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Edited Transcript of LHA.DE earnings conference call or presentation 3-Jun-20 11:00am GMT

Q1 2020 Deutsche Lufthansa AG Earnings Call

Frankfurt / Main Jul 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Deutsche Lufthansa AG earnings conference call or presentation Wednesday, June 3, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Bartels

Deutsche Lufthansa AG - Senior VP & Head of Lufthansa Group Communications

* Carsten Spohr

Deutsche Lufthansa AG - Chairman of the Executive Board & CEO

* Dennis Weber

Deutsche Lufthansa AG - Head of IR

* Thorsten Dirks

Deutsche Lufthansa AG - Member of the Executive Board & Chief Officer of IT, Digital & Innovation

* William Willms;Senior Vice President, Corporate Strategy and M&A

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Carolina Botacini das Dores

Morgan Stanley, Research Division - Equity Analyst

* Daniel Roeska

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

* James Edward Brazier Hollins

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Muneeba Kayani

BofA Merrill Lynch, Research Division - Director & Head of European Transport

* Neil Glynn

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

* Stephen Furlong

Davy, Research Division - Transport and Logistics Analyst

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Presentation

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [1]

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Yes. Thank you, Haley, and good afternoon, ladies and gentlemen. Thank you for your interest in today's call. Let me briefly outline the format of today's conference call, which we have set up as a joint call for analysts and investors.

Our CEO, Carsten Spohr; and Thorsten Dirks, Member of the Executive Board and responsible for digital and finance will present our first quarter results and give an update on how we are addressing the effects of the corona crisis.

I'd also like to introduce William Willms, our Senior Vice President, Corporate strategy and M&A, who will be around to answer questions on the stabilization package if needed later on. The presentation slides, which the 2 speakers will refer to are available in the Investor Relations section of our lufthansagroup.com website in case you haven't downloaded them already. The management presentation will be followed by 2 separate Q&A sessions: one for our analysts in English language and the second one for journalists in German language.

We kindly ask all participants to stick to this order. Thank you very much.

I'd now like to hand over to Thorsten Dirks, who will discuss our quarterly results. Thorsten?

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Thorsten Dirks, Deutsche Lufthansa AG - Member of the Executive Board & Chief Officer of IT, Digital & Innovation [2]

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Dennis, thank you, and good afternoon from Frankfurt. Welcome to our first quarter results conference call, which is special from various aspects.

First, Ulrik Svensson, who has been our CFO since 2017, cannot be here today. He has stepped down from his position for health reasons at the beginning of April. Ulrik, we miss you and hope that you are able to follow our presentation today. We wish you all the best and look forward for -- or to seeing you soon again.

Second, we would have normally published our quarterly results at the end of April. This was not possible because of the corona crisis, which became a substantial threat for our airline industry and ourselves in just a matter of weeks. It meant that Lufthansa would not have been able to survive on its own. The stabilization package, which we have just agreed with the Economic Stabilization Fund in Germany will secure the group's solvency. We are grateful for this support, which this great company and its almost 138,000 employees received. Carsten Spohr will present you the details on this package and its implication for our future.

But first, let me briefly summarize our first quarter results. The current crisis is unprecedented. We have started -- sorry, what started as a local limited disease has turned into a global pandemic, which brought the global airline industry to a standstill. We got into this situation through no fault of our own. We were one of the first industries affected by the crisis and will be among the last emerging from it. Our reaction to the crisis has been swift and focused. We were the first major airline cutting capacity significantly. We still contained the loss resulting from sudden drop in demand and the imposition of travel restrictions and travel bands around the world.

Nonetheless, we recorded an operating loss of EUR 1.2 billion in the first quarter. We even expect a significantly higher loss in the second quarter, given that we operated at a minimum level in April and May.

Let me briefly summarize performance in our different segments, starting with the Network Airlines. Here, capacity was down 19% in the quarter with far more significant declines towards the end of the period. RASK decreased 5.5% on a currency-adjusted basis, burdened by disproportionate declines in Asia, where the crisis hits first. Despite immediate cost reductions, resulting in a 9% decline of operating expenses in the quarter, CASK was up 11.1% on a currency-adjusted basis. In sum, adjusted EBIT amounted to negative EUR 891 million, some EUR 650 million below the prior year level, particularly affected by the sharp deterioration in the long-haul business towards the end of the quarter.

This wasn't a factor in the performance at Eurowings, given that its long-haul business for which Lufthansa German Airlines has taken over commercial responsibility, and Brussels Airlines are now, for the first time, reported as part of Network Airlines.

While adjusted EBIT at Eurowings continued to be negative, it did not deteriorate any further compared to the prior year. This highlights the progress that have been made in the turnaround program announced last summer. The optimization of the network, including the discontinuation of unprofitable routes, accounted for approximately 1/3 of the capacity decline in the quarter. RASK was up 7.4% on a currency-adjusted basis, supported by significantly lower customer compensation payments, which are now netted in the revenue line. However, this was offset by a 13.4% increase in CASK, meaning that adjusted EBIT remained almost stable, amounted to a negative EUR 175 million.

Let me turn to the Aviation Services starting with the logistics business around Lufthansa Cargo, where profits declined to negative EUR 22 million. This had to do with the weaker demand at the beginning of the year, in line with the trend of 2019 and the loss of belly capacity in the later stages of the quarter. The latter, however, led to substantial yield increase in the freighter business, which amount for roughly half of the Cargo revenues, a trend which has accelerated further in quarter end.

In the MRO segment, however, the sudden drop in global flight activities and the challenging situation, which many airline customers are in, let profits drop to just EUR 4 million in the quarter. Profits in the catering segment amounted to a negative EUR 55 million, equally affected by the standstill of global air travel. The results continued to include LSG's European operations, which we agreed to sell to Gategroup. The EU Commission approved the transaction at the beginning of April, subject to the condition that the buyer sells certain activities at different airports.

We expect the transaction to close once Gategroup has fulfilled these conditions. Finally, the results of the other businesses, which are -- which also includes the expenses of group functions declined to a negative EUR 75 million, because of losses at AirPlus and Lufthansa aviation train.

In sum, the group's adjusted EBIT amounted to negative EUR 1.2 billion. Adjustments, which describes the difference between adjusted EBIT and EBIT, and are based on a defined set of criteria, amounted to EUR 402 million. They are largely explained by 2 effects.

First, aircraft impairments that had a EUR 266 million impact related to the decision to permanently ground 49 aircraft. Retirements include 6 A380s, 5 Boeing 747-400, and 11 320s, all operated by Lufthansa German Airlines as well as 3 Boeing 767 and 13 -8 at Austrian. The remainder is aircraft leased by Brussels Airlines, which we don't fly anymore in the remaining lease time. Second, we impaired goodwill at LSG North America and at Eurowings, amounting to a total of EUR 157 million to account for the long and only gradual industry recovery we are expecting. Finally, the corona driven capacity decline has led to an over hedging of fuel costs. The result of ineffective hedges are booked in the other financial items of the financial results.

Assuming an only gradual resumption of flights activity starting this summer and an average oil price in the low 30s in the remainder of the year, we booked a EUR 950 million charge, of which EUR 60 million related to negative option values realized already in the first quarter.

Now on the cash flow statement and the balance sheet. Investments declined by 38% to EUR 750 (sic) [770] million as we halted all non-business-critical investments over the course of the first quarter. Considering the postponement of new aircraft deliveries, which we are currently negotiating with aircraft manufacturers, this trend is set to continue in the quarters to come. Investments in the full year of 2020 are now forecasted to amount to around EUR 1.5 billion or even less, including engine overhauls and non-aircraft related expenditures. This represents a significant reduction compared to our original CapEx plan of more than EUR 3 billion.

In addition to lower investments, the increase of adjusted free cash flow to EUR 620 million was driven by strict working capital management, especially the significant reduction of receivables and the non-recurrence of prior year tax payments. As a result, net debt declined to EUR 6.4 billion. The pension provisions grew by 5% to EUR 7 billion, reflecting the negative performance of planned assets, which was only partly offset by the 0.3 percentage point increase of the discount rate.

Ladies and gentlemen, our cash flow performance in the first quarter highlights that the group has shifted into crisis mode already at a very early stage of the corona pandemic. Since then, financial management has focused on cash and the protection of liquidity. In March, we announced the target to reduce fixed cash costs in our airline business, which accounts for around 30% of total costs by 1/3. Two months later, today, reductions are in line with these targets we have set.

The implementation of short time work for up to 2/3 of group employees had been the largest driver in this regard and accounts for approximately half of total fixed cost savings despite the top up payments made by the company and guaranteeing employees between 85% and 90% of the their last net salary. In light of the dimensions of the current crisis, we strive to reconcile the top up payments and economic reality. The discussions, which we are having with the social partners and operating partners in this regard, I can tell you, are not easy, but progressing in a constructive way.

Other drivers of the reductions include further personal measures, such as the expansion of flight hours project postponements and cancellations as well as the shift of aircraft maintenance.

The drawdown of credit facilities, the issues of commercial papers and promissory notes for further bolstering our liquidity position over the course of the first quarter. Centrally, available liquidity amounted to EUR 4.25 billion at the end of March. However, it has become clear since then that raising new funds, is only possible at extremely unfavorable terms.

Some markets, such as the aircraft financing markets, are effectively closed altogether. In the absence of new financing opportunities, limiting our cash burn has become even more important. At the moment, our cash burn amounts to around EUR 800 million per month benefiting from considerable cost savings I mentioned earlier. We expect cash consumption to remain at similar levels in the months to come. However, potential working capital risk and upcoming refinancing needs to create a risk that liquidity reserves will be exhausted shortly.

First, new bookings will remain far below normal levels, despite the gradual restart, which just begun. At the same time, flight cancellations mean that customers can claim up to EUR 2.5 billion of refunds. Despite the success we are having in offering vouchers and rebookings, the remaining risks continue to be substantial. Second, we will have to repay around EUR 1 billion of financial liabilities due to the remainder of 2020; third, trade payables continue to amount to more than EUR 2 billion, last but not least, fourth; the crisis has hit many airline customers of Lufthansa Technik causing increased default risk going forward.

In light of these risks, it is evident that our measures to protect liquidity and the expected recovery of cash flows towards year-end will not be enough to secure the group's solvency. We are dependent on receiving financial support from the governments of our home markets. In this regard, the stabilization package we agreed with the Economic Stabilisation Fund in Germany has been a milestone. Our CEO, Carsten Spohr, will present you more details on the package. But before turning over to him, let me conclude my remarks with our financial outlook.

Carsten will outline our expectations of a gradual recovery at the airlines in the second half year shortly. So let me focus on Aviation Services. The Logistics segment is the bright part in our business at the moment. I alluded to significantly high yields in the Lufthansa Cargo freighter business earlier, supported by the current imbalance of supply and demand, following the large-scale grounding of passenger aircraft. This is why we are operating 4G passenger aircraft across the group for the transportation of freight.

As a result, we expect the adjusted EBIT margin in Logistics to be clearly positive this year following almost 0 profits in the prior year. For our MRO in catering businesses, however, the outlook is far less positive. Lufthansa Technik is hit hard by a significant deterioration of utilization starting in March, reflecting the sharp decline in global flight activity. The same is true for the catering segment. In both businesses, cost savings will only partly offset the profit impact from lower sales. In some we continue to expect the group's adjusted EBIT to decline significantly. Low visibility and high levels of uncertainty, however, make a detailed financial outlook impossible also at this stage.

Thank you very much. And Carsten, now over to you.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [3]

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Yes. Thank you, Thorsten. Thank you, Dennis. Ladies and gentlemen, good afternoon, and a warm welcome also from my side. Obviously, hope you're all doing well and healthy in these, let's say, interesting times.

After the developments of the past days and weeks, the quarterly results that we are reporting here today are probably moving somewhat into the background. As you know, in view of the far-reaching on long-term effects of the corona crisis on our core business, we have worked hard to secure our solvency. And since a few days, I might say with success. And today, we can state that important prerequisites for securing our financial stability have indeed been achieved.

We, therefore, have a solid base to continue with our successful strategy as the leading European airline group. We still call and will remain so the most stable in terms of economics, markets of Europe as our home markets. We obviously still run a proven multi-hub model with our premium network carriers at its core. We will carry on with complementing our hub business with leisure travel brands like Eurowings and Edelweiss in Switzerland, and it's still true that our service companies are contributing to the strategic value of the group.

And although the corona crisis may change our industry these days, there are values and beliefs that will endure beyond the crisis. And one principle that we at Lufthansa follow with deep conviction is, as you well know, balance. And only if we take the interest of our customers, our employees and our shareholders equally into account we will continue to be successful in the long term. And this conviction applies, in my personal view, beyond corona, and it remains and did remain our compass even in these very difficult phases we have been through.

The stabilization package agreed with the German government for us is a basis for a sustainable future. And at the same time, it's a huge debt package on our back to be paid back within only a few years, including its interest. And in that sense, the package becomes an accelerator for us to make this company Lufthansa more cost efficient, leaner and faster and more cash flow oriented. And I want to be honest, it has been tough to accept that the Lufthansa group will not be able to overcome this crisis on its own. Despite our solid financial position before the crisis, and the tremendous reaction of the crisis teams in all parts of the organization since the global spread of the virus.

We were fast to give you 2 examples in cutting our capacity in order to not operate loss-making flights. We grounded the vast majority of our fleet within just weeks. And we reduced 1/3 of our fixed costs and postponed around half of our investments planned for the year 2020.

We have done our up nose to mitigate the effects of a crisis that hit us without any fault of our own. And let me, therefore, express my gratitude to the states, the government of Germany, Switzerland, Austria and Belgium. They -- let no doubt on the economic value and the importance of their home carriers. A lot of work has been done in several governmental departments and administrations of these countries, there's still a lot of work ahead of us. So a sincere thank you to all the people within the governments and, of course, our companies who have contributed on the financial stabilization of the Lufthansa group in the last weeks.

The stabilization package negotiated with the Economic Stabilisation Fund in Germany. In short, WSF totaled EUR 9 billion and includes different modules of equity, equity-like participations and a loan. Negotiations have been long and intense. However, the package is the best possible result for our shareholders, for our employees and for our customers.

The package and only with this package, we will ensure the growing concern and viability of the group for the times of the crisis. It preserves Lufthansa's integrity as an integrated airline group. It includes precise agreements, which ensure that the state will be able to exit once we have paid back the Silent Participation. And it secures the necessary strategic and operational flexibility of the Lufthansa group, ensuring that this company is sufficiently competitive and financially strong to tackle the challenges ahead.

And we are therefore confident that the measures will receive the necessary majority at the extraordinary general meeting, which we'll be holding one the 25th of June. Maybe allow me to add a personal comment here. Surely, before corona, the 20% government stake was nowhere in our plans. But still with -- now looking at this stake to be a reality soon, we are still having a smaller government share than all 3 of our major competitors, which, as you know, are Air France-KLM, IAG and Turkish Airlines. So in a way, the level field is there again. The stabilization package secures our solvency.

At the same time, it increases the need to restructure our business. Yes, it gives us the necessary time to get through this. But it's no alternative for deep restructuring as one or the other might think over. This view was also shared by the Supervisory Board when they approved the stabilization package just this Monday. We need to repay the additional debt as well as the Silent Participation as soon as possible as interest rates and coupons will raise over time. EUR 8.7 billion in total plus interest. In total, we will carry an annual additional burden of more than EUR 1 billion when summing up interest and coupon repayments as well as redemptions. It becomes obvious that in light of this additional burden, we must not limit our thinking. We return every stone in the company, never waste a good crisis, with a relentless focus on the generation of cash flow to repay the stabilization package as quickly as possible.

With this in mind, we are focusing mainly on 3 areas: first, we will raise funds by financial restructuring measures as well as changes in our corporate structure. In other words, we will have to look into active portfolio management. This could mean the selective divestiture of non-core businesses and assets once markets have picked up. We will start with the sale of international part of our catering unit, LSG, which, as you know, has been put on hold for the moment. Second, and probably most importantly, we will have to go through a significant operational restructuring. We must adjust the group size and structure to a new normal that means an environment in which demand will remain depressed for years, especially in our key segment, corporate travel.

Compared to pre-crisis levels, we expect our fleet to be around 300 aircraft smaller in the year of '21, around 200 aircraft smaller in '22 and to be still around 100 aircraft smaller in '23 and beyond. However, we target capacity to reach pre-crisis levels with 100 aircraft less. This, obviously, can only be achieved with the higher productivity of our fleet, which is key in reducing unit cost. We won't be able to overcome this challenge by the usual means of small-sized productivity improvements and just incremental savings.

Soon, we will meet again with our unions to talk about ideas how we jointly reach substantial progress in productivity and cost savings even before we approach the AGM at the end of the month. And let me be clear, we want to await layoffs as much as we can to adjust the size of the organization to a business, which has become much smaller. But however, this can only work out with smart and creative solutions to be found and agreed with our labor unions very soon.

And thirdly, we require and expect contributions from all stakeholders. This is not a Lufthansa crisis but an industry and global economic crisis. We need a new cooperative approach with airports, air navigation service providers, OEMs and other suppliers with a goal of achieving significant cost savings.

Let me give you a brief overview of our plans to ramp up the passenger flights again before I come to a close. The impact of this crisis on the global economy and in particular, on the aviation industry, will undoubtedly stay for a long time. However, the worst in terms of traffic decline with almost a complete grounding of our fleet is at least now behind us. Now we are starting to rebuild our network again. We do literally route by route as the world is opening up only step by step.

Countries have begun to relax entry restrictions or have begun to relax travel bans, as just Germany did a few hours ago. People in Europe and other parts of the world finally do make plans for summer holidays and consider visiting friends and relatives again. Demand, of course, continues to be far below pre-crisis levels, and current bookings are coming in either on an extremely short-term or a rather long-term basis. We can see a stable and continuous improvement though, but is still on a rather small scale.

When it comes to our fleet and network strategy during the restart phase, we follow clear principles. Our aim is to serve many destinations using smaller aircraft and operate lower frequency patterns initially. We primarily focus on expanding the width of our network at the same time minimizing our commercial risk. Once the network is sufficiently wide, we will concentrate on serving high demand markets by reintroducing additional frequencies. In June, Lufthansa SWISS and Eurowings are back in the market by offering over 2,000 weekly flights to more than 130 destinations, at least to consider it worldwide. This represents a significant expansion compared to the minimum flight plan of the recent weeks. Austrian Airlines and Brussels Airlines will resume operations in around 2 weeks from now. In autumn and winter, we expect to operate at levels of around 40% of our regular capacity in the fourth quarter. But we will be able to serve 70% of our planned intercontinental destinations, and 90% of our continental destinations by the month of September. This is, of course, all assumption based. We will adjust our flight schedule along actual demands in iterations and the flexibility of our fleet and our multi hub systems are obviously allowing us to show great response here to market demands.

Ladies and gentlemen, in every crisis, there's also an opportunity. And as the group's management teams, we are doing our utmost to make Lufthansa emerging faster, leaner and even more competitive from this crisis and therefore, ready to even foster our leading position in Europe. And with that, we're now looking forward to your questions. Thank you.

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [4]

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Operator, you call the first question, please.

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Questions and Answers

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Operator [1]

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First question comes from the line of Daniel Roeska with Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [2]

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First of all, I hope everybody is healthy and well. 3 questions, if I may. Retaining the EUR 9 billion within 3 years, it's quite a steep order. Could you quantify in broad terms how -- kind of which proportion of that do you expect to achieve from kind of the structural restructuring and the improvement, kind of improving operating cash flows. Secondly, the sale of assets, be it subsidies or aircraft or leasebacks; and possibly thirdly, kind of unsecured funding, either on the debt or additional equity measures. And kind of when that would lead you back to previous net debt EBITDA levels kind of roughly.

Secondly, maybe a bit more on the restructuring and the cash flow potential for that, please. Your fleet plan for '21 is down roughly 40%. And is that an indication for your ambition in the operational restructuring? It seems you're not getting back to previous levels until '23. So there must kind of be a discussion on how to resize the organization and kind of what are the targets you're walking into the union negotiations with? And then lastly, because there reportedly are some more restrictions on the bailout package. Could you comment on what the restrictions are or concessions related to the bailout, both with the WSF and the EU Commission?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [3]

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Thanks, Roeska. On your first question, it's obviously too early. We have this ambitious payback plan. And as you well know from the details, there is flexibility. We need it. But which share will be done in the various elements you mentioned, I think it's too early to say. And of course, it will be optimized along the way. Important thing is that we have all 3 modules available to us. Just think about our uncumbered assets in the fleet of EUR 10 billion. Think of the various entities we own, other airline groups don't. So I think there's lots of room to optimize along the way.

When it comes to enter the unions' negotiations, for me, there's 3 beliefs. One is we have to share our work the obviously, as you quoted, less work among the smaller fleet to be operated among more people by everybody working less, and of course, making less money, which is what I call innovative part-time models. If these can be achieved -- the more these can be achieved, the more people we can keep on board. The less we can achieve this, the more people have to leave. Second, I think we'll need to do that fast. We want to show some first results before the AGM or the additional general meeting end of the month. And thirdly, we will not give any concessions in terms that one group is optimizing itself on behalf of another group in the company, be it abroad or domestically.

And there was a third question, Dennis?

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [4]

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Restriction bailout.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [5]

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Okay, the restrictions on the bailout are the ones which are part of the European temporary framework or the German so-called Wirtschaftsstablisierungsfonds, which means there is no dividends. While you have not paid back 75%, there is no bonus payments to the staff and the management. While we are enjoying the stabilization elements and there is a ban on acquisitions of more than 10% unless we have paid back 75% of the money.

Then there is typical things like we need to continue to improve our CO2 footprint, which we were doing anyway. And as you well know, there's basically no execution of the voting rights of the fund in our AGM. Also, there is 2 additional seats -- 2 seats on the Supervisory Board where we can make proposals for, and the government has the right to refuse our proposals.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [6]

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Just a follow-up there. In -- kind of along the discussions of the past couple of weeks, there's sometimes surface to comment around being a good customer to Airbus. Similarly what was kind of discussed at the Air France table. Did any of that wind up in the final agreement?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [7]

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No, we are a good customer of Airbus. We're a good customer of Boeing, we're a good customer of Embraer. OEMs love us because we buy every airplane. And that was an insider joke. You know that we have decades of relationships to the OEM and we will continue, hopefully, to have decades of relationship. There was a moment where there were some ideas, but we have been able to negotiate those way that now is determined there that there will be a maximum of 80 aircraft entering the fleet. And these aircraft obviously need to improve the environmental footprint. But there is no mentioning from which OEM they have to come from. We have orders, as you know, with Boeing and with Airbus.

And these relationships with Airbus and Boeing are close, so I don't see all the comments you read in the papers.

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Operator [8]

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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 [9]

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If I could also ask 3, please? The first one, Carsten, you mentioned a new cooperative approach with the value chain, which is certainly something we've been thoughtful about. I guess you expect airport and ATC tariffs to be reset, but interested if that is the case, but also how do you think about employment and the scope for perhaps some of your employees to even find employment at other state controlled value chain players? Tied to that, can you frame at this point, early as it is, how do you think about the role that you hope to play relative to the decentralized traffic in Germany? I guess, ordinarily, one might expect Eurowings as a lower cost platform, to play a bigger role at Frankfurt and Munich. So interested to understand whether you think it's fit to do that and whether the hubs gain in importance as part of this restructuring plan?

And then the third question, I think what Thorsten talked about the corporate traffic relevance and about 50% of your passenger revenues per last year's Capital Markets Day, obviously, there are major questions about what proportion of corporate demand may well be permanently lost. And again, I know it's early, but would love to understand how you go about assessing that with some of your key corporates, if you can.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [10]

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Yes. Thanks, Neil. In the value chain, obviously, you know our view, which we probably share with every European airline that there is in the value chain, not enough profit for airlines, but too much profit for others. I think the most of -- many of these in the value chain are government-owned to a high degree. So I would expect that governments will try to enhance several in their various airports and areas. So I think there will be some support looking forward to.

When it comes to the shrinking volume of those, obviously, that answers your second question, is there going to be additional jobs for people who have to be laid off from Lufthansa? Probably very limited because we think we're looking at a shrinking aviation industry in total. And in Germany, in particular, the unemployment, as you well know, is very low. So I think even with the recession we're heading for, might be easier to find a job here than in some other parts of the world. But overall, I think we'll be looking at shrinking business in many, many parts of the economy.

Hubs with the Eurowings, as you know, our policy hasn't changed. We have a multi-brand approach, by the production platform approach. We always use the best platform for the market. We have been operating 330s out of Frankfurt and Munich before corona hit us. We're probably looking at expanding those to few more aircraft. We're looking at short-range aircraft already operating in Munich. We might see them in Frankfurt as well, whatever come to market, including competitors' behavior allow us to do in a profitable way.

Corporate travel, indeed, I think we are looking at companies in cost saving mode. We're looking at a smaller economic environment around the world, most likely. But as you also know, we have been shifting from corporate towards leisure travel for some years now. Look at the configuration of our aircraft, smaller business classes, sometimes first-class being taken out to optimize profitability. So I think we're well set for that trend and probably will continue.

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Operator [11]

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The next question is from the line of Stephen Furlong with Davy.

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [12]

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Everyone. Just 3 quick ones. Carsten, I was just interested, looking longer term, I assume, as the annual report states that you'd like to safeguard the current investment-grade rating for the long term. So I assume that the long-term goal would still be to be back at some stage this decade or in the middle of the decade at investment grade?

The second thing I noticed just might comment again about in [2010] just looking down a couple of years down the road, you say you'd be 100 aircraft smaller in 2023. So I mean, do you think Eurowings, it's too big for purpose. This was always maybe a question post the Air Berlin acquisition. I know it serves a role, but is it too big?

And then just a final thing, maybe just comment about the EU's comment on or about the slot pair give away of the 24 slots at Munich and Frankfurt, how do you feel about that?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [13]

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Stephen, when it comes to having investment-grade rating, I think we have been enjoying investment-grade rating for many, many years, and we're looking to get it back as soon as possible. I cannot give you a year or time frame on that. And we all know this industry is looking at -- to uncertainty, and we're just positioning ourselves in the very, very best way. And maybe I didn't mention it often enough in my opening remarks, flexibility is going to be key in many ways. And whenever it allows us to get back to the investment grade rating, we will be happy to do so.

The 100 aircraft we are roughly estimating to be smaller. Then you referred to Eurowings. Eurowings already is now looking at the target fleet between only 90 and 100 aircraft. And we came from a much higher number before the crisis, as you know, after the Air Berlin acquisition. So probably if you take that as a starting point, Eurowings shrinks to the highest degree. But of course, we have to take the Brussel Airlines change of strategy in there.

So in the end, it's about profitable growth, and we will rightsize our business according to their profitability. When it comes to Frankfurt, the ruling 4 aircraft slots equivalence in Frankfurt, 4 in Munich. They can go to new competitors initially only. And of course, we will behave as you behave when the new competitor starts to compete with you. And competitors have made experience with competing with us, and maybe new ones will make an experience to compete with us. And they have to be based in Frankfurt. So it's not only slot optimization of those who already operate here, it's only equivalent for aircraft which are based in those 2 airports. Does that answer your question?

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Stephen Furlong, Davy, Research Division - Transport and Logistics Analyst [14]

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Yes. Understood.

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Operator [15]

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Next question is from the line of James Hollins with Exane BNP.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [16]

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A few for me, please. First of all, in the aircraft financing market, you said it's basically dead. Is that opening up? And with regard to your comments about selling assets, are we categorically moving away from a virtually fully owned fleet? And what might you expect the owned versus the leased fleet percentage to be by 2023?

Secondly, following up from Neil's question, would you be pushing very aggressively for tariffs to come down in Frankfurt in 2021? Obviously, there's the annual negotiation. And then finally, on cash burn, would you expect cash burn to be actually higher in Q3 than it is currently given you're operating, I think, 40% of your capacity. And obviously, with all the (inaudible) come back around that.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [17]

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When it comes to the aircraft financing market, who knows. Right now, obviously, it's a bad time to finance aircraft, which is the reason why we have not done it significantly over the last weeks. Would have been another way to raise capital, but we just don't believe that the terms are right. So we definitely will be moving away from almost 100% ownership in the next year. So I think every aircraft will be accepting over the last 3 years will basically either be leased or be going into sale and leaseback within a day once we receive it because, obviously, the cash flow is needed for other means now, including the payback.

Then the market will drive our exact number of aircraft to be sold and be leased back. So any of you interested in aircraft deals, call me, I have about 700 available for you of every size. And depending on how many of you call me, we will make sure that there is enough aircraft to be sold and leased back if the terms are right. We are now in a comfortable position that we don't have to do this as fire sales, which is why the EUR 9 billion is a number, which gives us room to optimize our business, including room to optimize our finance structure. And the free cash burn definitely has reached its peak in April, when I made our statements about the EUR 1 million per hour, which surely was understood by every staff member in Lufthansa, which was the intention in every journalist in Germany as well. But we're reducing it now. Also, by the way, there is a quite high element of fuel hedging in there, which is going down on month by month, but also with our cost-saving costs, where we're optimizing our short time patterns, our staff, and many other means. And we're increasing our number of aircraft operating. We only operate with a cash positive flight.

So all these combined, you will see that the cash burn rate significantly comes down.

The airport fees in Frankfurt are always too high, they will always be too high, they were always too high. Let me start with that one. But indeed, I think also airports are looking for a more depressed market. And they're more competing with each other. At least the hub airports will be competing more for transfer traffic because there will be resources, not only in the 5 Lufthansa hubs, but also in Paris, London, Amsterdam. So I would think if we all believe in markets, markets will also work on airport fees, yes.

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James Edward Brazier Hollins, Exane BNP Paribas, Research Division - Senior Transport Analyst [18]

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And can I just follow-up on the fleet? I think -- just clarifying something you said earlier, I think you've got just shy of 200 aircraft for delivery. And I think you said you're taking a maximum of 80. Can you just let me know on what I should be thinking?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [19]

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Yes. The number of 80 is right. We'll be receiving even less than 80 aircraft over the next years until the end of '23. So we are significantly pushing back aircraft with Boeing and Airbus.

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Operator [20]

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The next question is from the line of Muneeba Kayani with BofA.

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Muneeba Kayani, BofA Merrill Lynch, Research Division - Director & Head of European Transport [21]

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Two questions, please. First, on your fuel hedging strategy, given the experience this year and the fewer hedging losses, would you consider changing your strategy going forward? And then secondly, on the seniority of the Silent Participation, is a junior pari passu today existing debt and especially the hybrid? And do you intend to call the hybrid next year? So if you could just help us understand the priority of payments on the Silent Participation over the other debt?

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Thorsten Dirks, Deutsche Lufthansa AG - Member of the Executive Board & Chief Officer of IT, Digital & Innovation [22]

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I'll start on the fuel hedging strategy. The strategy prevailing at the European airline industry are indeed not effective in the crisis, such as the one at the moment. But obviously, who could have expected this. So we indeed consider adjusting our long-term hedging strategy to increase our downside risk. But to be honest, we haven't made a decision yet.

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William Willms;Senior Vice President, Corporate Strategy and M&A, [23]

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Then this is William. To your second question, the Silent Participation I is, as you rightly mentioned, the hybrid instrument. It is senior to equity. But it is, therefore, junior to the KfW loan. Now on the hybrid, the second Silent Participation, that one, again, is senior to the Silent Participation I. As it is a debt instrument and structured as a debt instrument.

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Operator [24]

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The next question is from the line of Jarrod Castle with UBS.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [25]

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Three as well, please. You gave a CapEx number for this year of EUR 1.5 billion or less, and you obviously answered the question around pushing back fleet delivery. So just in terms of magnitude, any color how we should think about '21 and '22? Secondly, just coming back to the slots that you have to give up. Were the exact slots specified? Or do you have any control over which lots you actually give up? And then just looking again into '21, I mean, should we be thinking of capacity being 50% or less, just given that 300 planes aren't coming back, et cetera?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [26]

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Yes. Good afternoon. The CapEx numbers, I will hand over to Thorsten in a minute because we've only rough, of course, estimates on those. On slots, let me go to that. The ruling which we have agreed on as a compromise is that our competitors first need to apply for regular slot distribution methods through the slot coordinators. If they cannot obtain a slot there, they can ask for a slot according to their wishes. And we have to fulfill that requirement for a long-range spot within 60 minutes each way, for a short-range slot, within 20 minutes each way. And these lots have to be operated on top of slots, which they already operate in case it's somebody who already has an operation. So this is our, whatever you ought to call it, impact or input on the slot selection process or the other way around the requirement for the other party.

And the last question was on aircraft. The 300 aircraft on the ground next year, you cover, but you want this in ASKs? Is that how I understood your question?

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [27]

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Yes. Just wondering how much capacity you think will fly next year.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [28]

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Well, it's difficult to say because it would depend on U.S. opening up, when is it opening up. I would see us going maybe to 16, maybe 2/3 probably next year in the peak, of course, what we're talking -- so we'll talk about September, maybe or June. The U.S., of course, is huge, as you well know, not quite as huge as for IAG, but almost half of our wide-bodies operate on the North Atlantic alone between the U.S., Canada and Europe. So a lot will depend on that. If they continue to burn their cities, it might be less.

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Thorsten Dirks, Deutsche Lufthansa AG - Member of the Executive Board & Chief Officer of IT, Digital & Innovation [29]

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Okay, Carsten, thanks. On the Capex, as I said, this year, we planned EUR 1.5 billion in total, of which we, as I told you also, have already consumed EUR 770 million in Q1, so a little bit more than half of it. So from April to December, another EUR 750 million, approximately. For the next year, you should expect less than for the full year 2020 and then gradually growing to the numbers you have seen before the crisis until 2024.

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Operator [30]

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The next question is from the line of Carolina Dores with Morgan Stanley.

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Carolina Botacini das Dores, Morgan Stanley, Research Division - Equity Analyst [31]

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First question is on the sale of non-core. You used to talk about potentially being open to a minority stake disposal of the MRO business. Has this changed? And it could consider selling the entire business and will be classified as the far as non-core? My second question is, if you could give us a bit more color on the 15% of total capacity that is back online, what kind of load factors are you seeing?

And so as you go through the year and some of the airlines have been saying that they are going to stimulate demand through price is your -- what is your strategy? Just to retrieve and focus on profitable routes? So you going to -- wanted to compete for share in your home market?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [32]

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Carolina, yes, we never compete for market share. We always compete for money and profitability, and in times like this, even more then. So market share is not decisive KPI in Lufthansa. It's one which we enjoy where we have it, but we don't steer the company by it. Same is true for load factor. We finished by revenue in Lufthansa, revenue per flight RASK. So obviously, with no booking patterns being available, our yield management is in a very difficult situation, like everybody we see short-term bookings for the next 3 to 7 days, then we have a gap of a few weeks, then we have long-term bookings for the fall when things are supposed to be back to more normal patterns.

So I cannot give you any load factors at this point. We have increased the capacity on a few routes already because the load factors have been too high to optimize the yield management. So we bring bigger aircraft into the system. We have anything between 90 seats and 500, so we play with that optimization too. MRO, Lufthansa Technik, as you know, it's part of our core. This is close to our heart. So we will not give that up easily at all. We have been talking about a partial IPO before corona. Is there any partnering ideas for part of the business, as you well know, there's different divisions in the business. In engines, we already basically have 100% partnering, in others, we have 100% on our own. So there is no yes or no answer on this one. But again, the market at this point of time is the wrong one to do any divestment and it's good to have that value within the company. And the options, which we mentioned before corona might be the options we have after corona.

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [33]

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Operator, we are ready for the next question.

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Operator [34]

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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 [35]

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A few questions, I would like -- first of all, did I understand it correctly that you wanted to achieve the 29 capacity with 100 aircraft less or did I misunderstand that? The second question, in terms of your labor contract, I mean you have quite expensive, particularly with Lufthansa in the mainland, quite expensive union contracts. Did you see there any progress or any likely progress that you can get to better competitive contracts, particularly also keeping in mind that a lot of your key competitors can renegotiate their contracts or have a little bit laxer labor laws, which allows them to make more pressure on the unions. I think that's -- yes that was it.

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [36]

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Indeed, our estimate is that in '23, which we consider the first year of the new normal, we'll be able to operate roughly the same capacity as in 2019 with more or less 100 aircraft less. Why? Because we'll be selling some smaller aircraft or not necessarily smaller aircraft, but some less dense configurated aircraft. We'll be receiving aircraft with higher seats per aircraft numbers, 777, 350s, replacing aircraft with less seats, 320s in a higher density configuration, replacing old 320s with less fleet. So all that plus higher productivity, plus probably a little higher share of Eurowings, which tend to have a higher productivity, will give us more or less the same capacity with only with 12% as aircraft in numbers.

In union negotiations, obviously, unions understand, not only in Germany, also in Austria, in Brussels, in Italy that the company is shrinking and the number of people to be laid off will depend on their flexibility, be it on part time, be it on labor cost per se. So we are in the middle of that negotiation, but it's obvious when you shrink a company usually, the unions are able to compromise with you, which are much less when you grow a company, at least in our environment. So I would answer your question with a clear yes.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [37]

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Okay. Can you maybe also stretch why you needed EUR 9 billion and couldn't have survived with the, like, let's say, EUR 5 billion package? Yes, given that you already had EUR 4 billion liquidity?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [38]

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Well, we are Germans. We are boring. We like -- we love safety. So we didn't want to go to the edge of what we need. We wanted to make -- we are among the top 3 airlines in terms of turnover in the world. And we think we were able to convince the German government that this is not about just survival, this is about maintaining a global leading position, which some German companies do, but some are also looking at risks. So I think the German government was highly interested to have one company among others, don't get me wrong, which is playing in the global top league and allow it to continue to play in the global top league. And this, I think the EUR 9 million (sic) [billion] will ensure. And if you look at similar-sized airlines in the U.S., American, Delta, United or our friends in Paris and Amsterdam, who are a little smaller, even received EUR 11 billion. The EUR 9 billion very much is in line with the size of the company. So it's not extraordinary number, but we believe it's enough to keep us in the top league.

And as I said, we now are 20% government owned, but it's still less than all 3 European competitors have as a government share. I think IAG has 25%, France-KLM has 26%, I think, and Turkish, I don't even know. So -- but again, it was not my plan to be government partly owned, but compared to our 3 biggest competitors, we still have a lower government share than the other 3 big ones we are fighting with.

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Operator [39]

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

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Johannes Braun, MainFirst Bank AG, Research Division - Director [40]

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Yes, 2 questions for me. Firstly, you earlier mentioned you expect airport fees to decline because you expect them to follow market logic. I guess the problem with that for you is that normally, airport fees do not follow market logic as airports are regulated. So quite to the contrary, if this can increase, if volumes are down, if regulation is followed strictly. So how do you think your airports will still lower the fees? And then secondly, I guess one for Thorsten. Free cash flow was quite positive in Q1. You mentioned lower Capex. But there was also some EUR 400 million positive impact in trade working cap, which is quite counterintuitive in the current situation. So why was that?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [41]

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Yes. Let me start with the first question and the second one will be answered by Thorsten. I would love to hear what you said about airport fees, and I could spend an hour with you on that one. But I do believe we'll see some impact. If you look at the 5 hubs within Lufthansa alone. Only the internal competition among those 5 hubs, which we have been, I think, able to optimize over the last years will increase because the passenger numbers are smaller. There's extra aircraft on the ground in every of our hubs, and my network people will now, of course, optimize that, including cost elements. So I think the optimization game of our multi hub system, which we believe is a serious (inaudible) because the 5 hubs are so close to each other that many flows the majority of traffic flows can be done by any of those 5 with some exceptions like Africa and so on.

I think that optimization is able for us to put pressure on airports we maybe have not seen before. And the other way around, we don't need all the airport capacity. If we don't get the right concessions, we might put the traffic flows via other hubs, where there's extra capacity available, including staff, including aircraft, including slots, you name it. So I think we'll see some of that definitely move in the right direction.

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Thorsten Dirks, Deutsche Lufthansa AG - Member of the Executive Board & Chief Officer of IT, Digital & Innovation [42]

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Okay. On the working capital that you already mentioned, it's -- on one side is the reduction of receivables, which we immediately introduced by starting negotiations with our suppliers, especially on payment terms. And second driver is the non-recurrence of the prior year's tax repayments -- or sorry, tax payments, not repayments, take payment.

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Operator [43]

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So 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 [44]

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The business is going to be smaller for some time. If you think about how hubs work, they are very powerful scale economics. And as businesses get smaller, you get fewer connections and they work a lot less well. So whilst I appreciate you want to be a multi hub system, why when there's such a reduction in capacity, is it a given? Or why is it logical that you continue to operate 5 hubs because every hub that gets smaller, gets less efficient from connectivity? Related to that, perhaps, can you update us with the status of the aid negotiations in Belgium and in Austria? And finally as a traditional third question. Can you tell us what the liquidity is today? And when does that EUR 9 billion come in? Does it all have to wait till the AGM or has some trickled in through the back door already?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [45]

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Yes, Andrew, you surely mentioned one side of the equation. Hubs get smaller when volumes get smaller. But don't forget, hub start to offer -- or serve, not offer, serve new O&Ds when overall point-to-point comes down. I know where people have seen O&Ds via our Frankfurt hub, they have not seen in years because suddenly, there's a demand for a Gothenburg Lisbon, which probably is served in good times, nonstop, I don't know, once a day. And now suddenly, everybody going from Gothenburg in Sweden and Lisbon in Portugal has to go via hub. And then the hub system kicks in. So I think your logic works one way, the larger the hub, the higher the scale -- sorry, scale advantages. But it works the other way around, the smaller traffic volumes, the more there are certain O&Ds not being served required to go via hub. So far, I would think we have seen the more positive side of this, at least in Frankfurt, over the last weeks, which, of course, are not normal weeks.

And of course, when we work on scale, to be honest, our largest aircraft is 380, which will be grounded partly forever and partly, at least for a couple of years, has not been the most efficient aircraft. So some of the scale effects you're referring to doesn't work anymore with modern aircraft. Today, we are opening up Munich, Los Angeles with the 350, which has been usually served by a 380. The unit costs are higher on the 380 and are now lower with 350 we're operating as of today. So some of that logic -- long-term logic has been reversed by aircraft technology, which, as we all know, is why 380s don't work anymore that well. The 5 hubs create internal competition. They give us a great market share in any of the 5 hubs. And of course, there are certain focus elements like, for example, Eastern Europe out of Vienna or Africa out of Brussels. But that hub system, we do believe, start kicking in at a certain size.

Don't get me wrong. Right now, we're only operating 3 hubs for that reason you are mentioning. And we only start to operate hub #4 and 5 in 2 weeks. And even that is mainly on an O&D basis initially before we really go into hub scales.

The AGM indeed is a day which would trigger the transfer of the money from the German government. I think the liquidity we gave you at our annual was around EUR 4 billion. You more or less know what we are losing in terms of cash flow per hour. At the same time, we have been able to do some refinancing. So the AGM, we're looking to, I think, with some optimism that will be early enough to service. And of course, when we talk about liquidity, we never talk about actual liquidity. We talk about the so-called legal liquidity, which means we have less funds due than money on the bank. Otherwise, we wouldn't have any problem at all with billions on the cash side.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [46]

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Can you just say what the status is of the talks with the Belgian and Austrian government?

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Carsten Spohr, Deutsche Lufthansa AG - Chairman of the Executive Board & CEO [47]

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Yes. I think I would say Austria, we're in the final part of negotiations. I actually just got my corona test been done this morning to be able to see the Chancellor tomorrow. So -- and that corona test hurts and you know. So I will not insist on lasting the deal within tomorrow after I went through that pain. And Brussels is an earlier stage. So we need a little bit more time there. The higher the money, the faster it goes, it seems like. So Brussels is a little bit more complicated and probably we don't see a solution this week there. Austria, I'm positive, we could see a solution this week.

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Dennis Weber, Deutsche Lufthansa AG - Head of IR [48]

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All right. Thank you very much. And this concludes the first part of our Q&A session. As I said at the beginning of the call, we'll have a -- an additional Q&A session now for the journalists who have also been on the call. And for the purpose of this Q&A session, we'll switch to German language, and I'll hand over to Andreas Bartels, who will take over hosting, the analysts and investors are also invited to stay on the call as you prefer. Andreas?

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Andreas Bartels, Deutsche Lufthansa AG - Senior VP & Head of Lufthansa Group Communications [49]

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