATC institutions we have in Europe. It is a fact that American carriers in the U.S. are paying half of ATC charges as we have to pay here in Europe.
Ladies and gentlemen among the many uncertainties that we will face this year are the catastrophe in Japan as well as the political unrest in North Africa. A different topic, but also on our list of uncertainties for 2011 are of course the kerosene cost. Oil prices are currently extremely volatile. Lufthansa continues to implement its fuel hedging measures and we have the financial basis to do so. They enable us to compensate increasing prices, at least for sometime when they peak, but I will let speak Stephan Gemkow about more details on that one. With all these developments in view, our strategy to also not make any compromises in our fleet modernization program during times of crisis has proven to be right.
That is also the case when we look ahead and when we look at the environment. Our industry has set itself ambitious goals when it comes to lowering the burden on the environment and Lufthansa also assumes a pioneering role in this area, where the use of the latest technologies is our most effective weapon. Only they have allowed us to reduce the specific kerosene consumption by over a third during the past two decades within Lufthansa Group and consequently not only lower the burden on the environment, but also the burden on our budget.
Ladies and gentlemen, this is still far too early to attempt sound forecast. However, we remain confident despite the mentioned uncertainties and the economic forecasts remain pleasing. Our confidence is also motivated by the medium-term growth forecasts. The number of passengers worldwide in air traffic should increase by 5.9% per year until 2014, whereby the growth is especially based on the strong demand development in China. And according to the latest forecasts, airfreight will also increase by 6.4% per year until 2014. We, of course, also want to benefit from this development.
For Lufthansa and the 2011 business here, we expect our revenue to continue to grow and our operating result to increase further that is also why we plan to employ 4,000 new staff as announced at the beginning of the year. We also want to create value again in 2011. We do not want to grow for the mere purpose of being a giant, but rather to achieve profitable growth in an industry that is marked by price pressure, losses, and crisis, particularly in Europe.
Ladies and gentlemen, let me now conclude my report and pass on to Stephan Gemkow who will provide you with some more detailed figures on the 2010 business year. I thank you for your time and I’m looking forward to answering your questions afterwards. Thank you very much.
Stephan Gemkow - Member of the Executive Board and Chief Financial Officer
Good afternoon everybody. I’m, of course, also pleased to welcome you all to the presentation of our annual figures for 2010. A year ago on this occasion I talked about the coming year of the Tiger in the Chinese horoscope and the characterization of the Tiger includes on the one hand mistrust and the courage to take risk, but also a powerful urge to succeed. And I know that some of you smiled last year, but the Chinese were right, we have plenty of reasons for mistrust in 2010. We still overcame all the unusual events and risks and in the end closed the financial year with great success that is and Christoph laid it out how we want to continue in 2010. However, given what we have been experiencing already, I doubt that we will be able to rely again on the Chinese horoscope this year, where the Year of the Rabbit stands for gentleness, harmony, and pleasure. Even though I would like to do so, but I think the events in Japan and North Africa, Arabia really speak a different language and it’s clear that our thoughts are not fully concentrated around our annual results, but also that our thoughts are with many who are suffering from these events currently including, of course, our (indiscernible) to handle the crisis.
Let me turn to the key figures of the Group first. In 2010, we increased Group revenue by 22.6% to €27.3 billion. Of course, this is partly due to the fact that Austrian Airlines and bmi were consolidated for the whole year for the first time. Adjusted for this effect, growth nevertheless still came to 14.4% and the real driver, which will be seen later was traffic revenue in the passenger and freight business, which was up by 26.5% or adjusted for consolidation by 16.2%.
As we all know, the Group generated an operating result of €876 million, and our so-called adjusted operating margin improved by 2.7 percentage points to now 4.1%. EBIT came to 1.3 billion, which is a sevenfold increase over the previous year. Also the previous year’s net loss of €34 million was transformed into a very pleasing profit of more than €1.1 billion. This includes a positive one-off tax effect of around 400 million from the financial restructuring in the Catering segment.
Operating cash flow leapt by 54.4% to a record €3.1 billion, which was well above gross capital expenditure of 2.3 billion, despite the purchase of 47 new fuel saving aircraft. This surplus over our capital expenditure and the very strong net profit had of course a very positive impact on our balance sheet figures. It enabled us to reduce our net indebtedness to 1.6 billion, and as a result, our gearing is now at 50% right in the middle of our non-target corridor between 40% and 60%. The equity ratio at the same time climbed by a total of 4.9 percentage points to now 28.4%, and it is also true that in the first year after the crisis, Lufthansa managed to create value, again on the CVA amounted to €71 million.
However, I think the Group’s performance - the great performance of the Group only becomes really visible when you see under what conditions it was achieved. This is because the year 2010 had two halves and two aspects. One was the exceptionally dynamic top-line recovery, with growth rates in passenger and freight that were well into the double-digits. And this of course also began in the first half and the second quarter, to be precise, of the last year already.
Nevertheless, several unforeseen events meant that the potential of this market recovery is at the end not fully reflected in the result. And Christoph has already discussed the individual factors. In total, these sliced out around €340 million off the bottom line. It should be added that on top of that in 2010 we sustained considerable operating losses of €211 million from Austrian Airlines and bmi, which are still in the restructuring mode. This clearly shows how strong the annual result for 2010 really is. It manifests the structural improvements of all the business segments, which overcompensated the adverse events.
Since all business segments made a distinct contribution to this performance, it is clear that most of the momentum came from the Passenger Airline Group and the Logistics segment. But the service segments MRO, IT Services and Catering too contributed more than €350 million to the operating result. And this enabled the Lufthansa Group to extend its lead not only during the crisis, but also in the 2010 year of recovery. And I think it’s really important to note and it shows that a stable crisis-resistant business and outstanding results do not rule each other out.
Let us return to the analysis of the annual financial statements. Revenue growth of 22.6% stemmed largely from the airborne companies. Other revenue mainly composed of external revenue from our MRO, IT and Catering segments went up by 8.1% to €5.1 billion, while traffic revenue from the passenger and freight businesses soared by €4.7 billion, or 26.5% to €22.3 billion.
Greater sales volume accounted for almost 1.3 billion of the increase, and at the same time, our airlines were able to charge higher ticket prices and freight rates, which added revenue of €761 million. Exchange rate movements here were also in our favor, adding another 808 million, and finally a further 1.8 billion in traffic revenue came from the consolidation of Austrian Airlines and bmi for the full year.
The structural improvements mentioned earlier and our continued cost management can be seen by looking at the different expense items. All cost items all went up significantly less than revenue in 2010. Total expenses climbed by 16.7% to €28.9 billion or by 8.3% after adjusting for consolidation effects. For this increase, the higher oil price is largely responsible. If we adjust expenses for fuel costs too, they were just 4.6% higher in 2010 than in the previous year. The cost of materials and services rose by 21% to 15.4 billion. And as fuel costs account for large proportion of this item, I’ll go into more detail later as you know.
Fees and charges are another major driver of the cost of materials and services. They went up by 21.8% to €4.6 billion or adjusted for consolidation by 6.9%. Staff costs went up 11.1% to €6.7 billion, which reflects the 4.2% rise in staff numbers due to consolidation. On an adjusted base, the workforce grew by 2.2% and staff costs were only 4.4% higher than in the previous year. I’m not even sure if this is correct, I thought the workforce shrank by 2.2% adjusted for consolidation. We’ll find that out that’s – I was just curious. This was due to higher contributions to pension provisions triggered by lower interest rates and higher variable profit share payments and exchange rate effects.
Depreciation and amortization is strongly influenced by our ongoing fleet modernization and the restructuring of the short-haul fleet. Altogether, depreciation and amortization increased by 14% to €1.7 billion. And adjusted for consolidation, the increase came to 5.2%, 96% of depreciation and amortization were scheduled write-offs and went up by almost 200 million due to aircraft deliveries and the enlarged group of consolidated companies. Around €72 million represents impairment charges, largely for planes that were phased out step-by-step were sold as part of our Climb 2011 program. Additionally, we made impairments of €16 million on aircraft that are still up for sale largely the 50-seater small or regional jets.
Other operating expenses went up by 13% to €5.2 billion. Adjusted, the figure was just 5.1% and this was principally due to exchange rate movements. In particular, the stronger U.S. dollar compared with 2009 led to a €276 million rise in exchange rate losses out of a total of around €1.1 billion recognized here. These exchange rate losses correspond to exchange rate gains of approximately €1 billion in other operating income, so that these items largely balance each other out as usual. Furthermore, ongoing cost optimization had a positive effect on other operating expenses, leading to lower costs for marketing and electronic distribution systems as well as other staff-related costs.
Now, we come to the detailed breakdown of fuel costs. They went up by a total of €1.5 billion to €5.2 billion. The additional capacity only accounted for €68 million of that and I think this is remarkable, because it really reflects the use of the larger more fuel-efficient aircraft creating more capacity, but at the same time, not creating more fuel burn, which is of course twice important because of the fuel cost and the emission certificates we need in the future.
The main factor driving the cost up was the oil price, which rose by 27.8%, setting the Group back €795 million. Thanks to our well-known systematic hedging. We were nevertheless able to mitigate this rise slightly by €21 million. The stronger U.S. dollar increased our purchasing costs further by €261 million. However, I should say that in 2010 we also realized approximately €65 million income from U.S. dollar hedges that can be clearly and directly attributed to the fuel exposure. So in total, our hedge is basically had a value of between 80 and €90 million. Last but not least, the expansion of the Group accounted for a further €410 million.
In spite of higher fuel expenses, the Lufthansa Group improved its profit from operating activities in line with IFRS by €969 million to 1.2 billion in 2010. As you know, we always adjust this figure for several factors in order to facilitate the comparison with previous years.
In 2010, these necessary adjustments added up to €364 million. Alongside the usual corrections, such as income from write-backs of provisions or impairment losses, in 2010 they include book gains of €181 million on the sale of financial investments. As part of this, we eliminated income of €67 million from the sale of a part of our Amadeus stake in the course of the IPO as well as €94 million from the transfer of the Fraport shares to our pension fund. Other non-operating book gains of €65m resulted from aircraft sales.
After all these corrections, we arrive at the well-known operating result of 876 million, which represents an increase of 746 million compared with 2009. Overall, exchange rate movements had a positive effect of €204 million on the operating result.
As not all our competitors adjust their results in the same way, we also calculate the so-called adjusted operating margin in order to enable the best possible comparison between our results and theirs. It includes income from write-backs of provisions again and this figure rose to 4.1%, an improvement of 2.7 percentage points.
EBIT also performed well. It’s €1.3 billion it was €1.1 billion higher than the previous year. It includes the result from equity investments, which improved by 46 million to 104 million. This increase stems partly from losses of €11 million at bmi in the first half of last year of 2009, which 2009 were still accounted for at equity, as well as from what was in some cases substantially higher income from subsidiaries, joint ventures and associates in the Logistics and MRO segments.
The improvement in other financial items to now minus €9 million is principally only a major base effect from the previous year. In 2009, you might remember that we had a impairment loss of €140 million on our Fraport stake. Adding depreciation and amortization of €1.7 billion back to the EBIT results and EBITDA of €3 billion, which is 1.2 billion higher than in the previous year.
We then calculate net profit for the period by subtracting net interest, income taxes and minority interests from EBIT. And at €1.1 billion, the figure is 1.2 billion up on the previous year. This corresponds to an earning per share of 2.47.
Net interest of €357 million was 32 million lower than the previous year. The reason here of course was the expansion of the Group and the borrowings we undertook in 2009 as a precautionary measure. The fact that net profit is much higher than expected is due to a tax effect in connection with the financial restructuring in the Catering segment, as I said in the beginning. We carried out the restructuring in order to make the balance sheet for the segment more transparent, as this is dominated by a very large number of small entities and small operations. For this purpose, the Deutsche Lufthansa AG and the LSG Holding AG waived claims in favor of the LSG Sky Chefs Group in the USA. The corresponding accounts receivable, however, had already been impaired in the previous years going back number of years after 2001, 2003 and other crisis we’ve already had. As a result, fiscal loss carry forwards that so far had not been activated and where we did not see a chance to activate them, because of the less of operating results in the same magnitude could now be capitalized and thus provided for this nice tax result.
Altogether the effect from the restructuring added up to around €400 million deferred tax income, so that instead of the tax expense that would have been expected given the positive pre-tax earnings, we’ve recorded a tax income of €165 million. We’ve also had a tax income the previous year, I’ll slowly get accustomed to tax incomes, I should say.
The performance demonstrated in 2010 means that the basic requirements have again been met for a dividend payment, so that the Supervisory Board will be able or was able to propose a distribution of €0.60 per share at the Annual General Meeting. This is in line with our dividend policy. The payment equals 31% of our operating result and based on the closing price of our share at the end of last year, it represents a dividend yield of 3.7%. As of today, I guess it’s a little bit more.
Let us now move on to cash flow and the Group’s liquidity. Cash flow from operating activities rose by 54.4% to a record €3.1 billion. The increase is predominantly due to the improved operating result. While depreciation and amortization remained roughly stable, the growth in business volume led to an improvement in working capital, which increased cash flow year-on-year by €346 million. Negative effects, for example, came from the income tax payments of 110 million.
Cash flow from operating activities stood against net capital expenditure of 1.5 billion, so that despite the ongoing fleet modernization program, the Group generated a free cash flow of €1.6 billion. This is of course available for further capital expenditure or for interest of principal repayments. Group’s liquidity went up substantially as a result. At year-end, it came to a total of €5.6 billion, almost 1 billion more than at the end of 2009.
Ladies and gentlemen, let me now turn to the performance of the individual companies and segments. All of them made a positive contribution to net profit, but at the same time, they are at different stages of the upswing. The main driver for our Group, the Passenger Airline Group, participated fully in air transport’s dynamic upswing. Revenue was up by a quarter, climbing to €20.9 billion in total.
Adjusted for the first full year consolidation of Austrian and bmi, the increase came to 13.3%. Despite the non-recurring expenses mentioned earlier, the Passenger Airline Group earned an operating profit of €436 million in 2010. A year ago, we were still at a slight loss of 8 million. I will examine the contributions of the individual companies in this segment further on. The segment’s adjusted operating margin improved by 2.2 percentage points to 3%. EBITDA increased to 2.6 billion.
As expected, CVA in the segment was still negative, but at minus €198 million, it was much better than the previous year’s figure of minus 691 million. We expect the Passenger Airline Group to increase both its revenue and its operating result in 2011.
However, the best horse in the stable in 2010 was the Logistics segment. Thanks to the farsighted measures to safeguard earnings in the crisis. Lufthansa Cargo was able to get its services to market again quickly in 2010 when the global economy recovered and German exports unexpectedly boomed, taking a clear lead over its competitors. Revenue soared by 43.3% to €2.8 billion as a result. The segment then completed an impressive turnaround, reporting an operating profit of €310 million, and this came after an operating loss of 171 million the year before.
The adjusted operating margin came to 11.4%, beating the average for the aviation industry. Lufthansa Cargo benefited not only from price increases and higher sales volumes, but of course, also from the ongoing cost-cutting measures. And as a consequence, EBITDA climbed from minus 28 million the previous year to 445 million. Under these circumstances, it was possible to create value again in 2010 and the CVA came to an impressive €233 million. Lufthansa Cargo is also optimistic for this year. If demand remains strong and everything looks like it so far, revenue is expected to rise even further.
Cost management measures will also continue. Another substantially positive operating result will therefore be recorded in 2011 as well, although we do not really expect repeat of last year’s record result, which reflects a great deal of catching up in the economy and a very scarce capacity. So this was an unusual situation.
The MRO segment was yet unable to benefit fully from the upswing in 2010. As a late-cycle player in the airline industry, Lufthansa Technik still recorded a drop in revenue in the first half of 2010, but was then able to pickup again sharply again in the second half, with revenue rising overall by 1.4% to €4 billion. By contrast and as expected, the operating result was not able to keep up with the previous year’s strong figure declining by 15.2% to €268 million.
At 7.4%, the adjusted operating margin for Lufthansa Technik was again sound. EBITDA came to €412 million and the CVA was again substantially positive at €172 million and even slightly improved year-on-year. In view of larger aircraft fleets worldwide, Lufthansa Technik is expecting the MRO market to grow again in the years ahead. For 2011, the segment is already predicting an increase in revenue and operating result again.
For the IT Services segment, the year 2010 was marked by a challenging environment. Despite the airlines incipient recovery, their willingness to invest is still low, dwindling revenue and the industrial customers was the result.
Overall, revenue fell by 1.7% to 595 millions. Lufthansa Systems then responded to the changing market conditions and launched the already mentioned extensive [ph] revenue and profits in the short-term and set the company up, so that its profitability is durably secured. This caused restructuring expenses of €9 million in 2010, which of course depressed the operating result accordingly. Lufthansa Systems reported all-in-all an operating profit of €10 million, a fall of 37.5%. The adjusted operating margin contracted by 1 percentage point to 1.8%.
CVA and the first time of IT came to minus 23 million, compared to plus 3 million the year before. In 2011, the revenue for Lufthansa Systems is forecast to go down again in the course of the restructuring measures, but we nevertheless expect to reverse the earnings trend that is we expect higher operating results. After a modest start, the Catering segment increasingly benefited from the sharp revival in demand over the course of the year, with growing passenger numbers in particularly higher demand of the premium segment. This resulted in an revenue increase of 7% to €2.2 billion, from which LSG Sky Chefs generated an operating profit of €76 million.
Adjusting the previous year’s figure of 72 million for the well-known one-off payment of €40 million from a D&O insurance shows that the operating result more than doubled, improving by €44 million. The adjusted operating margin of 3.4% nearly matched the previous year’s figure. By contrast, EBITDA went up by 45% to €174 million. CVA improved to minus 28 million and in the previous year was still up minus 68 million. For the 2011 financial year, LSG expects current market trends to continue and revenue and operating profit to improve again as a result.
Let us now take a deeper look at the development of the traffic regions in the Passenger Airline business. The global economic recovery is also reflected in these figures. Traffic revenue in all regions went up at double-digit rates. Despite additional capacity, the passenger load factor improved in all regions as well. A look at average yields reveals the known familiar picture. Intercontinental traffic saw a strong recovery in premium demand and therefore in average yields, whereas pricing in European short-haul traffic was still down on the depressed level of the crisis year 2009 fundamentally due to a structural shift of passengers from the premium cabin to the back of the airplane.
Overall, average yields rose by 8.4% and together with a 13.3% increase in capacity and an improvement of 1.4 percentage points in the load factor, traffic revenue grew by 24.9%.
An important indicator for Lufthansa Passenger Airlines is their share of First and Business Class revenue in total long-haul revenue. And compared with 2009 - and despite - in the course of this fleet roll-over which we have mentioned, we registered a rise in this ratio of 1.2 percentage points to 48.7%.
Please allow me a little remark here, when you look at the traffic data in the Annual Report, you will see a slight deviation from the figures reported in our traffic figures for December, for example, 91 million passengers instead of 90 million passengers. This is because we have now consolidated Edelweiss Air and the SWISS traffic numbers. And we have decided that going forward we will also include Germanwings in our reported traffic figures. You will find the figures reflected in our monthly report starting with the following release for March 2011. I hope that by eliminating the exclusions, we can contribute to make your analysis easier.
Lufthansa Passenger Airlines were able to use the positive environment to their advantage, increasing revenue by 13.4% to €14 billion. After recording a negative operating result of minus 107 million the previous year, they earned an operating profit of now 382 million in 2010. Further improvement in revenue and the operating result is expected for 2011.
SWISS too had a very successful year, generating revenue of 3.5 billion, which represents an increase of 24.9%. And even in the crisis in 2009, SWISS was able to earn an operating profit of 98 million, which then was more than tripled in the last year to 298 million. For 2011, SWISS is aiming for a moderate further improvement in earnings. Both Austrian and bmi profited enormously from their restructuring activities and collaboration in the airline group. I will come back to the current status of these activities later.
Austrian Airlines closed the books with revenue of €2 billion and reduced its operating loss to €66 million. A return to profitability is as you know planned for 2011. Bmi generated revenue of €896 million during its ongoing restructuring process. The operating loss was reduced to 145 million for the financial year 2009. We had calculated a pro forma figure as it was only consolidated in the second half of approximately minus €225 million. For 2011, bmi is expecting the operating result to improve, but of course still be negative.
Germanwings, one of the winners in the crisis year 2009, reported revenue growth of 8.6% to €630 million. However, for our low-cost airline the year 2010 was also marked by numerous non-recurring factors which the programs to safeguard earnings could not fully erase. And I should say, but of course, the ash cloud and the pilot strike and the winters in January and September have affected Germanwings particularly and they had no compensation with the long-haul traffic obviously. As a result, Germanwings closed the year with an operating loss of €39m. Revenue growth and an improvement in the operating result are expected for 2011.
Coming back to the already mentioned state of affairs in the restructuring and cost management measures, they are all progressing at all companies. Climb 2011 at Lufthansa Passenger Airlines made an earnings contribution of 230 million last year. For 2011, we expect further savings of at least €350 million. And therefore, we are now also confident of reaching the target of €1 billion in sustainable earnings improvements. The full potential of which is to become visible in the financial figures next year. One of the main drivers is cost reduction in the loss-making decentral traffic. By exchanging smaller aircraft for larger more fuel-efficient models, we were able to increase the average body size in decentral traffic from 76 to 91 seats, which has already reduced unit costs significantly. The new so-called Europe cabin will bring further improvements here.
Austrian Airlines achieved savings of €250 million in 2010 as part of its Austrian Next Generation program. Alongside the planned reduction in staff capacities, the company managed to significantly increase productivity in the cockpit and the cabin. What it has achieved so far confirms our conviction that Austrian Airlines will soon be profitable again. Greater synergy potential, which we now estimate at about €130 million per year, has also been identified in the course of further integration.
Bmi also realized the savings planned for 2010. The necessary reconfiguration of the company was continued. This entailed the kind of capacities by 25% and the kind of staff numbers by 20%. These cuts also enabled aircraft productivity to be improved significantly. And it’s clear to say that the restructuring is continuing and that further measures are in preparation.
Synergies, which we now put at €30 million per year will also help to improve the results. I should also mention that, of course, bmi is in a very difficult environment currently as you at least those of you come from the UK know, the UK market was the only market last year, which has seen a reduction in the number of passengers only in the UK was this case and a number of governmental cost-cutting is underway and the environment is really difficult and those of you who follow bmi more closely also know that their main – one of their main traffic areas is into the Arabic countries and North African countries, which of course are currently also no easy territories to serve, but as I said, we are very satisfied with the progress that we faced there, but we, of course, have to recognize that the environment is very different than what it has been a year ago.
But again and on top of this, there is of course also a server lying at the horizon, because 2011 is the year in which Austrian Airlines, bmi and SWISS are scheduled to become part of the Atlantic Plus-Plus joint venture, which for us is a Lufthansa core business has proven to be extremely beneficial.
After this extensive look back at 2010, let us now turn to the current year. Lufthansa is still enjoying strong sales growth, both in short and long haul passengers and in airfreight. As expected, there is no recovery in the pricing environment in European traffic, however, particularly on decentral routes.
In intercontinental traffic, we still see an intact market environment. The Asia-Pacific traffic region in particular is showing rapid growth rates. Yields on long-haul routes are still improving slightly overall as was expected. And let me also say, as we are just talking about Asia that our Japanese operation continues to operate of course, just about 4.5%, 4.6% of our total capacity and flights are full in both directions. So in terms of revenue on profit, the Japanese situation so far has not had any impact on our figures yet.
In the Cargo business too, demand is still progressing well. Substantial capacity increases due to the fully reactivated MD-11 fleet and the additional capacities provided during the last year from Austrian Airlines and AeroLogic, whose fleet now counts eight Boeing 777 freighters, go hand in hand with ongoing sales growth. And it would really be interesting to see if Lufthansa Cargo this time is not again an early indicator, which it has been before. So as long as they continue to operate strongly, this is fueling our optimism for the year 2011.
At our last conference in October 2010, the pace of the global economic recovery had already contributed to a notable price increase of oil and kerosene. However, the first few months of 2011 have seen escalating unrest in Libya, which alongside Nigeria has the largest oil reserves in Africa, and this caused oil prices to reach their highest level for more than two-and-a-half years.
We are able to reduce the effects of price rises with our systematic hedging policy. The break-even price for hedging transactions for 2011 is currently US$91 with a hedging cover of 70% for this year and 32% for next year.
And as you can see from the well-known yellow curve, the current pricing environment really gives us substantial benefits from our hedging, which will significantly increase over the pervious year’s hedging results. On the basis of current futures prices, we are anticipating fuel expenses now of €6.8 billion for 2011. And compared with fuel expenses of €5.2 billion for 2010, this represents a rise of another 30.8% or €1.6 billion. Lufthansa Passenger Airlines, the other companies in the airline group and Lufthansa Cargo have responded to these developments with adjustments to their fuel surcharges and will continue to monitor oil price movements closely and you should not be surprised to see fuel surcharge increases.
Ladies and gentlemen, at this point and as indicated by the title of this year’s annual report, we traditionally try to sketch a vision of the months ahead as difficult as it maybe. Even though those predictions are famously difficult, from a current perspective, we are assuming further economic growth, particularly in Germany, which will result in positive demand trends, and of course, then also corresponding revenue growth. But we still have to go a long way until the end of the year and as with every long-haul flight, there is always the risk in business that some turbulence may occur.
Therefore, severe weather conditions cannot be ruled out, particularly in the form of future further oil price hikes, intensive competition and also upcoming collective bargaining. Although we are a little bit more relaxed in that regard as then we have been some months ago. The extent to which the air traffic tax will lead to a downturn in demand is also still difficult to predict. In order to maintain our leadership in terms of profitability, we will pursue our activities to increase efficiency in all segments.
Our flexibility in cost and capacity management will help us as well. Thus equipped, we therefore expect further improvements in our operating results in the 2011 financial year. The strong performance that is forecast will also be visible in net profit for the period. It is not possible to quantify this at present, but as of today, we assume that the conditions for paying a dividend will be met in 2011 as well. And as we know, our ambition is to increase results and also to move up the pay-out ratio. So that is something we tried to achieve.
A good year will also benefit our financial profile. And despite capital expenditure of €2.6 billion mainly for new aircraft again, we expect to generate free cash flow again in the current year and to create value. Thank you very much for your attention and now I’m happy to take your questions with Christoph.
Christoph Franz - Chairman of the Executive Board and Chief Executive Officer
Great. Thank you very much. And we are now happy to take your questions as usual. Please be so kind, raise your arms, and then wait for joining the colleagues with a microphone also as a courtesy for those who follow us by phone or later on in the webcast.
By
Monika Jain
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