Lufthansa s Group Strategy and Setup for Passenger Business Investor Day 2007 Frankfurt/Main, January 25th, 2007 1 Wolfgang Mayrhuber Chairman of the Executive Board and CEO Deutsche Lufthansa AG
Overview Industry Trends Group Strategy Passenger Business Strategy 2
Air Traffic will Remain a Growth Industry Forecast of Worldwide CAGR for Different Regions until 2011 North America- India 7.9% 9.0% 3.6% 3.9% 4.7% 5.1% 4.7% 6.5% 7.5% 5.2% 5.3% 4.2% 4.6% 4.0% 4.0% 3.9% 3.6% Bubble size = market size, in terms of passengers 3
Profitability in the Industry is Restored Airline Industry Net Results in USDbn 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006e 2007e -5-10 Forecast -15 Source: ICAO 1995-2005, IATA 2006-2007 4
Capital Markets Reward Stronger Economic Perspectives Top Ten Airlines Worldwide in EURm, plus Selected Airlines 1) 1) 2) 2,199 3,296 5,729 5,488 4,873 6,387 5,877 6,105 4,795 4,913 3,737 3,693 7,805 7,357 9,548 9,388 9,195 8,591 8,049 11,081 10,738,194,122 2,567 2,817 1,384 2,617 2,16 2,121 1,827 3,625 Market Cap. 31st December 2006 Market Cap. 31st December 2005 5 1) Approx. year-to-year data 2) Year-to-year data not available due to changes in quotation
Consolidation in the Industry is Gaining Momentum Recent Steps in Industry Consolidation USA: America West - US Airways (2005) US Airways offer for Delta Air Tran s offer for Midwest Air United Continental talks Europe: Air France - KLM (2004) Lufthansa - SWISS (2005) AirBerlin - dba (2006) Ryanair s offer for Aer Lingus Australia: Qantas takeover by financial investors 6
Overview Industry Trends Group Strategy Passenger Business Strategy 7
The Lufthansa Group Sets for Future Growth and Ongoing Value Creation Focus on core Profitable growth in core business Strengthen and invest in core Expand position in growth markets Capitalise on integration capabilities Enhance value also for non-core Keep financial and strategic flexibility strong 8
The Strategy: Focussing on Passenger Business as a Nucleus is the Major Strategic Group Rationale Lufthansa Provides Mobility for People and Goods Management of Networks Management of Operations Management of Assets, Resources and Supply Chain (People, Aircraft, Systems, Facilities, Fuel) Individual Business Unit Strategies Competition Growth / Yield Capital Requirements Risks Dependencies on Passenger Business Competence Fit with Passenger Business Relevance for Passenger Business Dependency on Passenger Business Strategic Mapping of Business Units 9
Business Units Logistics and MRO Competence fit Management of networks and know-how of processes Relevance Belly sales/marketing/it/mro Dependency Logistics. Utilization of belly capacity of passenger aircraft by logistics.. Competence fit MRO Operation/Global Support Relevance Management of optimised life cycle cost Know-how, purchase power Dependency Strategic co-operation Brand... 10
Business Units IT Services and Catering Competence fit IT Services Airline specific know-how of processes Relevance Supply of airline specific innovations Dependency Internal supplier Competence fit Catering Management of production and logistics Relevance Internal supplier Dependency Internal customer 11
Leisure Travel Solution Found Providing Value Leisure Travel Thomas Cook was identified as non-core to Lufthansa After turnaround in 2005 Thomas Cook is set for growth Agreement found with KarstadtQuelle MoU signed in December 2006 12
Segments are Well Positioned in Growth Markets Passenger Business Logistics Market Growth Shorthaul: ~ 5% Western Europe 2.6% Domestic Germany 2.0% Eastern Europe No. 1 Carrier EU & to Eastern Europe Russia: 9 destinations and 103 frequencies Eastern Europe: 24 destinations and 582 frequencies Var. co-op (e.g. LOT, AUA, Croatia) No. 1 Cargo Carrier with 45 destinations served 6.4% Market Growth Longhaul: > 5% 4.1% 5.1% 5.9% No.1 Carrier to Asia, No. 2 to NA 5.9% India: 6 destinations and 88 frequencies China: 4 destinations and 47 frequencies Japan: 3 destinations and 26 frequencies Various co-operations (e.g. Air China, Shanghai Airl., Air India, Singapore Airl.) Joint Ventures in Shenzhen and Pudong Jade Cargo started operations in 2006 Source: IATA Passenger Forecast 2006-2009 MRO JV in Hungary, Ireland, Malta Further development evaluated MRO contracts with growth carriers Various JV s (Ameco, LHT Philippines) 13
Overview Industry Trends Group Strategy Passenger Business Strategy 14
The Key Issues for the Upcoming Changes in Airline Business Are Proactively Addressed by Lufthansa Mega-Trends as Drivers of Change Key Issues and Subjects of Activity What Interferes in Our Process of Change? Globalisation Deregulation Shareholder s prospects New business models Internet and IT Innovations Consolidation Enlargement Star Alliance Integration Swiss etc. Segmentation Full range of products Multi-Hub, Multi-Market Focussing Aviation Group System Partnerships Regulatory influence High barriers for market exit Expectations of unions Monopolistic suppliers 15
The Strategic Frame Enhances the Spirit of Entrepreneurship within the Organisation Multi-Brand Multi-Product Premium Economy Budget Multi-Market Entrepreneurship & Competition Multi-Hub 16
Multi-Brand: From a Branded House to a House of Brands "Mainline" "Regional" "Budget " Premium Large markets Intercont. & continental Transfer & point-to-point Premium Small markets Continental & regional Transfer & point-to-point No frills Stimulating markets Point-to-point only We address our customers with a portfolio of tailor-made brands The brands are complementary and competitive 17
Multi-Product: Mobility à la carte with High Quality Products in Each Segment Segment Role Current Measures Premium Economy Budget First Class Business Class Economy Flex Economy Basic No- Frills Top line Business / Celebrity Service Brand amplifier & image driver Mainstream Business customer Global Corporate / SME Driving Earnings Yielding new customers Profit contribution Rounding off the range Participate in growth market Lufthansa Private Jet Services HON Circle Service First Class Terminal New Business Class Continental and Intercont. WLAN, SMS services FFP range (SEN, FTL, JetFriends) Schnäppchen Aggressive price system germanwings SunExpress Mobility Buyer Budget Traveler 18
Multi-Product: Focus on Premium Improved Passenger Mix Investments in Quality and Innovation Product Enhancements Increase Passenger Mix and Create Loyalty Rev. Share 55 50 in % 45 40 35 Q3 2003 Q3 2004 Q3 2005 Q3 2006 First Class Terminal: individualised, time saving boarding process for First Class and HON Circle Lufthansa Private Jet Services Plus 10%P revenue share of longhaul premium customers In 2006 premium revenue on longhaul flights exceeded 50% share 19
Multi-Market: Star Alliance Offers a Tight Network Full of Opportunities for Our Customers More than 16,000 Daily Flights to 841 Destinations in 157 Countries and welcoming in 2007: 20
Multi-Market: Succeeding in New Markets with Partnerships and New Business Models In Our Home Market Europe We Build Strong Partnerships Strengthening of Non-Hub Traffic and Local Catchments Regional Partners Increased frequencies ex: Hamburg, Dusseldorf, Stuttgart 21
Multi-Hub: A Consequence of Growth, Market Segmentation and Organisational Accountability Objectives for Lufthansa: Staying in close touch with markets Transparency Fast reaction to market needs Entrepreneurship and decentralised responsibilities Governing complexity Advantages for Our Customers: Choice of transit airport, if no direct flight is available Higher flexibility for our customers by time lagged offers 22
Multi-Hub: Development of Hub Management Is a Role Model for Balancing Entrepreneurship and Central Leadership Leadership central Entrepreneurship de-central Fleet Planning Network Development Alliance Management Pricing Interlining Group Steering Revenue Integrity IT Frame contracts etc. Golden Rules Input Network Planning Yield Management... dedicated tailsigns Local Touch Individual Services 23
Multi-Hub: Organisational Vision of an Airline Network Within Lufthansa Group Holding Functions Define rules and code of conduct Allocation of resources e.g. fleet allocation e.g. network strategy e.g. branding, product Divisions / Airlines Entrepreneurship P&L responsibility (at least in parts) FRA MUC DEC LX XY Support Functions Realisation of synergies Coordinative functions e.g. IT, traffic rights, e.g. station management, e.g. HR, fuel, fleet-procurement, controlling scalability 24
Lufthansa Is Set to Go for Further Consolidation in Europe Strategic rationale Strengthening our European stronghold Access to attractive markets and additional destinations Realisation of synergies by changing industry structures Prerequisites Partner and stakeholder fit (e.g. strategic fit, no unbridgeable differences in corporate cultures and strategies) Economic fit / real opportunity (e.g. investment is appropriate with regard to economical benefit of acquisition, avoid negative rating effect, gain sales/purchasing power) 25
Lufthansa stands for success Managing Costs and Quality Partners: Star Alliance is growing, SWISS integration faster and better than planned Innovations: Market leader also with respect to new developments Fleet Management: Modern fleet with low cost profile and high flexibility Affiliated Businesses: Success in airlinerelated markets with professional knowhow and long term experience 26
The Key Factors for Successful Implementation of Lufthansa s Strategy Brand Location Home Market Growth Market Fleet Employees Product Infrastructure Leadership Financials 27
Lufthansa Shares An Investment with High Upward Potential We upgrade our stronghold Europe We place investment in growth markets We establish a strong leadership and have sufficient talents We are a strong brand with strong partners We secure solid financials by continuous strict cost management We offer an outstanding network to our customers We offer high quality products for every customer s segment We are flexible to adapt fast to market needs We are set for future growth and increasing profitability 28
Rising Share Prices Created Value of 3.8 EURbn in 2006 Lufthansa Shares Outperform DAX 180% 160% Deutsche Lufthansa AG 140% +67% 120% 100% 80% DAX +22% 60% Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 XETRA, Close, Reuters 29
Outlook 2007 Internal perspective Maintain course on Costs Quality Innovations Enforce flexibility as strategic guideline External perspective Enlarge Star Alliance Screen strategic options for consolidation Develop strategies to reduce dependencies on monopolistic suppliers Prepare for future growth Enhance accountability and market driven entrepreneurship 30
Lufthansa - Value That Grows - Set for the Future - Share This Future with Us! Thank You! 31
Disclaimer This presentation is for informational purposes only, contains preliminary financial and other information about Lufthansa and is subject to updating, revision, amendment and completion. This presentation does not and is not intended to constitute or contain any offer of securities for sale or a solicitation of an offer to purchase any securities of Deutsche Lufthansa AG or any other company and neither this presentation nor anything contained herein shall form the basis of any contract or commitment. Certain statements contained in this presentation may be statements of future expectations and other forward-looking statements or trend information that are based on management's current views and assumptions and involve known and unknown risks and uncertainties. In addition to statements which are forwardlooking by reason of context, including without limitation, statements referring to risk limitations, operational profitability, financial strength, performance targets, profitable growth opportunities, and risk adequate pricing, as well as the words "may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, or continue", "potential, future, or further", and similar expressions identify forwardlooking statements. Actual results, performance or events may differ materially from those in such statements. Lufthansa assumes no obligation to update any such statements or any other information contained herein. 32