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Edited Transcript of LHA.DE earnings conference call or presentation 30-Jul-19 7:15am GMT

Q2 2019 Deutsche Lufthansa AG Earnings Call

Frankfurt / Main Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Deutsche Lufthansa AG earnings conference call or presentation Tuesday, July 30, 2019 at 7:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis Weber

Deutsche Lufthansa AG - Head of IR

* Ulrik Svensson

Deutsche Lufthansa AG - CFO & Member of Executive Board

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Daniel Roeska

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* James Edward Brazier Hollins

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Neil Glynn

Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator

* Ruxandra Haradau-Doser

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Stephen Furlong

Davy, Research Division - Transport and Logistics Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the conference call of Deutsche Lufthansa AG. (Operator Instructions) I would now like to turn the conference over to Dennis Weber, Head of Investor Relations. Please go ahead.

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [2]

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Thank you, and good morning, ladies and gentlemen. Welcome to the presentation of Lufthansa Group's first half year 2019 results. My name's Dennis Weber, and I head up Lufthansa's Investor Relations activities. Today's call, our CFO, Ulrik Svensson, will give you an update of the group's performance and outlook. Afterwards, we will be happy to answer your questions. Ulrik, over to you.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [3]

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Thanks, Dennis, and good morning, everybody. Before coming to our financial results in detail, let me take a step back and review the first half year from a strategic and operational perspective.

When we met through our Capital Markets Day in Frankfurt a good month ago, we presented our New Premium initiatives to further enhance customer experience. In doing so, we are building on the strength of our brands and product, which is just confirmed by the feedback we receive from customers every day as well as high profile awards. Only 3 weeks ago, Lufthansa and Eurowings took first and third place at this year's Business Traveller Awards.

Earlier in the year, Lufthansa was named Airline of the Year by ATW, the industry's leading trade magazine. ATW highlighted that Lufthansa has not only been awarded a 5-star rating by Skytrax, it was also continuously introducing new technologies and services that are making traveling more pleasant and convenient for passengers. In this regard, it all starts with reliability and punctuality. In the first half year, the investments we made to ensure that the difficulties of the prior year summer would not repeat and have clearly paid off. Cancellations declined by 28% at the Network Airlines and 23% at Eurowings.

Those airlines groups improved punctuality, too. Based on EUROCONTROL data, Eurowings even was one of the most punctual airlines in Europe in the period.

Operations stability is an important prerequisite for the turnaround of Eurowings. 4 weeks ago, we outlined a comprehensive plan to achieve breakeven in 2021. Since then, we have already made progress in several areas. First, we entered into negotiations with employee representatives and unions regarding the move to just one AOC in Germany. In this context, let me highlight that the plan was well received, in particular, with regard to the simplification of the business model and the clear strategic direction it provides.

Second, Eurowings has started to retire older, inefficient aircraft as part of its plan to modernize the fleet.

And third, we are in the midst of preparations for shifting the responsibility for Eurowings long-haul business to the Network Airlines organization. A decision on the turnaround plan for Brussels Airlines will be made shortly.

In many parts of our business, we are moving in the right direction. In the short term, however, adverse market conditions are overshadowing the progress we are making, especially now at home markets, Germany and Austria. Here, overcapacities have built over the last few seasons as different airlines try to expand their market share after the demise of airberlin. Latest with the weakening of overall economic growth, growing trade tensions and rising political risks, which have created pressures on price.

Our Network Airlines were not immune against these pressures either. Although their year-on-year performance in Europe improved compared to the first quarter helped by a moderation of market-wide capacity growth, yields in Europe were down 3.5% in currency-adjusted terms for the second quarter. In the first quarter, the yield decline had been almost twice as high. Nonetheless, above all, the German and Austrian markets remained difficult in the past 3 months. It was marked by overcapacities, aggressive competition and an increasingly price-sensitive demand.

In contrast, long-haul performance held up well. The transatlantic business was particularly strong, although yields were partly driven by the strong -- the strength of the U.S. dollar even more so as U.S. point-of-sale saw the highest level of growth. Performance in South America remained sluggish mainly reflecting weakness in Brazil and Mexico. Asia recorded solid growth in terms of loads and yields also in the second quarter despite a China-driven slowdown towards the end of the period. Finally, performance on the routes to Middle East and Africa improved mostly driven by network changes and high demand on routes to the Middle East.

Overall, strong long-haul performance only partly offset the pressures in short-haul. Total Network Airlines RASK decreased 1.6% in the second quarter and 3.2% in the first half year. Load factor increases highlight that demand remains resilient in volume terms, especially when it comes to long haul. However, in Europe short-haul, and even more so on domestic routes, customer turned very price sensitive over the past 3 months.

Against this backdrop, it's even more important that we manage costs tightly. Year-to-date, the Network Airlines CASK is down 0.2%. In the past 3 months, however, CASK was up slightly because higher MRO cost more than offset the benefits from lower irregularity expenses and muted labor cost growth. MRO cost growth predominantly relates to GEnx-2B engine powering our 747-8, which is having technical issues requiring more maintenance work at the lot.

Fuel costs increased 18% to more than EUR 2.5 billion in the first half year. The absolute Increase of almost EUR 400 million dropped through to operating profit as we were not able to pass on the higher cost to customers.

Total adjusted EBITDA for the Network Airlines declined by 43% to EUR 565 million in the first half year reflecting a margin of 5.1%. Profit declined at all 3 Network Airlines with Austrian Airlines being challenged the most by the competitive market situation in Vienna. The low-cost competitors exert high-priced pressures.

Turning to Eurowings. Capacity growth across the business slowed further in short-haul even to negative rates in the quarter. Nonetheless, short-haul yields remained under pressure given the market situation I outlined earlier. On a currency-adjusted basis, they were down 4% in the second quarter. Pressure is particularly high in Düsseldorf, Stuttgart and Berlin where the pricing of low-cost peers continued to be very aggressive.

Performance in long haul improved from a low base mainly due to changes in the Eurowings routes portfolio, including the transfer of the Munich-Bangkok route to Lufthansa. In addition, Brussels Airlines recorded increases. Remember that we will shift commercial responsibility for additional parts of the Eurowings long-haul business to the Network Airlines organization at the end of October, the shift of the remaining Eurowings long-haul routes as well as the entire Brussels Airline business to follow in 2020.

In total, Eurowings RASK declined 2.1% in the second quarter, a markedly better performance compared to the high single-digit decline recorded in the first quarter. Sequential improvements was primarily because performance was no longer diluted by disproportionate growth in long haul where RASK is much lower.

Eurowings CASK declined by 5.7% in the quarter and 6.1% in the first half year driven by the nonrecurrence of prior year integration costs and the decline of irregularity costs.

Factoring in a rising fuel cost as expected, Eurowings adjusted EBIT remained negative also in the second quarter. It amounted to negative EUR 273 million in the first half year, some EUR 50 million below the prior year levels.

Turning to the nonpassenger business. The logistics business of Lufthansa Cargo continues to suffer on the current decline of the air cargo market. In a seasonally small quarter, adjusted EBIT turned slightly negative. Good performance on the transatlantic routes was offset by challenges elsewhere. Especially on the routes between Europe and Asia, loads and yields were down. Lufthansa Cargo has responded to this by reducing capacity and adjusting its cost base. Nonetheless, first half year profits declined 88% reaching EUR 15 million in the period.

Lufthansa Technik recorded a 7% profit growth in the first half year despite a slightly weaker second quarter. Good performance of the engine division was partly offset by cost inflation as well as higher subcontracting expenses related to internal capacity shortages.

Profits at LSG amounted to EUR 33 million in the first half year, down 18% compared to 2018 because of the ongoing transformation of the European business where we are centralizing the production and logistics setup.

Finally, adjusted EBIT of the other business and group functions declined by EUR 47 million year-on-year reflecting IT investments at AirPlus and in central functions.

Turning to the cash flow statement and the balance sheet. Investments declined 11% in the first half year due to lower expenditure for new aircraft. Nonetheless, adjusted free cash flow, including the IFRS 16-related amortization of operating lease obligations shown in the financing cash flow, decreased by 73% to EUR 269 million. This was due to the operating profit decline as well as high tax payments. EUR 350 million of tax expenses in the first half year still related to 2017, and to a lesser extent, 2018 and profits turned out to be much higher than reflected in prepayments at the time, an effect which will not recur in the second half year.

Net debt increased 79% to EUR 6.2 billion at the end of the first half year. The increase was largely driven by the first-time application of IFRS 16. Excluding the change in the accounting of operating leases, net debt would have increased by just 13% compared to the end of 2018.

The same effect also explain approximately half of the 0.9 increase of financial leverage, which reached 2.7 at the end of the quarter. Higher pension liability, which rose due to a reduction of the discount rate accounted for the remainder of the increase.

Let me conclude my remarks with our financial expectations for the rest of the year. Today, we reconfirm our outlook for 2019 as we presented it in June. We forecast the group's adjusted EBIT margin to reach 5.5% to 6.5% in 2019 reflecting an absolute adjusted EBIT between EUR 2 billion and EUR 2.4 billion.

For the Network Airlines, we forecast a low single-digit unit revenue decline in the full year. We assume that the long-haul business will continue to outperform short-haul, especially when it comes to the transatlantic routes where bookings continue to be good. The Asian route should perform solidly in the second half year term. Nonetheless, we acknowledge that risks for the long-haul business have grown in the recent weeks primarily related to the macroeconomic slowdown in our home markets. As always, at this time of the year, we have just collected the good half of total bookings for September, which is an important business travel month and even less for the remaining months of the year. So the achievement of our targets depend on the evolution of short-term bookings, especially in the premium cabins.

In the full year of 2019, we project the Network Airlines to achieve an operating margin between 7% and 9% including a fuel cost increase of around EUR 500 million. Excluding fuel, strict cost management will ensure that 2019 will be the fourth year in a row in which we'll reduce unit costs.

Eurowings unit revenues are forecasted to decline at mid-single-digit percentage rate in the full year, in line with performance in the first half year. Performance should be supported by further capacity cuts. In the full year, ASKs at Eurowings are now forecasted to decline 1%. The shift of commercial responsibility for parts of the long-haul business to the Network Airlines organization in autumn will contribute to better results in long haul. In short-haul, however, we expect pressures in the remainder of 2019 to be similar for the first half year based on the assumption that the European market environment will remain challenging at least until the end of the year. Assuming a CASK decline of 6% to 8% in currency-adjusted terms and an increase of fuel cost by around EUR 50 million, the Eurowings margin will amount to a negative 4% to negative 6% in 2019.

Finally, we expect the logistics business around Lufthansa Cargo to achieve a 3% to 5% operating margin based on more or less unchanged revenues compared to the prior year levels. Considering seasonality of the air cargo business, the fourth quarter will be key to achievement of this outlook. In the fourth quarter, we assume Lufthansa Cargo's performance to improve again compared to current levels benefiting from a stabilization of demand as well as recent capacity adjustments and overhead cost reductions.

Our guidance for all other non-passenger business remains unchanged.

In summary, my presentation should have made clear that we're operating in some of the most challenging markets. That is why it's so important to further improve our cost efficiency and to make sure that we can adapt quickly to changing market conditions.

To give you a few examples. In the past few weeks, we have cut significant capacity at Lufthansa Cargo. We have brought down planned growth in winter to almost 0 for both airline routes. And we have identified more than 400 measures to offset commercial pressures in different parts of our business. In doing so, we are not losing sight of our long-term agenda. Irrespective of our exposure to short-term market forces, we are in control of major margin and cash flow drivers. We are confident that the turnaround of Eurowings, further cost efficiency improvements, the achievement of new levels of operational excellence and constant innovation in our commercial strategy will result in better profitability and stronger cash flows, ultimately driving higher shareholder value.

And with that, I would like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Stephen Furlong with Davy.

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [2]

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Can I just ask, in your outlook statement, the comments on short-term bookings especially in premium cabins, is that the kind of normal phenomenon in terms of the short-term bookings? Or has that been you've seen that over a number of years just the cycle of bookings get shorter, particularly in corporates?

And then maybe just talk about the importance in Cargo of the fourth quarter, which I know it's always very seasonal, and that's where the peak season is, that will be great.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [3]

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Yes. Thanks. Yes. So in terms of short-term bookings, that is indeed, of course, the case always when we go into Q3 every summer. It means people are on holiday and business people are not booking until they basically are back here in September. So that visibility is indeed always there on top of the trend as you are rightly indicating, that there are shorter and shorter advanced bookings as a general trend.

When it comes to the fourth quarter for Cargo, as we all know, the visibility of our Cargo business is only a couple of weeks. So it is indeed very difficult to say how the fourth quarter is going to develop this year.

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Operator [4]

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The next question is from the line of Daniel Roeska with Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [5]

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Two, if I may. Firstly, there have been a couple of press reports that you're thinking about kind of the organization and the matrix and the holding structure. And while I effectively won't be commenting on that, I would like to ask you with the current organizational setup, if you were to do organizational changes, what is it you want to change? That is what is currently being conceived as kind of hindering you or slowing you down? What would you like to improve about the organization if there was such an approach?

And then, secondly, could you comment on the new revenue management software you have talked about at the Capital Markets Day, just where we are? When is that coming online? And kind of when would we start to expect benefits from that new revenue management software?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [6]

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Yes. So starting on organization, well, as we did a number of years ago, we implemented our matrix. We are indeed very happy with our matrix. It has helped us to take benefits out specifically in the areas of network, sales, fleet, revenue management and there are new ideas or plans to change that matrix setup. So I think that is more of a press speculation.

When it comes to the revenue software, implementation has already started. But when it comes to seeing effects of that, that, of course, is something which we're only going to see towards the end of the year and most importantly in 2020.

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Operator [7]

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The next question is from the line of Ruxandra Haradau-Doser with Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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First, on Asia, I have noticed some strong capacity changes between Europe and Japan in Q2. How do you expect trends for Japan in H2?

And second, what is your strategy with respect to the new airport in Beijing? And how do you expect capacities between China and Europe to develop over the next flight schedules, particularly summer 2020?

And second (sic) [third], could you please give us an update on your current discussions with Fraport? Are you still optimistic to reach a longer-term tariff agreement at Frankfurt airport? And Frankfurt is by far the most profitable airport in your network and long-haul activities of Eurowings have shifted to Frankfurt to turn them profitable, would you please discuss your medium-term strategic trends at this airport beyond some potential small cost reductions?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [9]

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Yes. So starting on Fraport. Indeed, Fraport, of course, is very important for us in our network being our most important hub. As long as the costs are higher at Fraport compared with the other hubs, there will be, by definition, a higher growth in the other hubs just logical commercial thinking. But we do, indeed, believe that we will be able to reach a long-term agreement with Fraport and there had been some good progress on that, but it's too early to say exactly when we'll be able to close it.

When it comes to the specific questions you have on Beijing, there is no real change planned in terms of that.

When it comes to Japan, we see good demand in Japan, which is planned and expected to continue. There is nothing more to report than positive things out of Japan.

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Operator [10]

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The next question is from the line of Damian Brewer with RBC.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Ulrik, I've got 2, maybe 3 questions, if I can. Can I turn to Cargo, first of all, and just your sort of outlook there suggests a quite challenging climb up to deliver the numbers for Q2. So can you elaborate a little bit more on what you were talking about on the H2 and maybe even 2020 capacity plans for the business given the market weakness and the very weak recent ADV data, for example?

And also talk to us a little bit more through what you can do in terms of flex there if there was a rebound in restocking because of low inventory. Particularly pertinent because it's a business that seems to pretty consistently miss its targets.

Secondly, I mean the profit levels are lower. Have you had any further thoughts on your CapEx plans going forward, and if so, could you share those with us? I mean it particularly seems strange to be continuing with significant new capital in the business when the returns may no longer generate that across the group?

And then very finally, if I can ask one. Could you elaborate a little bit more on what your forward bookings are looking like, in particular, percent booked at this point versus where you were last year for the Q3 period?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [12]

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Yes. So starting on the Cargo outlook for the second half of the year, since the visibility is so short as we just spoke about a couple of minutes ago, it is indeed very difficult to say. There are different cargo experts and external analysts saying both ways. In other words, some are very cautious and some are saying it's going to be a normal quarter in the fourth quarter. So that is difficult.

The beauty of our business model, of course, is that we can fairly, quickly reduce capacity and we have already taken out 3 MD11s. And during 2020, as we have announced, we will take out our own MD11 fleet, which is basically 11 aircraft, which will leave the fleet in 2020 and will, to some extent, be replaced by 777 but to a much smaller degree. So it will indeed be a capacity reduction in our Cargo business reflecting where that -- how that market is looking for today.

In terms of bookings for Q3, we are always, in this quarter, seeing a smaller business booking as I indicated in the earlier question. I mean, typically, and this is the case also today, we have around 50%, our bookings in September are there, and the other 50% will have to come in on short-term demand and that's where, of course, the business demand becomes so important to fill those aircrafts. So it's not a change compared with earlier periods.

In terms of CapEx, we are indeed expecting to have EUR 3.6 billion in this year. It's going to be slightly lower in 2020. But as we all know, most of those CapEx numbers have been ordered a long time ago and are not very easy to change. However, we have, of course, flexibility when it comes to wet leases and so on. So as we already indicated for the winter season, it's going to be very modest growth. And as long as this present market situation continue, you will also, going forward, see very modest ASK growth coming out of the Lufthansa Group.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Okay. So growth is low but the CapEx stays as it is.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [14]

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Well, most of the CapEx anyway was refleeting, as you remember, we have at the Capital Markets Day. It was only a few number of the aircraft, which was growth-oriented. And this refleeting is giving a good return anyway because it is older aircraft, which, of course, have much higher fuel burn where we will get a good return even if the market is weaker. So it's a pure cost replacement.

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Operator [15]

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The next question is from the line of Neil Glynn with Credit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [16]

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If I could ask 3 questions, please. The first one, I guess, following on to the theme in terms of forward bookings and short booking windows, I know Cargo is no longer the leading indicator it once was, but given the weakness in exports, I presume your commercial teams are working hard with corporates in key industries to understand their plans in this uncertain environment? Just interested in terms of whether there's anything you can share in terms of how Lufthansa is preparing in what is an increasingly uncertain world and how that may impact capacity growth next year. Could it even be flat or down, for example?

Second question on your distribution strategy, I guess, has been evolving over the last 4 years. But I'm interested in terms of how you fill that positions relative to your major competitors on short-haul. Clearly, just looking at pricing on a stand-alone basis, it isn't apparent given the weakness that the distribution strategy changes and other revenue initiatives are helping. But I'm just interested in more perspective on that in terms of how that strategy is today or kind of in the future help you compete against Ryanair and easyJet for the German market?

And then the third question. Your irregularity expenses were up 70% in FY '18 to EUR 518 million, and Ulrik, you mentioned second quarter clearly had some benefits, not sure whether that'll also flow through into the third quarter. But would you expect 2019 based on what you know now to look more like FY '17 or kind of be meaningfully down on FY '18 at least on the irregularity side?

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Operator [17]

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The next question is from the line of James Hollins with Exane BNP Paribas.

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [18]

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Sorry, we need to answer this question first. We're still on mute. So let us answer the questions of Neil first. Ulrik, please.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [19]

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Yes. So starting at the bottom of your questions when it comes to irregularity costs. So irregularity costs were down EUR 44 million in the second quarter. So that was indeed very helpful. When we're looking at the estimate for the irregularity cost for the full year 2019, it's going to be there somewhere in between 2018 and 2017. As you recall, they nearly doubled in 2018 and we are not going to get down to the 2017 levels. But indeed, the second quarter was encouraging.

We had to take some investments to get to that. As you recall, at the Capital Markets Day, we spoke about increasing the number of spare aircraft, increasing the turnaround time of aircraft just to have more space in case there are delays and some of those delays are coming from external factors like ATC and so on. So we are basically compensating other people's problems. But it's moving in the right direction.

When it comes to distribution and how do we fight off Ryanair and easyJet, we are expecting that we will indeed have a very tough price competitive situation with these carriers for the rest of the year and maybe also into 2020. This is our home market. We believe long term that we sit on one of the most important markets in whole Europe and we are clearly going to make sure that we fight them off. So we will have to calculate that also going forward, there is going to be price pressure, which means that we just have to continue with our CASK cost reductions to compensate some of that price pressure.

In terms of uncertainty in the market, yes. Indeed, we will live with it for some time now with uncertainty in the market and it comes back here to looking at already in this winter schedule, as we indicated, we are going to see very low growth, or in some parts of the business, actually negative growth. In Eurowings, they will be shrinking in the winter season 2019/'20. So it's all about very, very disciplined capacity and to continue on the CASK reduction. Those are the most important factors to mitigate the market.

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [20]

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But just to follow up on that question. Are your commercial teams, I guess, more engaged now than they would have been over the last 12 or 24 months to try to properly figure out what corporate intentions are? Or can you give us some flavor in terms of, I guess, how you're trying to best keep your finger on the corporate pulse with a view to understanding premium revenue prospects?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [21]

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Well, clearly, they are very engaged with our most important customers, and as we are seeing today, it's a very mixed picture. Some of the more traditional manufacturing industries are seeing less traveling while consultants and so on seeing more traveling. So it's not one homogeneous picture. It's also depending on where you are in terms of geography, where we see strong demand in some areas and less so in other areas. So it's a mixed picture. But clearly, the sales department of Harry is working very close to our customers, and by our direct distribution initiatives, we get even closer to them.

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Operator [22]

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The next question is from the line of James Hollins of Exane BNP Paribas.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [23]

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Just 2 for me. First on the Eurowings capacity, it looks like H2 will be down 5%. Can you just say -- split that out between Q3, Q4 and also hopefully indicate where you'd probably be for full year '20. I know obviously that's a little way out, but just to get an indication what we should be modeling for Eurowings.

And then, secondly, I guess, sticking with them, you've highlighted 3 key weak areas, Düsseldorf, Stuttgart and Berlin. Outside of those airports, are you seeing any signs that the price war and the issues you've got within Eurowings and in the short-haul Lufthansa is getting any better from either competitive capacity or pricing standpoint?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [24]

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Yes. In terms of the price competitive situation in Germany, so we highlighted there the toughest ones, which you mentioned when it comes to the other hubs and the other airports. It is still a price pressure. We have seen some retreating of low-cost in Munich and Frankfurt, but it's too early to speak about that prices are going up. So in general, in Germany, there is price pressure even if we highlighted the toughest ones.

In terms of capacity, Eurowings, yes, there will be more decline in Q4 than there is in Q3, and of course, also partly due to we're shifting the long-haul business over to Network Airlines. It's too early to speak about how will the growth or the nongrowth look in 2020, but as I indicated earlier to one of the questions, it is going to be a very conservative capacity situation going forward.

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Operator [25]

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The next question is from the line of Malte Schulz with Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [26]

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2 Wo questions also from my side. First of all, also on Eurowings. I mean, on the Capital Markets Day, you also suggested that there will be some routes and base closing potentially. Is there a certain time frame you give to some bases and routes before you start cutting outside your 4 target areas, Düsseldorf, Stuttgart, Cologne and Hamburg? Or is it still something you would rather decide 2020, 2021 or is it something we would expect also this winter?

And then also I mean if you say just on the important -- I mean how much of your premium revenue do you currently generate in Germany and Austria? And particularly, if you see the ones that are improving, can you say how much you generate maybe even in North America, probably the most improving region?

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [27]

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Yes. Thanks. So when it comes to routes and bases, the different closures and cancellations will be much earlier than 2021, Ulrik, you were referring to. But obviously, this is something we cannot think about in advance of actually -- the actual decisions happening. But that will be happening more into the near future than in the distant future.

In terms of premium revenue, basically we are seeing that premium revenue is stronger out of the U.S, out of a number of intercontinental countries while premium revenue in our home markets are less strong. But overall, if you add it all together, the premium revenue or the premium cabins are having basically a flat development.

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Operator [28]

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The next question is from the line of Johannes Braun with MainFirst Bank.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [29]

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Just 2 left from my side. Firstly, any guidance on free cash flow for the full year? I think H1 delivered EUR 270 million and I think H2 is normally significantly negative on the working capital swing. So is it fair to assume free cash flow this year to be negative by some, I guess, EUR 500 million?

And then any update on the LSG sale? I think there were some press reports recently of this being slowed down.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [30]

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No. We gave an indication when we met at the Capital Market Day about LSG sale, it's making good progress. We see good interest and we pick most know about the European market and European business. We are expecting to sign LSG Europe in 2019. So clearly, those press reports are wrong.

In terms of guidance of free cash flow, as you recall, we have never given any free cash flow guidance, but with the present EBIT guidance, it will be in the lower range of that. There is a decline to a negative number in the free cash flow.

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Operator [31]

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(Operator Instructions) The next question is from the line of Andrew Lobbenberg with HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [32]

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I think in your introductory remarks, you commented that China was showing new signs of weakness at the end of Q2. Could you just elaborate on that and discuss whether how that goes into Q3?

And then just returning to the question I think of Daniel's about the first obstacles about potential corporate restructurings, which I sensed you pooh-pooh-ed rather saying that you're happy with your matrix organization.

And just curious because clearly you are reorganizing how you position Brussels, and if we do that, the differences of strategic positioning of Austrian relative to SWISS and Lufthansa certainly become apparent. I mean if it's -- I mean obviously you're trying to downplay the fact that you're moving to an IAG structure, but is there not cause for a good view of the corporate organization?

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [33]

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Yes. Starting with the China weakness towards the end of the Q2, what we saw there at the very end of the period is strong local competitive situation in China and higher capacity growth in connection with that. Whether that is going to be feed-ed into the second half of the year is, indeed, too early to say. But clearly, there is -- with the trade wars going on with China, there is certain uncertainty hanging over the market. There is no doubt about that.

In terms of the press reports referring to the holding company concept or not, I think that has very little to do whether we are moving over Brussels Airlines to the Network Airlines or not. Clearly, that is a benefit, which we will take from the 1st of January 2020 when the Brussels Airlines will move over.

The actual matrix, which, I guess, is what has been at the heart of the matter here is something where we, with our very close hub switch, either with the 4 hubs distant-wise very close to each other, I think there the matrix is indeed playing a very important and positive role. Now whether you have such a matrix with a holding structure or not with a holding structure is actually a legal question, which has very little to do with each other.

So we will continue with our matrix. But of course, as in all companies, we are working very much on the lean concept, which means that every morning, we wake up and see are there things we can improve on the margin. But the basic of the matrix is here to stay.

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Operator [34]

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Ladies and gentlemen, there are no further questions at this time. I would like to hand back to Ulrik Svensson for any closing comments.

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Ulrik Svensson, Deutsche Lufthansa AG - CFO & Member of Executive Board [35]

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Well, thank you very much, everybody, for your questions and interest. I look forward to meet and speak to you in the next couple of weeks and the latest in connection with our Q3 results. Thank you, and have a good day.

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Operator [36]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.