Valuation Of

Valuation of

and the Changing Market Environment Following the Insolvency of Airberlin

Program: MSc Applied Economics and Finance

Authors: Karen Patricia Steffe (Student number: 106981)

Maria Frederiksen (Student number: 57417)

Supervisor: Bo Danø

Date of submission: 15th of May, 2018

Master Thesis

Copenhagen Business School 2018

Number of pages: 114 Executive Summary This master thesis is a valuation of Lufthansa Group as of December 31st, 2017 in light of the changing market environment driven by the insolvency of airberlin Group.

Objective The airline industry is at constant change § The objective of this Some structural challenges increasingly define the business master thesis is to environment for Lufthansa with large implications on the corporate evaluate the share price of Lufthansa Group within agenda. Since the liberalization of the EU flight market, competition its current market position significantly increased. The entry of Low Cost Carriers as well as and to give an outlook on ongoing consolidation in the sector puts high pressure on ticket industry changes prices, while costs are driven by fuel expenses as well as following the insolvency employees’ salaries and wages. of airberlin. Insolvency of airberlin strengthens Lufthansa’s market position Lufthansa at a Glance Through the insolvency of airberlin, Lufthansa’s market share on § Founded in 1926, intra-German flights increased from 69% to 87%, making it the Lufthansa Group is based dominant player in this country. It also helped Lufthansa to report a in Germany and is record high net income in 2017 and made the share price increase currently the largest by almost 150% during that year. airline group in Europe § Lufthansa operates three "Nobody has yet endangered Lufthansa, but surely many have business segments: challenged us.” Carsten Spohr, CEO Lufthansa Group 1) Network Airlines Highlights 2) Point-to-Point Airlines 3) Aviation Services Lufthansa revenue, EUR million Share price development 2017 § As of December 31st, +4.2% p.a. 40 40000 37961 2017, Lufthansa had 38000 30 471,259,644 shares out- 36000 35091 30% 32228 33939 standing, trading at a 34000 20 32176 share price of EUR 30.72 32000 10 15% Aviation Market Europe 30000 28000 0 § In 2017, there were 146 2013 2014 2015 2016 2017 01 / 2017 12 / 2017 aviation companies active Conclusion in the European market § By employing both valuation methodologies and other analysts Market shares based on predictions, a suggested value range of EUR 18.49 – 39.50 is available passenger seats obtained

Others 16% DCF 36% 16%

9% 13% 10% Multiple

Problem Statement § What is a fair share price for Lufthansa as of Other December 31st, 2017 and Analysts how will the insolvency of airberlin change the

company’s position in the 17 21 25 29 33 37 41 EUR market? Contents 1 Introduction ...... 5 1.1 Background...... 5 1.2 Purpose and Problem Statement ...... 5 1.3 Structure of the Paper ...... 6 2 Methodology ...... 7 2.1 Research Design...... 7 2.2 Theory ...... 8 2.3 Data Collection ...... 8 2.4 Data Limitation and Criticism ...... 8 3 Strategic Analysis ...... 10 3.1 Company Introduction – Lufthansa Group...... 10 3.1.1 Lufthansa in Brief ...... 10 3.1.2 Lufthansa Group’s Business Segments and Products...... 11 3.1.3 Investors ...... 12 3.1.4 Corporate Governance ...... 13 3.1.5 Company Strategy ...... 14 3.1.6 Alliances and Partner Airlines ...... 16 3.2 External Factors – Market Assessment ...... 17 3.2.1 The Global Flight Market ...... 17 3.2.2 PESTLE Analysis ...... 21 3.2.3 Porter’s Five Forces ...... 26 3.3 Internal Factors – Competitive Position ...... 31 3.3.1 SWOT Analysis ...... 31 4 Selection of Peers ...... 37 5 The Analytical Financial Statements ...... 41 5.1 Accounting Quality...... 41 5.2 Classifications ...... 42 5.2.1 Income Taxes and Corporate Tax Rate ...... 42 5.2.2 Cash and Cash Equivalents ...... 42 5.2.3 Capitalized Operating Leases ...... 43 6 Financial Analysis ...... 45 6.1 Profitability Analysis ...... 45 6.1.1 Return on Equity ...... 46 6.1.2 Operating Analysis ...... 47 6.1.3 Trend and Common-Size Analysis of Income statement ...... 50 6.1.4 Profit Margin Conclusion ...... 56 6.1.5 Asset Turnover Analysis: Turnover Rate of Invested Capital ...... 56

2 6.1.6 Conclusion Asset Turnover ...... 60 6.2 Growth Analysis ...... 61 6.2.1 Sustainable Growth Rate ...... 61 6.2.2 Value of Growth ...... 63 6.3 Risk Analysis ...... 64 6.3.1 Liquidity Risk Analysis ...... 64 6.3.2 Fuel Price Risk ...... 69 6.3.3 Exchange Rate Risk ...... 70 6.3.4 Interest Rate Risk ...... 70 6.4 Financial Analysis Conclusion ...... 70 7 Cost of Capital ...... 72 7.1 Weighted Average Cost of Capital (WACC) Formula ...... 72 7.2 Weighted Average Cost of Capital for Lufthansa ...... 73 7.2.1 Capital Structure ...... 73 7.2.2 Required Rate of Return on Equity ...... 73 7.2.3 Risk-Free Interest Rate ...... 73 7.2.4 Systematic Risk on Equity (Beta) ...... 74 7.2.5 Market Risk Premium ...... 75 7.2.6 Corporate Income Tax Rate ...... 76 7.2.7 Required Rate of Return on Net Interest-Bearing Debt (NIBD) ...... 76 7.3 Conclusion on Lufthansa’s Weighted Average Cost of Capital ...... 78 8 Financial Modelling and Forecasting ...... 79 8.1 Revenue Forecast ...... 79 8.1.1 Traffic Revenue ...... 80 8.1.2 Other Revenue, Changes in Inventories, Other Operating Income, and Total Revenue 84 8.2 Forecast of Operating Expenses ...... 85 8.2.1 Cost of Materials and Services ...... 85 8.2.2 Staff Costs, Other Operating Expenses, Total Operating Expenses, and EBITDA ...... 87 8.3 Forecast of Depreciation and Amortization Costs and EBIT ...... 88 8.4 Tax Forecast and Net Operating Profit After Tax ...... 89 8.5 Forecast of Capital Expenditure ...... 89 8.6 Forecasts of Changes in Net Working Capital ...... 90 9 Valuation Methodologies ...... 92 9.1 Lufthansa Free Cash Flow and Discounted Cash-Flow Valuation ...... 92 9.2 Multiple Valuation ...... 93 9.3 Sensitivity Analysis ...... 98 10 Acquisition of airberlin ...... 99 10.1 Historical Events and Structure of the Deal ...... 99 10.1.1 Reasons for airberlin Insolvency ...... 99

3 10.1.2 Historical Events of airberlin’s Insolvency ...... 102 10.1.3 Acquisition of airberlin Assets ...... 103 10.2 Approval by the Regulator ...... 103 10.3 Changes in Industry and Competition...... 104 10.3.1 Literature Review ...... 105 10.3.2 Changes in Lufthansa’s Main Markets Following the Insolvency of airberlin ...... 105 10.4 Share Price Development ...... 109 11 Conclusion ...... 112 12 Bibliography ...... 115 13 List of Figures ...... 137 14 List of Tables ...... 139 15 Appendix ...... 142

4 1 Introduction

1.1 Background The airline industry worldwide is in constant change, with old players leaving the market and new entrants emerging every year. Especially since the liberalization of the EU flight market in 1987, competition significantly increased, with many Low Cost Carriers (LCCs) entering the market, putting pressure on ticket prices. Across the US and Europe, also airline consolidation continues to effect the competitive landscape for carriers.

“Greater commercial freedom for airlines is vital for the long-term health of the industry and for the global economy” (Smyth & Pearce, 2007, p. 3).

In light of this background, Lufthansa German Airline evolved to become Germany’s flag carrier (former government owned airlines) since its foundation in 1926. Together with its subsidiaries, it is nowadays not only the largest airline in Germany, but in 2017 also became the largest airline by passengers in Europe (O'Shea, 2018). While other European airlines like Alitalia and airberlin went bankrupt in 2017, Lufthansa Group reported record annual earnings for the third year in a row (Reuters, 2018) and its share price stood at an all-time high of EUR 31.12 on December 28th, 2017 (Yahoo Finance, 2018). What makes Lufthansa so strong compared to other airlines and is this share price a fair valuation of the company? Will the bankruptcy of airberlin further strengthen the company’s market position and what are the effects of a takeover of (parts of) airberlin?

1.2 Purpose and Problem Statement The purpose of this master thesis is therefore to evaluate Lufthansa Group within its current market situation and to give an outlook on industry changes following the acquisition of airberlin.

To determine the fair value and share price of Lufthansa Group, an independent strategic assessment will be conducted, including the identification of underlying strategic advantages and financial drivers of the airline market. The financial valuation of Lufthansa is based on different valuation methodologies. Lastly, the acquisition deal of airberlin will be examined from a regulatory position as well as a market view.

5 As a guidance for the analyses and design of this master thesis, the following problem statement has been articulated:

What is a fair share price for Lufthansa as of December 31st, 2017 and how will the insolvency of airberlin change the company’s position in the market?

1.3 Structure of the Paper In order to provide answers to the above stated research question, this thesis is prepared according to the following structure.

Initially, some background is given on Lufthansa Group, before starting the strategic analysis, which covers an assessment of the market and both the external and internal factors relevant for the valuation of Lufthansa. This includes a comprehensive analysis regarding Lufthansa’s competitive position.

Subsequently, in order to establish the foundation for the financial valuation of Lufthansa, a financial ratio analysis will be provided based on reclassified financial statements of Lufthansa and its peers.

This part is then followed by the financial valuation of Lufthansa, which is conducted via a discounted cash flow model and the multiple methodology, and further validated by a sensitivity analysis.

The last part focuses on Lufthansa’s acquisition of airberlin. After presenting some background information on the deal, the EU Commission’s concerns will be illustrated and an overview of market reactions will be given.

This master thesis will therefore provide a holistic view on Lufthansa’s fair share price and position in the market.

6 2 Methodology

2.1 Research Design The main contribution of the thesis is the valuation of Lufthansa Group in the context of a changing market situation.

The thesis will consist of two main parts, a strategic and financial valuation of Lufthansa Group as well as implications derived from the acquisition of (parts of) airberlin Group. The strategic subsection will focus on overall market developments as well as firm-specific characteristics and will give answers to the following questions:

Strategic sub-questions

- How did Lufthansa evolve historically and how does it influence its performance nowadays? - Which macroeconomic factors affect Lufthansa’s operating markets? - What are Lufthansa’s core competencies, its value proposition, and overall strategic position? - How is the competitive environment in Lufthansa’s core markets and how can the company exploit this situation?

Secondly, the financial valuation will use the DuPont model to analyze Lufthansa’s financial performance in the past and will then conduct a valuation of Lufthansa by applying a discounted cash flow model. This second part will therefore answer the questions presented below:

Financial sub-questions

- How did Lufthansa’s performance evolve over the past years and how does that compare to its main competitors? - What are the financial value drivers behind Lufthansa’s historical performance? - What is the expectation about Lufthansa’s future performance? - What is a theoretically fair price of Lufthansa shares as of December 31st, 2017?

7 The last part will then examine the takeover of airberlin assets and will give opinions on the following questions:

Airberlin sub-questions

- What are the reasons for the insolvency of airberlin and are those possible threats for Lufthansa’s business as well? - What are the regulator’s concerns regarding this deal? - How did the acquisition of (parts of) airberlin impact the market and Lufthansa’s market position? - What impact did the deal have on Lufthansa’s share price?

2.2 Theory Throughout the strategic and financial valuation, several theoretical models have been applied, including PESTEL and Porter’s Five Forces analyses, a SWOT analysis, the DuPont model, and a DCF and multiple valuation. The relevant theoretical elaboration and considerations of the various methodologies are included in the respective sections.

Additionally, this master thesis includes a perspective on the changes in industry following the airberlin transaction.

2.3 Data Collection Lufthansa is evaluated from an outside-in perspective, meaning that only publicly available information is used. Main sources include Lufthansa’s and its competitors’ annual reports, as well as market and industry reports. Furthermore, theoretical frameworks are used in accordance with books from Peters & Plenborg, Damodaran, Berk & DeMarzo, and others.

2.4 Data Limitation and Criticism The valuation of Lufthansa is conducted as of December 31st, 2017. Their annual report 2017 was released on March 15th, 2018 (Lufthansa, 2018), which will be seen as a cut-off date. This means that the strategic and financial valuation will not include information that was made public after this date, except for the Annual Report 2017 of Air France-KLM, which is included for better comparability between the firms, even though it was published after the cut-off date.

8 Additionally, to ensure that all information regarding the airberlin transaction is up-to-date, all data publicized before May 15th, 2018 is included in the second part of the thesis.

The thesis addresses all current and potential private and institutional investors, from which it is assumed that they possess basic knowledge of business strategy, statistics, and corporate finance. The thesis therefore only contains limited explanations of the applied theories and methodologies.

One of the main challenges is making reliable forecasts of the development of Lufthansa’s business. A fundamental aspect of this thesis is thus the relevance of reasonable and well- founded assumptions, which will be clearly stated and outlined throughout the respective sections. However, the financial valuation should still be regarded with precaution.

Furthermore, Lufthansa Group operates in various subsectors of the aviation industry, e.g. passenger aviation, cargo, maintenance and repair services, and catering. However, as the largest part of its business is conducted within the passenger airlines, the main focus will be on this market, especially within the strategic analyses.

9 3 Strategic Analysis

3.1 Company Introduction – Lufthansa Group “Keeping up tradition means reflecting on where you come from and, from this reflection and experience, defining where you're going.“

(Abraham - Co-Founder of the Deutsche Lufthansa Berlin-Stiftung, p. 1)

3.1.1 Lufthansa in Brief Deutsche Lufthansa AG (commonly referred to as Lufthansa or Lufthansa Group) is the largest airline in Germany and the third largest airline worldwide based on revenue in FY17 (Euromonitor, 2017). The airline carried 130 million passengers on 1,130,008 flights in 2017 and held a fleet of 728 aircrafts with an average age of 11.4 years as of December 31st, 2017 (Lufthansa Annual Report, 2017). This growth of 111 aircrafts compared to 2016 is due to the wet-lease contract of aircrafts from airberlin Group and the consolidation of Brussels Airlines. Furthermore, the company served a route network of 301 destinations in 103 countries in 2017 (Lufthansa Annual Report, 2017) .

The history of Lufthansa can be traced back to January 6th, 1926 when the company was formed from the consolidation of two German aviation interests as “Deutsche Luft Hansa AG” (Lufthansa, n.d.). At this time, Lufthansa was a monopoly run by the German government (Grant, 2005). During the second world war, Lufthansa was forced by law to provide services, transport flights and technical operations for the German government, until the operations got suspended in 1945 and the company was dissolved in 1951 (Lufthansa, n.d.).

Lufthansa, as it is known today, was founded on January 6th, 1953 as “Aktiengesellschaft für Luftverkehrsbedarf” (Luftag). Since the company bought the trademark, name, and colors from the first Lufthansa in 1954, it called itself “Deutsche Lufthansa Aktiengesellschaft” (Lufthansa, n.d.).

Nowadays, Lufthansa Group is a global aviation group, which consists of 331 subsidiaries as of FY17, structured into the Business Segments Network Airlines, Point-to-Point, and Aviation Services (Lufthansa Annual Report, 2017).

10 3.1.2 Lufthansa Group’s Business Segments and Products Lufthansa’s largest business segment (63.6% as of December 2017) is the Network Airlines business segment, consisting of Lufthansa German Airlines, SWISS, and Austrian Airlines (Lufthansa Annual Report, 2017).

As of January 2017, Eurowings, Brussels Airlines and the equity investment in SunExpress have been removed from the Network Airlines segment and integrated into a separate Point-to- Point Airlines segment, accounting for 11.4% of total revenue as of December 2017 (Lufthansa Annual Report, 2017).

A third business segment, Aviation Services, is composed of several sub-segments, including Maintenance Repair Overhaul (MRO, 10.0%), Catering (7.2%), Logistics (7.0%) and Additional Businesses and Group Functions (0.8%, (Lufthansa Annual Report, 2017)).

The segment Maintenance Repair Overhaul (MRO) is an independent provider of maintenance, repair, and overhaul services for civilian commercial aircraft, and is composed of Lufthansa Technik Group, which itself has 31 maintenance operations worldwide and furthermore holds stakes in 57 companies. Its services, ranging from “the repair of individual components to consultancy services and fully integrated supply of entire fleets” (Lufthansa Annual Report, 2017, p. 3), are offered via seven divisions: Aircraft Overhaul, Aircraft Systems, Components, Engines, Innovations and Completion, Maintenance, and Servicing of VIP Aircraft (Lufthansa, n.d.).

The sub-segment Catering consists of LSG Group, which is composed of several subsidiaries under LSG Lufthansa Service Holding AG. LSG Group established LSG Sky Chefs, which operates airport lounges and offers in-flight products and services (food, equipment, onboard retail, and logistics) through a network of 205 facilities in 50 countries (LSGgroup, n.d.).

Lufthansa Group’s smallest sub-segment Logistics mainly consists of Lufthansa Cargo, one of the world’s largest provider of international scheduled airfreight services, which focuses on airport-to-airport air cargo business. The subsidiary offers its services through 17 own aircrafts, but also makes use of chartered cargo aircrafts and belly capacities on passenger aircrafts operated by Lufthansa, Austrian Airlines, and Eurowings (Lufthansa, n.d.).

11 Lufthansa Group therefore operates in the overall aviation market, but as its main operations are in the Passenger Airline segment (Network Airlines and Point-to-Point Airlines), we will concentrate our analyses on this market.

3.1.3 Investors In 1966, Lufthansa shares were traded for the first time and since then have been traded on several German stock exchanges. As of December 31st, 2017, trading in Germany took place on Frankfurt stock exchange and electronically on XETRA, while in the United States, shares are traded via a sponsored American Depositary Receipt (ADR), with Deutsche Bank Trust Company Americas being the depositary (Lufthansa, n.d.). ADRs are “certificates issued by a US depository bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADR's are "sponsored," the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADR” (NASDAQ, 2017, p. 1). In the case of Lufthansa, one ADR represents one underlying share. The total number of issued shares as of December 31st, 2017 was 471,259,644 (Lufthansa, n.d.), which were traded at a closing price of EUR 30.72 (Lufthansa Annual Report, 2017). Lufthansa shares are widely held by several shareholders, with a free float of 100% according to Deutsche Börse AG. The shareholder structure by nationality reveals that most shareholders are German (72.1%), followed by US nationals (9.6%) and Luxembourg nationals (5.3% (Lufthansa, n.d.)), as shown in Figure 1:

Figure 1 - Shareholder Structure By Nationality 2017, Based on (Lufthansa, n.d.)

12 3.1.4 Corporate Governance For Lufthansa, Corporate Governance “is of vital importance for guaranteeing enhanced transparency towards shareholders and helps developing continuous trust with [their] management” (Lufthansa, n.d., p. 1). Corporate Governance at Lufthansa is based upon the German Companies Act (Aktiengesetz), the German Codetermination Act (Mitbestimmungsgesetz), the German Corporate Governance Code, and the German Corporate Governance Codex (Deutsche Corporate Governance Kodex DCGK). Lufthansa applies a corporate governance structure as shown in Figure 2 (Lufthansa, n.d.):

Figure 2 - Corporate Governance Structure, Based on (Lufthansa, n.d.) Lufthansa operates as a German stock corporation (Aktiengesellschaft, AG). For these companies it is typical to have a two-tier board which is separated into the Executive Board and the Supervisory Board. The German Stock Corporation Act prohibits being member in both boards at the same time. Furthermore, it defines the responsibilities of the executive board (or also called board of management) as managing and representing the company against other parties. The supervisory board, on the other hand, is responsible of overseeing the company’s board of management and also has the right and obligation to appoint members to the board of management. It is therefore not directly involved in the daily business operations and should be independent from the management (SGLGroup, n.d.). Lufthansa’s supervisory board is represented by a total of 20 member, ten being shareholder representatives and ten employee

13 representatives. All shareholder representatives have gained experience as members of other supervisory boards. Furthermore, 75% of all supervisory board members have been a member for less than 6 years, which is an indicator for high independence at the supervisory board (Lufthansa, 2018). Member’s expertise is guaranteed by a pre-defined nomination process of new candidates, focusing on relevant skills, diversity, and experience. However, members are also being supported by several committees, including the Steering Committee, the Audit Committee, the Arbitration Committee, and the Nomination Committee.

As for the supervisory board, also for the executive board basic criteria exist for the selection of their members, being for example leadership skills, personality, professional qualification, diversity, etc. In 2017, Lufthansa had five members in the executive board, including the CEO Carsten Spohr (Lufthansa, n.d.). The executive board is in charge of the company’s operations and sets the company’s strategy discussed in the next section.

3.1.5 Company Strategy “Customers are at the heart of the airline group’s market strategy, which is based on the pillars of high quality, safety, punctuality, dependability and professional service. An awareness of ecological responsibilities also features strongly in the airline group’s business activities” (Lufthansa, p. 1).

The airline’s long-term goal is “to be the first choice in aviation for customers, employees, shareholders and partners” (Lufthansa, n.d., p. 1). To reach this goal, Lufthansa operates as a premium provider in the aviation market, focusing on high-quality travel experience for the customers.

14 Three pillars build up Lufthansa’s corporate strategy: Network Airlines, Point-to-Point Airlines, and Aviation Services (Lufthansa, n.d.), as can be seen in the figure below:

Figure 3 - Three Pillars of Lufthansa's Corporate Strategy, Based on (Lufthansa, n.d.) Lufthansa’s business segments are connected via these three pillars and therefore exploit synergies and economies of scale. Furthermore, Lufthansa consistently reviews and adapts its business model, products and services in order to stay profitable in a digitalized world. The company therefore initiated the program “7to1 – Our Way Forward”, which implements the program’s seven action areas in and across all business segments (Lufthansa, n.d.):

Figure 4 - "7-to-1 - Our Way Forward" Strategy, Based on (Lufthansa, n.d.) 3.1.6 Alliances and Partner Airlines Other important aspects of Lufthansa’s strategy are alliances and partner airlines. Lufthansa is a founding member of the world’s biggest global aviation network, Star Alliance, which was established in 1997 in order “to offer customer convenient worldwide reach and a smoother travel experience” (Lufthansa, n.d., p. 1). Furthermore, Lufthansa Regional, a partner of Air Dolomiti and Lufthansa CityLine, offers point-to-point flights across Europe and to onward international destinations.

Lufthansa also cooperates with United Airlines and Air Canada in the A++ transatlantic joint venture, with All Nippon Airways in the J+ bilateral Europe/Japan joint venture and through a commercial joint venture with Singapore Airlines (Lufthansa, n.d.).

16 Those strategic alliances not only help airlines to reduce their costs and exploit synergies, but also increase the customer service offered (Lufthansa, n.d.), as will be further evaluated in Section 3.2.

3.2 External Factors – Market Assessment

3.2.1 The Global Flight Market According to Marketline, “the airlines industry comprises passenger air transportation, including both scheduled and chartered, but excludes air freight transport” (Marketline, 2017, p. 7), and reached a value of almost USD 600 billion in 2016, while the European market has a market size of USD 130 billion. The German market accounts for 3.7% of the total market or USD 22.4 billion and had 110.7 million passengers in 2016 (Marketline, 2017).

Economic growth, varying consumer demand, volatile oil prices, as well as changes in regulations and technologies are continuously shaping and impacting the global flight market. Average growth of 6.2% per year in demand of passenger air travel worldwide and airfare decreases of 0.9% per year were seen over the past ten years (Boeing, 2017). In 2017, industry- wide Revenue Seat Kilometers (RSKs) grew by 7.6% and are expected to further grow by 7.5%- 8% in 2018 (IATA, 2017). By the end of 2021, Marketline predicts the global industry value to be above USD 900 billion, achieved through a CAGR of 8.9% between 2016 – 2021 (Marketline, 2017). However, the German market is more saturated already, only showed market growth rates (CAGR) of 3.5% between 2012 and 2016 and is forecasted to grow by 4.7% (CAGR) in 2016 – 2021 (Marketline, 2017). The same applies to the European market, which grew by 4.4% between 2012 – 2016 and is expected to have a CAGR of 6.5% in 2016 – 2021 (Marketline, 2017).

Forces shaping this growth include increasing presence of Low Cost Carriers (LCCs), Middle East carriers, consolidation and alliances of airlines as well as dynamics of new startups and ceased airlines. These factors will be discussed in the next sections.

3.2.1.1 Low Cost Carriers LCC has been a known airline business model since its introduction in the 1970s and has grown to capture large market shares in the aviation industry. As observed in Figure 5, Low Cost Carriers occupy more than 30% of the total number of seats in Europe and 53% in South East Asia.

17 Africa 13% Oceania 31% South Asia 46% Middle East 19% Northeast Asia 22% Non-LCC Latin America 33% LCC Southeast Asia 53% China 4% North America 37% Europe 31% 0,00 5,00 10,00 15,00 20,00 25,00

Figure 5 - LCC Share of Total Seats by Region, Own Depiction Based on Boeing (2017) Low Cost Carriers often operate point-to-point flights, usually at secondary airports, have high utilization, quick turnaround, limited services and standardized aircrafts on short-haul flights, leading to high effectiveness with load factors of more than 90% (Boeing, 2017).

These characteristics enable the carriers to offer low airfares. Long-haul flights are arguably more complex as networks of feeders need to be established and regulatory requirements are higher (Boeing, 2017). Nevertheless, attempting to meet consumer demands for low fares on long-haul flights, it is seen that LCC carriers also enter the long-haul market as seen with Norwegian shuttles flying to North America, while network carriers like Lufthansa start utilizing their low cost subsidiaries on the same routes (Boeing, 2017).

3.2.1.2 Startup and Ceased Airlines Growing demand in the global airline market attracts large numbers of new airline operators, while the competitive environment additionally drives a large number of businesses to terminate.

According to CAPA – Center for Aviation (2017), more than 60 startup carriers were launched between August 2015 to August 2016, of which the majority consisted of full service and charter carriers. Europe experienced the largest share of start-ups (34%, followed by Asia- Pacific (21%) and Latin America (21%), as can be seen in Figure 6.

18 Recently Launched Start-Ups by Region

11% Europe 34% North America Asia-Pacific 21% Latin America Africa 10% Middle East 21%

Figure 6 - Recently Launched Start-Ups by Region, August 2015 – August 2016, Own Depiction Based on CAPA (2017)

45 airlines were however ceased in the same period, of which the majority of 26 carriers were European, including Cyprus Airways, Estonian Air, and Lithuanian Air (CAPA, 2017). In 2017, the Middle East carrier Etihad pulled funding from a Swiss regional operator and German airline airberlin, after which both carriers terminated their businesses (Dunn, 2017) with easyJet and Lufthansa seeking to acquire assets from airberlin Group.

Recently Ceased Operations by Region

13% Europe 5% North America Asia-Pacific 13% Latin America 58% Africa 9% Middle East

Figure 7 - Recently Ceased Operations by Region, August 2015 – August 2016, Own Depiction Based on CAPA (2017)

On the other side, businesses started in 2017 include the creation of Joon, a hybrid operation of Air France-KLM flying short haul from Paris and long haul to Brazil from 2018 on (Dunn, 2017), as well as the foundation of easyJet Europe to ensure easyJet’s European operations in light of Brexit.

19 3.2.1.3 Middle East Carriers Another trend in the global aviation market, which is particularly relevant for European carriers, is the growing presence of Middle East carriers. Geographical locations of Middle East nations enable their airlines to operate direct flights to destinations such as Asia. Similar to Asian airlines, Middle East carriers have advantages in terms of cost and quality of service. Additionally, the presence of Middle East airlines and groups is found in their investments in European airlines, as seen with Etihad’s stakes in airberlin and Alitalia as well as Qatar Airways stakes in IAG (Canelas & Ramos, 2016). However, in 2017 the market share of Middle Eastern airlines fell for the first time since 1997 and lies around 9.5% as of December 2017, while the European market still accounts for more than 1/4th of the market (IATA, 2017):

Market Share 2017

23% Africa

34% Asia Pacific Europe 10% Latin America Middle East 5% North America

26%

Figure 8 - Market Share by Region in 2017, Own Depiction Based on IATA (2017)

3.2.1.4 Alliances As a response to competition from LCCs and Middle East carriers, network carriers seek alternative strategies through alliances and consolidation. Alliances allow airlines to serve more destinations, provide higher connectivity and share loyalty programs across allied carriers through code sharing. As seen in Figure 9, the three biggest airline alliances worldwide are Star Alliance, which represented the largest alliance in 2016, followed by SkyTeam and Oneworld, while the majority of the market shares were still held by airlines that are not in alliances.

20 Leading Airline Alliances in 2016, by Market Share

Non-Aligned

Star Alliance

SkyTeam

Oneworld

0,00% 5,00% 10,00% 15,00% 20,00% 25,00% 30,00% 35,00% 40,00%

Figure 9 - Leading Airline Alliances in 2016, by Market Share, Own Depiction Based on Statista.com

Consolidation strategies vary, and reach from mergers of network carrier such as KLM and Air France in 2004 (Milner, 2004) to the establishment or acquisition of low cost subsidiaries such as Lufthansa’s acquisition of Germanwings (Krishnamurthy, 2016).

3.2.2 PESTLE Analysis In the next part, the impact of macroeconomic factors on Lufthansa and the airline industry will be analyzed using the PESTLE framework. This framework helps identifying the “factors [that] will change the forces in the industry” (Galavan, 2004) and its results can be used in the assessment of a company’s competitive position. Political, economic, social, technological, legal and environmental factors influencing Lufthansa’s business environment are considered with a focus on the European airline industry.

3.2.2.1 Political Liberalization of the aviation industry over the past 20 years has increased competition within the European market. Before that, network carriers like Lufthansa, KLM, SAS amongst others, have enjoyed monopolistic positions serving and connecting in their national markets. However, union policies allowing member states’ airlines to freely operate within other member states as well as initiatives to improve and align safety, efficiency and environmental approaches driven by Single European Sky (European Commission, 2018) have strengthened competition between airlines and gave rise to Low Cost Carriers such as Ryanair, Norwegian Air Shuttle and easyJet (Erkelens, et al., 2017). On a global level, EU negotiations and agreements with ASEAN, The UAE, and Turkey additionally contributed to the liberalization

21 of the markets and increased competition, as EU airlines can now take part in emerging economic markets, while within the European market, Middle East carriers have increased their presence (European Commission, 2016).

Other relevant political factors relate to Brexit and unstable political environments in Northern Africa and the Middle East. In the process of The UK exiting The European Union, access to the UK market and competition from UK based airlines are yet to be established. However, it is clear that the same benefits of an open market as within the EU cannot be enjoyed, which has caused airlines to overcome these obstacles, such as easyJet (a London-based company) establishing easyJet Europe to continue its European operations. Furthermore, war and unstable political environment limits access and operations in Northern African countries and some Middle Eastern countries and pose threats to Lufthansa and other airlines operating at those destinations and airspaces. However, these developments only have a small impact on Lufthansa’s operations, as the company’s main market is still within Europe.

3.2.2.2 Economic Air travel has faced growing demand over the past 13 years as shown in Figure 10.

Annual Growth in Global Air Traffic Passenger Demand from 2005 to 2018

10,00% 8,90% 7,90% 8% 7,40% 7,50% 8,00% 6,90% 7,30% 6,30% 5,70% 6% 6,00% 5,30% 5,20%

4,00% 2,40% 2,00%

0,00% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F -2,00% -1,20%

Figure 10 - Annual Growth in Global Air Traffic Passenger Demand from 2005 to 2018, Own Depiction Based on IATA (2017)

With only a small downturn in 2009 in light of the financial crisis and a quick recovery afterwards, it can be argued that economic instability has a limited impact on demand for air travel. According to the International Air Transport Association IATA (n.d.), passenger air

22 travel demand is forecasted to further grow over the next 30 years. Several economic factors should be considered in relation to this forecast.

Firstly, emerging markets such as Brazil, China and India experience large economic growth and an increasing middle class. More wealth enables larger parts of the population to travel and provides growing customer segments for airlines. Passenger growth in recent years has on average increased more than 10% per year in China and India, while India is additionally expected to be one of the largest commercial aviation markets by 2020.

Moreover, the number of international tourist arrivals worldwide grew 3.9% more than the overall GDP, with similar 4% yearly growth expected to contribute to the worldwide GDP in the future (Boeing, 2017). This expected growth over the next years shows that travelling is becoming an essential part of daily lives and that it is becoming less sensitive to financial fluctuations.

Other economic factors influencing the airline industry are those related to costs that airlines incur, particularly the fuel and labor costs. Fuel expenses are airlines’ largest input costs. While decreasing crude oil prices can be profitable to airlines as it reduces costs, it can also pressure airfares downwards, with then increased flight demand making airlines to increase capacity by investing in more airplanes (Macquarie, 2016). Consequently, it is viable for airlines to balance between profiting on low crude oil prices and still be able to handle increased capacity when oil prices increase again.

The second largest operating expense impacting the airline industry is labor (European Commission, 2017). Observed strikes in Europe relating to Lufthansa as well as other airlines regarding pension plans and wages indicate the sensitivity of labor relations. Air crew and handler’s requests for better labor conditions pose a larger threat on the airline industry’s costs and profitability. This factor will be further examined in the next section.

3.2.2.3 Social In extension to previously mentioned factors relating to labor conditions and wages in the airline industry, these are additionally relevant when analyzing social factors. Strikes across Germany from pilots demanding pay rises led to a more than two years dispute lasting from 2014 to 2016 (TheLocal, 2016). In addition, wage and working condition dispute with cabin crew led to a walk-out in November 2015, forcing 4,700 flights to be cancelled (European

23 Commission, 2018). Such disputes have been seen in most of Northern Europe over the past ten years in response to the airlines’ attempt of cutting costs in order to compete with Low Cost Carriers’ prices. Although perception of underpaid labor and poor working conditions are debated, demand for low airfares and the emergence of Low Cost Carriers are still increasing. This also highlights passengers’ changing demand in air travel, which is becoming more of a transportation commodity in which passengers are willing to compromise additional service such as inflight entertainment, check-in luggage and meals in order to get a lower air fare. One group of passengers to whom cheap tickets are particularly important are young travelers. Airlines need to meet demand of this passenger group with low airfares, however, more flexible travelers. This is seen for Lufthansa offering tickets with student discount and SAS creating cheap SAS Youth tickets, for passengers under 25 years, travelling on certain weekdays.

3.2.2.4 Technology Advancements in technology have a significant influence on aviation and the airline industry. Systems to manage data, track flights and improve communication and coordination, increases efficiency for aviation players, such as enabling quicker turnaround, minimize excess capacity in aircrafts and market to the right customer groups.

Moreover, the use of the internet has had a great impact on the airline industry. While on the one hand, the ability for passengers to easily find and purchase tickets online positively impacts the airline industry as access to flying is increased and the ability for airlines to target customers on the internet additionally increases passengers travel demand, on the other hand, passengers’ ability to compare prices and services of airlines can be thought of as a driver for focus on airfare costs, fueling the emergence of the Low Cost Carriers’ business model.

Another impact that technological factors has had on the airline industry is the development within aircrafts, in which increased speed, lighter aircrafts and less fuel usage impacts the performance of airlines and allows for lower costs for trips. Additionally, technological advancements increase safety standards and passenger comforts, another driver to increasing air travel demand.

3.2.2.5 Legal In the aftermath of the 9/11 attacks, safety has played a major role for legal frameworks and regulations for aviation. Regulations relate to passenger lists requirements, limited access to

24 aircrew members on airplanes, and limitations on amount and content of luggage. This led to significant increases in administration costs for airlines (IATA, 2011).

Other legal factors include regulations on crew and employees’ working conditions. States regulate companies’ and airlines’ employee wages and pension plans through minimum wages and pension payment legislations, consequently affecting the operational costs of airlines. Such regulations vary across Europe, in which Northern Europe has higher minimum wages and pension payments. During the past ten years it has been seen that airlines are hiring air crew members and other employees from Eastern European countries and moving their bases in these countries known for having lower required wages. Regulations regarding air crews’ working conditions in terms of required resting hours, amount of work days, whether employees pay for own sick days, also vary across states. These additionally affect airlines’ operating costs and impact the airline industry, as airlines have the tendency of hiring from countries with less regulations.

A last factor related to technological impacts are laws regulating airlines’ management and handling of personal data to protect passengers and customers. Technological advancements enabling airlines to obtain personal data, and legal guidelines of safety requiring airlines to do so, resulted in additional rules and regulations about how the airlines protect the data, and are costly in terms of the carrier’s image and heavy fines from governmental bodies, if data is not properly protected.

3.2.2.6 Environmental Increased focus on pollution and environmental impact associated with aviation has led players in the industry to work towards common goals to decrease CO2 emissions, as aviation is responsible for around 2% of man-made CO2 emissions. The International Civil Aviation Organization under the United Nations, governing international aviation, has set three goals for a sustainable future in aviation. These goals are related to new aircrafts, engine technologies and research on fuel alternatives, more efficient airline operations and infrastructure management, as well as a framework to measure and control CO2 emission and to further increase fuel efficiency in order to stabilize and reduce CO2 emissions (Boeing, 2017). Similar frameworks are adopted within the European Union and other single nations, requiring airlines to consider and invest in new technologies and aircrafts to operate more sustainably and efficiently.

25 3.2.3 Porter’s Five Forces Lufthansa’s industry is further analyzed by applying the framework of Porter’s Five Forces. The five forces consist of the threat of new entrants and substitute products, bargaining power of suppliers and customers as well as the intensity of rivalry between established competitors in the industry. These forces and threats impact the profitability of the industry and can lower its appeal. Lufthansa offers flights on a global level, however, based in Germany and operating mainly within Europe on short haul flights and from Europe to overseas destinations on long haul flights, this analysis primarily focus on the European airline industry. Figure 11 assesses Lufthansa’s industry based on Porter’s Five Forces.

Bargaining power of supplier 5 4 3 2 Bargaining power of Competitive rivalry 1 buyers 0

Threat of substitutes Threat of new entrants

Figure 11 - Porter's Five Forces for Lufthansa

3.2.3.1 Bargaining Power of Suppliers In industries with a low number of suppliers, their bargaining power is often high, enabling them to set prices and impact profits. This is arguably the case for the airline industry as limited suppliers provide large (full-body) aircrafts and technology required. Airlines depend heavily on the duopoly industry of American Boeing and European Airbus to provide passenger jets, indicating extreme dominance of those two players. Furthermore, airlines are highly dependent on aircraft fuel, which is sold by major oil companies. Usually, long-term agreements between airlines and those companies exist and airlines hedge prices by making pre-agreements with oil companies on a certain oil price for a given time period.

Considering Lufthansa’s position in Germany, it is also relevant to emphasize the high bargaining power of labor in Germany, as labor unions have a strong position and can initiate

26 strikes and disputes concerning wages and working conditions. Recent disputes between Lufthansa, the pilot labor union and the cabin crew labor union have caused strikes and walkouts, leading to the cancellation of more than 4,700 flights (TheLocal, 2016) as discussed in Section 3.2.2.3. Conclusively, the overall bargaining power of suppliers is assessed to be high.

3.2.3.2 Bargaining Power of Buyers Similarly, buyers bargaining position is strong when they can exert pressure on prices and impact industry profits. Single buyers in the airline industry, being consumers and business account holders, have low bargaining power due to their small size and the large number of middlemen such as travel agencies. However, switching costs below airlines are low when another company can fly the same route, while customers’ price sensitivity and the range of similar offered products is high. Consequently, customer’s similar perceptions of airlines together with requests for low airfares puts pressure on airlines to meet this demand. This can be observed in the airline industry, as Low Cost Carriers have increased their position in the market in recent years and network carriers have utilized low cost subsidiaries to keep prices low.

However, bad reputation of an airline, including punctuality, safety, and quality of services can prevent customers from choosing a particular airline. Furthermore, business travelers are less price sensitive than leisure travelers, but according to Eurostat, their demand in most European countries decreased in recent years.

Nevertheless, low switching costs for passengers and product similarity in the industry put pressure on network airlines. Therefore, buyer’s bargaining power is considered relatively high.

3.2.3.3 Threat of New Entrants Profitable industries attract new entrants, which then may push down prices and profitability. However, complications and costs related to high entry barriers lowers threat of new entrants.

High capital investments in aircrafts and technology are required to operate in the flight market. Boeing and Airbus are the two main suppliers of passenger jets, for which costs related to production, testing, R&D and services are high (Grant, 2015). In this regard, high entry and exit costs for airlines are related to the intense capital investments in airplanes, as well as contractual obligations with suppliers and passengers.

27 Airlines can benefit from economies of scale through large market shares, allowing companies to spread administrative costs onto more outputs and strengthen their negotiating positions with suppliers for lower prices (Grant, 2015). Additionally, as will be seen in Section 6, profit margins in the industry are rather low, making it somewhat unattractive for new players to enter the market.

Furthermore, product differentiation can lower the threat of new entrants as they face costs associated with marketing and creating a customer base. Established carriers can take advantage of brand recognition and customer loyalty (Grant, 2015). Network carriers such as Lufthansa benefit from flight connectivity and frequency through established networks.

However, low barriers of entry come from access to distribution channels and regulations. New entrants have easy and direct access to customers and buyers due to the internet enabling low distribution costs. Over the past 20 years, liberalization in the aviation industry has lowered entry barriers. Within the European airline industry, the launch of Single European Sky allowed airlines within the European Union member states to operate across borders without further permission requirements, making it easier for foreign airlines to enter the market.

For new entrants, it is important to gain access to landing slots at and routes between important airports. These are controlled by airports, governments and the European Union, which regulate competition.

In this regard, threat of new competition is present, however, not considered as a big threat to established airlines.

3.2.3.4 Threat of Substitute Products In industries were customers are able and willing to pay for a similar product, the threat of substitute products is high. In the case of the airline industry, a substitute product does not include a flight with another carrier, but means another mode of transport. Consequently, substitutes mainly refer to trains and busses. The threat of customers choosing to travel by bus or train can in some instances be argued to be high, particularly on short-haul and domestic flights and if airports are located far from the customers’ end destinations. This is evident with the rise of low cost bus trip operators such as Flixbus, and the rise of fast speed trains as observed in Europe (Rahmann & Schlesiger, 2017). On the other hand, low air fares, as well as high frequency and connectivity of flights, particularly within Europe, strengthen air travel. On

28 long haul flights, the threat of substitutes is arguably non-existing. Increased demand for flights indicates that passengers in general are less willing to switch to a substitute product of a flight. Therefore, the threat of substitute products is considered very low.

3.2.3.5 Competitive Rivalry The degree of competition among established companies in an industry impacts profitability of the industry and the overall competition. In some industries, high rivalry drives companies to compete on low prices, while in other industries competition is based on differentiation, marketing and innovation (Grant, 2015). Various factors are relevant to consider when analyzing the competitive level in the airline industry. The concentration ratio (CR4) indicates whether an industry is dominated by a few big players or fragmented with many smaller players (Boeing, 2017). Dispersion on the global market is seen in the concentration ratio of 12.6% for the four largest airlines in 2017, as shown in Figure 12, with Delta Airlines servicing 4.4% of the market, followed by United Continental Holding, Deutsche Lufthansa and American Airlines (Euromonitor, 2017).

Global Market Share by Retail Sale Price (RSP) in 2017

3% 3% Delta Air Lines Inc 3% 4% 2% 2% United Continental Holdings Inc 2% Deutsche Lufthansa AG 1% 1% American Airlines Group Inc 1% Southwest Airlines Co Emirates Airlines Air France-KLM Group SA 78% International Airlines Group China Southern Airlines Co Ltd Air China Co Ltd

Figure 12 - Global Market Share by Retail Sale Price (RPS) in 2017, Own Depiction Based on Euromonitor (2017)

29 In Figure 13 it can be seen that, obviously, the European market is less dispersed at a CR4 ratio of 55% in 2017, with Lufthansa and Ryanair both holding a market share of 16%, followed by IAG (13%), easyJet (10%) and Air France-KLM (9%).

European Airlines Market Share in 2017, Based on Available Passenger Seats

16%

36% Lufthansa Group Ryanair 16% IAG easyJet Air France-KLM 13% 9% Others 10%

Figure 13 - European Airlines Market Share in 2017 (Based on Available Passenger Seats), Own Depiction Based on (BDL)

Both markets indicate intense competition, which is intensified considering competitors diversity and product differentiation. Differences between companies and their products offered determine the extent to which companies will compete aggressively on prices, as switching costs are usually lower for very similar products (Grant, 2015).

Two types of carriers can be distinguished in the European airlines industry; the low cost carriers and network carriers. Network carriers differentiate themselves from low cost carriers by including added services in terms of rebooking possibilities, connectivity etc., while low cost carriers, operating mainly on short-haul distances, offer point-to-point flights with limited extra services. Competition amongst network carriers themselves is relatively low as their hubs, which describes the airport from which they operate most of their flights, are placed to serve different geographical markets. Examples are Lufthansa mainly serving the German market through hubs in Frankfurt and Munich, and SAS serving the Scandinavian market through hubs in Scandinavia. However, competition from low cost flights has driven network carriers to utilize subsidiary carriers to operate short haul flights, and they are also expected to enter the long-haul segment in the near future. Moreover, as seen before, competition has risen from Middle East carriers utilizing their geographic position to directly fly from Europe to South

30 East Asia and other destinations (Boeing, 2017). To sum up, relatively intense competition can be seen within the European market.

3.3 Internal Factors – Competitive Position

3.3.1 SWOT Analysis To further assess the competitive position of Lufthansa, a SWOT analysis is conducted, including a full value chain perspective of Lufthansa covering logistics, operations, marketing & sales and services along with a range of financial, organizational and strategic perspectives. A SWOT analysis addresses both internal and external factors influencing a company’s business environment by looking at the company’s strengths and weaknesses in their business operations, as well as opportunities and threats evolving from the market environment (Harrison, 2010).

3.3.1.1 Strengths Lufthansa’s key strength is its position as a leading global network carrier, being the 3rd largest airline by revenue in 2017 (Euromonitor, 2017) and 8th largest airline by Revenue Seat Kilometers (RSK) in 2017 (Statista, n.d.). This is achieved by a global network coverage and a well-diversified route network, which is one of the largest worldwide. The strong market position (market share of 9% (Lufthansa, 2017)) in the European airline sector and leading domestic market position in Germany is supported by Lufthansa’s hubs in Frankfurt, Munich, Zurich, and Vienna (Listowska, 2017). This multi-hub strategy gives customers a broad range of travel options (Stäblein, 2016).

Additionally, even though Lufthansa’s main market is located in Germany, its geographical diversification reduces the dependency on developments of local economies. Downturns and recessions in one or more single markets can be offset by booming economies in other countries and regions. Spreading out their business activities across different geographical market also protects Lufthansa from localized event risk (Moody's, 2017).

Furthermore, Lufthansa is a co-founding member of the Star Alliance network, a co-operation of 28 member airlines (Lufthansa, n.d.). Customers benefit from a worldwide reach and a smooth travel experience. Member airlines often coordinate their schedules, resulting in shorter journey times for passengers, offer overall validity of frequent flyer programs as well as privileges with check-in and luggage. Additionally, member airlines, like Lufthansa, not only

31 benefit from a higher perceived service level by passengers, but can also exploit synergies and reduce costs when operating in a global network, as the airlines usually offer common check- in facilities in the same terminal and mutual access to their lounges. As a result, not every airline needs to offer each facility at each airport, but can make use of the other member’s facilities, and therefore reduce their costs (Lufthansa, n.d.).

Another important strength of Lufthansa lies in its business strategy. The company has a well- diversified business profile with leading market positions not only in the passenger and cargo business, but also in the MRO and airline catering segments. This reduces Lufthansa’s exposure to volatility and cyclicality in the passenger and cargo traffic and adds stability to the Lufthansa Group’s earnings (Moody's, 2017).

In the passenger business segment, Lufthansa benefits from its brand strength of the airlines Lufthansa German Airlines, Swiss, Austrian Airlines, and Brussels Airlines, as well as its multi- passenger branding. The airlines offer both luxury and economy cabins and operate on long haul and short haul flights, which balances across its route portfolio.

Also, Lufthansa caters different customer groups with different airlines. A high service level is important for premium brands like Lufthansa German Airlines and Swiss, leading to a high share of business travelers at those airlines. The complementary services at those airlines include in-flight drinks and meals, free check-in and seat selection and free checked luggage allowances (Stäblein, 2016). Eurowings, the low-cost airline in Lufthansa Group portfolio, however, addresses both price-sensitive and service-oriented customers with low-cost basic fares and additional service options by a point-to-point traffic strategy. In a point-to-point traffic system, customers travel nonstop from one city to another (from origin to destination), versus in a hub-and-spoke system (mainly used by network carriers), one or a few central hubs connect origins and destinations, as explained by Figure 14.

Figure 14 - Point-to-Point vs Hub-and-Spoke System, Based on (Schule für Touristik, 2017)

In a point-to-point system, the customers benefit from lower connection and travel times and no interdependency of flights. This is also an advantage for carriers such as Eurowings, as in this system flights are at a lower risk to be delayed, leading to lower costs for those airlines (StanfordPress, 2016). Eurowings transition to a point-to-point traffic system enables it to better compete with other successful low-cost airlines. However, network carriers like Lufthansa German Airline still make use of the hub-and-spoke system, as this allows them to cover a larger network of destinations (Cook & Goodwin, 2008).

3.3.1.2 Weaknesses Lufthansa is operating as a premium carrier with a high customer service level, which leads to higher cost positions and therefore a competitive disadvantage for the company on a financial side (Listowska, 2017). Even within Europe, Lufthansa ranges amongst higher cost airlines (in terms of costc per available seat kilometer), leading to a lower Group profitability than its peers (Bhasin, 2017).

Also adding to costs for Lufthansa Group are significant and volatile pension obligations due to a fluctuating discount rate. As of December 31st, 2017 those obligations accounted for almost 50% of total adjusted debt (Lufthansa Annual Report, 2017) and a further increase would lead to a substantial change in Lufthansa’s financial leverage ratios. In an environment of low interest rates, having underfunded defined benefit plans can become a significant challenge for the company, as it raises the cost of funding retirement benefits. “The enormous pension burdens are putting considerable pressure on our equity” (Menne - Lufthansa CFO, 2015, p. 1).

33 However, Lufthansa implemented proactive measures to lower those pension obligations and exposure to interest rates. These measures include a permanent reduction of pension obligations due to a new defined-contribution pension plan for cabin crew staff (agreed in June 2016), and pilots (agreed in March 2017), as well as cash injections into the pension scheme (Listowska, 2017).

The aforementioned agreements followed years of strikes and debates about pensions, salaries and working hours by Vereinigung Cockpit union, which represents about 5,400 pilots of Lufthansa Group. The strikes made clear the poor labor relations, another weakness of Lufthansa Group (Bryan, 2017), and also occasionally affected Lufthansa’s operating performance, because the strikes and labor disputes led to several delays and cancellations of flights (Deutsche Presse Agentur, 2016).

However, Lufthansa’s somewhat low profitability, which will further be assessed in Section 6, is not only driven by pension liabilities, but also depends on external factors including uncertain oil and fuel prices as well as economic developments in Germany and Europe. Especially oil prices are very volatile and difficult to predict, but Lufthansa tries to hedge their exposure to oil price fluctuations continuously in order to reduce the associated risks (Lufthansa Annual Report, 2017).

On a strategic side, Lufthansa’s market position is challenged by Low Cost Carriers in the short- haul segment and Middle-Eastern airlines in the long-haul segment, as discussed in Section 3.2 (Listowska, 2017).

Furthermore, most airlines of Lufthansa Group operate a multi-hub strategy. The most important disadvantage of this strategy is the lower flexibility to adjust capacities without influencing the overall system, as in this system, travel schedules are timed and interconnected (Stäblein, 2016).

3.3.1.3 Opportunities However, numerous opportunities exist for Lufthansa to pursue. Lufthansa German Airline’s business model is based on offering premium services. This is in line with the airline’s aim of becoming Europe’s only five star rated airline by Skytrax, which it achieved in December 2017. “The award is a well-deserved recognition of our major efforts to make Lufthansa one of the world’s leading premium airlines again. […] The combination of premium offerings with the

34 quality and professionalism of our employees has earned Lufthansa the status of a five-star airline” (Spohr - Chairman of the Board, 2017, p. 1). However, further investments throughout all booking classes (first, business, and economy class) are planned and must be made in order to secure this competitive advantage in the future (Skytrax, 2017).

Another opportunity for Lufthansa derives from increased travel demand. In emerging economies, the number of travelers has grown, which leads to an increased need for airlines in those countries. In Lufthansa’s home markets, foreign travels as well as overseas vacations for families, couples, and singles are also on an increasing trend. Furthermore, those customers tend to demand a higher service level from airlines and are willing to pay more for privileged services (Bhasin, 2017).

On a strategic side, Lufthansa has a solid liquidity position, as further evaluated in Section 6.3.1, which allows the company to make acquisitions in the aviation industry. The acquisition of parts of airberlin, which will be further assessed in Section 10, will strengthen the airline’s competitive position in the German market. Furthermore, a potential takeover of bankrupt Italian airline Alitalia would allow Lufthansa to better utilize its capacities and achieve scale effects. The offer by Lufthansa is concentrated on parts of the global network traffic and European and domestic point-to-point business (Lufthansa, 2017).

3.3.1.4 Threats A central threat Lufthansa is facing is coming from the intense competition in the aviation industry. This includes yielding pressure from Low Cost Carriers and other network airlines. In September 2017, capacities from most European airlines increased at a higher rate than Lufthansa (1.1%) compared with the previous year. The largest increases in capacity during 2017 were made by Aeroflot Russian Airlines (15.0%), KLM-Royal Dutch Airlines (10.6%), Ryanair (9.7%), and easyJet (8.0%) (Casey, 2017). Also, Asian-Pacific carriers as well as airlines from the Middle East demonstrate their competitiveness, as their revenues increased substantially over the past years, and they operate at a lower cost (IATA, 2017).

Another threat is coming from fuel prices. During the last years, oil and fuel prices were low. However, fuel consumption remains one of the main cost items for the entire aviation industry, and increased oil and fuel prices will significantly increase the airlines costs in this segment (UKEssays, 2017). Crude oil prices tend to be volatile and difficult to forecast. However, most

35 experts expect increasing crude oil prices in the next years, resulting in higher costs for aviation companies (Knomea, 2017).

Other costs include the high pension obligations, as mentioned under “weaknesses”. A prolonged environment of low interest rates is a challenge for Lufthansa, as it makes funding of these defined pension liabilities difficult (Listowska, 2017).

Furthermore, the European aviation market is impacted by higher terrorist threats against air travel (European Commission, 2017). This leads to a risk of higher insurance costs for Lufthansa, as massive premiums are being charged for insuring the entire fleet against war and similar events (UKEssays, 2017).

On the business side, Lufthansa’s passenger airline and logistic segments depend on volatile passenger and cargo traffic and therefore face the risk of material fluctuations of operating profits in those segments (Stäblein, 2016). However, as can be seen in Section 6 and 8 past years showed continuous increases in both Passenger and Cargo Traffic, somehow mitigating this risk.

Lastly, like all internationally operating companies, Lufthansa is exposed to exchange rate and interest rate fluctuations in the international money, capital, and foreign exchange markets, as will be discussed further in Section 6.3.

36 4 Selection of Peers The selection of comparable companies, which is referred to as a peer group, is a crucial part of a valuation, as it is used in the financial analysis as well as in the multiple valuation. In a theoretical approach, using a large number of peers is preferable as it gives the opportunity to even out values that deviate significantly from the rest. Therefore, academic literature often uses all companies of an industry as peer group, while practitioners mostly focus on only a few relevant comparable companies. Fewer peer group companies are needed, when certain criteria of those companies are similar to the firm that needs to be evaluated, which in this case is Lufthansa (Meitner, 2006). This is also supported by recent studies, showing that the use of five to ten peer group companies is sufficient and on average leads to as accurate results as using the entire industry does (Cooper & Cordeiro, 2008).

In order to find comparable companies of Lufthansa, a list of the, according to BrandFinance, top 50 most valuable airlines (Appendix 1) was screened for airlines operating in the same business environment as Lufthansa. Based on this list, a selection of companies, presented in Table 1 has been evaluated by several criteria, which are further discussed below. However, airlines operating together as a group have been combined under the parent company’s name.

First of all, the companies must generate most of their revenues from airline business. Using the same industry as a criteria comes from the thought that companies operating in the same industry will show similar profitability and growth and share the same risks (Nel & le Roux, 2015). This criteria is met, as all companies on the list operate in the flight industry.

On an external dimension, the peer group companies should operate in the same geographical markets as Lufthansa, to ensure that external market risks faced by those firms are truly comparable. As Lufthansa is a German-based firm and 67% of its revenues are coming from Europe (Lufthansa Annual Report, 2017), this can be viewed as Lufthansa’s main operating market. We therefore set a minimum of 50% of revenues that must be coming from operations inside of Europe in order for companies to be an eligible peer company for Lufthansa. This of course leads to the exclusion of all Asian and American airlines, which generate most of their income in their respective home markets. Also TAP Air Portugal, which focuses a lot on Central and Southern America, has only 48% of revenues coming from Europe and will be excluded from the peer group.

37 Furthermore, only companies of a certain size should be included in the peer group (Prof Dr. Dr. Ernst & Prof. Dr. Dr. Häcker, 2011). Lufthansa is the largest airline in Europe, so all other European airlines will have revenues lower than Lufthansa. Therefore, we define that revenues as well as assets must be at least 10% of Lufthansa’s revenues and assets for a company to be considered as a comparable company. This logic further excludes Virgin Atlantic, Wizz Air Holding, Flybe Group, Norwegian Airlines, and Aegean Airlines from the list.

As it can be seen in Table 1 the final selection of peer group companies thus includes Air France-KLM Group, Ryanair Holdings, International Airlines Group (IAG), easyJet Airline Company Limited, and SAS Group.

Table 1 - Selection of Comparable Companies, Based on Annual Reports

40 5 The Analytical Financial Statements In a next step, it is necessary to reorganize Lufthansa’s income statement and balance sheet to properly assess Lufthansa’s financial institution. Lufthansa’s profitability, growth and liquidity risks are measured by several financial ratios that require the company’s activities to be distinguished between those associated with operation and those associated with financing. Operating activities are value creating and difficult for competitors to replicate, while financing activities relate to the company’s financial composition, covering investments in operations and how operations are financed (Petersen & Plenborg, 2012). In the income statement, operating and financing items need to be separated, as only operating items are used to calculate the Net Operating Profit After Tax (NOPAT), where tax is adjusted so that the tax shield from financial items is not incorporated. In order to then arrive at net income, financial income and expenses are added back to and subtracted from NOPAT respectively and corporate tax rate effects are corrected.

In the balance sheet, operating activities and financing activities are divided according to the same logic as the income statement. Invested Capital (also called Net Operating Assets), which is defined as “the amount a firm has invested in its operating activities and which requires a return” (Petersen & Plenborg, 2012, p. 74) is then calculated as the sum of operating assets minus the sum of operating liabilities.

Analytical financial statements of Lufthansa and its peers are found in Appendix 2 and 3.

5.1 Accounting Quality Figures and numbers from Lufthansa’s annual reports from 2013 to 2017 provide the basis for financial ratios calculated in the financial analysis. All five annual reports have been prepared in accordance with the IFRS, as adopted by the EU. Independent auditors have found that the financial statements comply with the IFRS EU standards as well as German Commercial Code (Handelsgetzbuch) as required by law with no remarks given (Lufthansa Annual Report, 2017). It is therefore valid to assume that Lufthansa’s financial statements accurately reflect the airline’s financial position and that the annual reports are comparable. Furthermore, the peers’ annual reports have also been prepared in accordance with IFRS EU standards, so no further adjustments have to be made to their accounting numbers.

41 5.2 Classifications When classifying items as operating or financing in Lufthansa’s balance sheet and income statement, most items can easily be related to the appropriate activity, while other items require further attention and consideration of the item. These items will be discussed and classified below.

5.2.1 Income Taxes and Corporate Tax Rate Income taxes in Lufthansa’s financial statements cover taxes on both operating and financing activities, which need to be separated. According to Plenborg and Petersen (2012) this can be done by calculating the tax shield from net financial expenses as shown in the following equation:

�� ℎ�� = ��

Several methods can be applied to determine an appropriate tax rate for Lufthansa. The corporate tax rate in Germany increased from 29.6% in 2013 to 29.79% in 2017 (Tradingeconomics, n.d.), however, as the company operates in several countries with varying tax rates, the value of the tax shield is affected when debt is held in foreign entity (Petersen & Plenborg, 2012). Consequently, it is both theoretically and practically correct to use Lufthansa’s effective corporate tax rate instead of the German corporate tax rate in the analytical financial statements. The varying tax rates in the different countries are mirrored in the effective corporate tax rate as it determines the average tax rate posed on all income as shown in the following equation:

�� = �� (��)

Appendix 4 shows the calculated effective corporate tax rate for Lufthansa and all peers.

5.2.2 Cash and Cash Equivalents The item Cash and Cash Equivalents on the balance sheet covers operating cash and excess cash, which can be used to repay debt, buy back shares or paid out as dividends (Petersen & Plenborg, 2012). It is difficult to properly estimate operating cash as Lufthansa does not distinguish between operating and financing items. In accordance with Petersen and Plenborg (2012) imprecise results are expected when attempting to estimate operating cash, while a stable

42 cash position can be treated as excess cash as it is done in the analytical income statement for Lufthansa.

5.2.3 Capitalized Operating Leases The fleet of Lufthansa consist of aircrafts owned by the Lufthansa Group and aircrafts leased on finance contracts or operating contracts. Aircrafts on a finance lease are reported under assets on the balance sheet as Lufthansa has the option to purchase the asset or renew the lease and bears all risks and rewards associated with the lease.

In operating leases, on the other hand, the leased asset is owned by the lessor. Payments associated with operating leases are not disclosed on the balance sheet as an assets with a corresponding liability. This affects operating profits, as an implicit interest expense is included in the rental expense (Koller, et al., 2010), which therefore decreases operating profits. Moreover, as the assets are not listed in Lufthansa’s balance sheet, capital productivity is boosted. Due to a typically smaller reduction in operating profit than in invested capital, the net effect is an artificial increase in the return on invested capital (Koller, et al., 2010). As airlines have different capital structures, it is essential to adjust for this effect to properly compare Lufthansa to its peers. This adjustment is done by capitalizing the asset value of the operating leases on the analytical balance sheets.

Various methods can be applied in order to capitalize the asset value of the operating leases. Firstly, rating agencies like S&P compute the present value of the required lease payments, however, (Koller, et al., 2010) argue that this undervalues the asset. Alternatively, the perpetuity method can be used, dividing the rental expense by the cost of debt, which (Koller, et al., 2010) argue overvalues the assets. Lastly, (Koller, et al., 2010) recommends applying the following equation to estimate the asset value;

�� = 1 � + ��

The asset value is calculated from rental expense the following year. Asset life is depicted to be 20 years (Lufthansa Annual Report, 2017), while � is the cost of secured debt. According to Koller, et al. (2010) the yield to maturity on AA-rated 10-year bonds can be used to estimate this cost. However, factors such as industry differences causes varying yields to maturity on corporate AA-rated 10-year bonds. Figure 15 shows the yields for US Treasury High Quality

43 Market Corporate bonds between 2013 and 2018. A steady yield fluctuation between 3% and 4% can be observed.

US Treasury High Quality Market Corporate 10-Year Bond Yields 2013-2018 6,00 5,00 4,00 3,00 2,00 1,00 0,00 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Jul Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan Sep 2013 Sep 2014 Sep 2015 Sep 2016 Sep 2017 Sep Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar Nov 2013 Nov 2014 Nov 2015 Nov 2016 Nov 2017 Nov May 2013 May 2014 May 2015 May 2016 May 2017 May Figure 15 - US Treasury High Quality Market Corporate 10-Year Bond Yields 2013 - 2018, Own Depiction Based on (treasury.gov, 2018)

Bloomberg additionally reveals yields for 10-year Government Bonds around 3% for the US and 0% to around 4% for EMEA, mainly showing increasing government bond yields. Consequently, a cost of secured debt of 3.5% will be applied.

Asset value is calculated from rental expenses on operating leases like aircrafts, and is therefore being classified as non-current asset (tangible fixed asset) on the operating side of the invested capital calculations. Consequently, Capitalized Operating Leases are included in Lufthansa’s Total Operating Assets. On the financing side of the invested capital the corresponding liability is classified as non-current liabilities, wherefore it is included in Lufthansa and its peers’ Net Interest-Bearing debt.

In the analytical income statement, a corresponding adjustment is done by separating the implied lease interest expense part and the depreciation part in the leasing expense. Appendix 4 shows the implied lease interest expense and the asset value using the cost of secured debt and asset life. The implied lease interest expense is calculated by the following equation:

�� = � � ��

In the analytical income statement, the implied interest lease expense is added to the EBITDA, therefore increasing the NOPAT.

44 6 Financial Analysis This section will analyze Lufthansa’s financial position by assessing the company’s ability to generate profits, and its growth and liquidity risk, which will be compared to selected peers. The analysis is based on Lufthansa’s and the peers’ historical financial data and their annual reports from 2013 - 2017. Ratios and other measures make use of figures from the analytical financial statements from Section 5.

6.1 Profitability Analysis This chapter will analyze Lufthansa’s profitability based on historical financial data. Lufthansa’s ability to generate profit from operations will be measured using Return on Invested Capital (ROIC). This is a conventional method, as it uses the unlevered earnings (NOPAT) and therefore is independent of capital structure (Holthausen & Zmijewski, 2014). The ratio will further be decomposed to analyze value drivers for Lufthansa, on which trend analysis and common size analysis will be applied to determine the impact on profitability. Additionally, Lufthansa’s financial leverage will be analyzed, measuring the financing side of Lufthansa’s profitability. Historical financial data from Lufthansa’s peers will be applied to calculate profitability ratios, which will then be compared to Lufthansa’s ratios to properly analyze the company within its specific industry. Lufthansa’s peers will include all companies selected in Section 4, namely Air France-KLM, easyJet, IAG, Ryanair, and SAS.

The DuPont model, shown in Figure 16, provides the framework for the profitability analysis. The framework gives a structure for the analysis, expresses relations and interconnections between ratios and thus allows profitability drivers to be isolated (Petersen & Plenborg, 2012). Ratios are calculated based on analytical financial statements for Lufthansa and its comparable companies.

Figure 16 - DuPont Model for Lufthansa, Own Depiction Based on Petersen & Plenborg (2012)

6.1.1 Return on Equity The overall profitability ratio Return on Equity (ROE) measure a company’s profit generated from shareholders’ investment. ROE ratios for Lufthansa and its peers are calculated using the following equation (Petersen & Plenborg, 2012):

�� = ��

Figure 17 depicts that Lufthansa’s ROE shows an overall increase in the past five years with a drop in 2017 due to an ongoing increase in book value of equity between 2014 to 2017. In 2017, Lufthansa’s ROE was almost 25% indicating that the company generated 24.98% profit on shareholders’ investments. It can be seen that Lufthansa’s ROE was one of the lowest in 2013 and 2014, but increased in the following years and now ranges in the middle compared to its peers. Further analysis will be conducted in the next sections in order to analyze profitability of Lufthansa’s operating activities and financial leverage.

46 Return on Equity 80,00%

60,00%

40,00% Lufthansa 20,00% Air France-KLM 0,00% easyJet 2013 2014 2015 2016 2017 -20,00% IAG

-40,00% Ryanair

-60,00% SAS

-80,00%

-100,00%

Figure 17 - Return on Equity of Lufthansa and its Peers, Own Calculations Based on Annual Reports

6.1.2 Operating Analysis 6.1.2.1 ROIC Following the structure for profitability analysis in Figure 16, Return on Invested Capital (ROIC) measures overall profitability of operations. ROIC is expressed by the following equation (Petersen & Plenborg, 2012):

�� (��) �� = ��

The ratio measures Lufthansa’s return as a percentage of the amount invested in operations. Table 2 below shows ROIC for Lufthansa and its peers:

Return on Invested 2013 2014 2015 2016 2017 Average Capital (ROIC) Lufthansa 3.87% 2.20% 7.64% 9.76% 12.62% 7.22% Air France-KLM 3.07% -18.22% 8.21% 5.89% 0.09% -0.19% easyJet 20.30% 21.46% 24.13% 18.28% 14.62% 19.76% IAG 4.59% 11.38% 12.53% 13.53% 14.15% 11.24% Ryanair 15.35% 14.24% 22.40% 29.21% 26.08% 21.46% SAS 9.28% 2.79% 6.30% 7.12% 5.89% 6.28% Average 9.41% 5.64% 13.54% 13.97% 12.24% 10.96% Table 2 - Return on Invested Capital (ROIC) for Lufthansa and its Peers, Own Calculations Based on Annual Reports Lufthansa’s ROIC has increased since 2014, and the company was capable of generating a return of approximately 12 cents per Euro invested in operations in 2017. A similar positive trend can be observed for IAG, Ryanair and SAS, while Air France-KLM and easyJet’s ROIC show higher fluctuations. Decrease in Lufthansa’s ROIC in 2014 is traced back to a decrease

47 in NOPAT that year, which vastly grew again in 2015, regenerating a growing trend from 2015 on. As can be seen in Figure 18, Lufthansa’s peers experienced similar drops in 2014 as also indicated by the low average ROIC in that year. While most of its competitors ROIC’s decreased in 2017, leading to a lower average ROIC in that year, Lufthansa managed to increase its ROIC by 3 percentage points compared to 2016. The following sections will evaluated the reasons behind these developments.

Return On Invested Capital 40,00%

30,00% Lufthansa 20,00% Air France-KLM 10,00% easyJet

0,00% IAG 2013 2014 2015 2016 2017 Ryanair -10,00% SAS -20,00%

-30,00%

Figure 18 – Plot of Return On Invested Capital (ROIC) of Lufthansa and its Peers, Own Calculations Based on Annual Reports

Extensive analysis is required to get an understanding of the trends and measures. Petersen and Plenborg highlight the following equation to decompose ROIC and express the relationship between the measure, the profit margin and Turnover Rate of Invested Capital: �� = ��

In the following sections, profit margins and Turnover Rate of Invested Capital of Lufthansa and its peers will be analyzed to study if the indicated positive trend in Lufthansa’s ROIC is generated from better utilization of capital or higher revenue and expense relation.

6.1.2.2 Profit Margin Profit margin (after tax) measures the relation between revenue and expenses. As indicated in the following equation, the ratio expresses by how much revenue from operations exceeds costs in operations:

�� = �100 ��

48 Profit margins for Lufthansa and its comparable companies are shown in Table 3.

Profit Margin 2013 2014 2015 2016 2017 Average Lufthansa 1.74% 1.09% 4.19% 5.64% 6.75% 3.88% Air France-KLM 1.46% -10.92% 4.69% 4.05% 0.06% -0.13% easyJet 14.16% 14.58% 16.33% 14.37% 10.54% 14.00% IAG 2.70% 7.81% 9.53% 10.08% 10.57% 8.14% Ryanair 13.57% 12.33% 17.01% 20.73% 21.13% 16.96% SAS 6.67% 2.51% 5.77% 7.42% 5.42% 5.56% Average 6.72% 4.57% 9.59% 10.38% 9.08% 8.07% Table 3 - Profit Margins for Lufthansa and its Peers, Own Calculations Based on Annual Reports Lufthansa had a profit margin of 6.75% in 2017, which indicates that the company generated EUR 6.75 cents on each Euro of Net Revenue. A high profit margin is attractive, as it shows the company’s ability to generate profits from its operating activities. However, over the years 2013 – 2017, Lufthansa had a lower-than-average profit margin, meaning that the company’s profit margin is generally lower than the one of most of its peers. On the other hand, Lufthansa’s profit margin has shown an overall increase from 1.74% in 2013 to 6.75% in 2017, as can be seen in Figure 19.

Profit Margin 25,00%

20,00%

15,00% Lufthansa

10,00% Air France-KLM easyJet 5,00% IAG 0,00% Ryanair 2013 2014 2015 2016 2017 -5,00% SAS

-10,00%

-15,00%

Figure 19 - Plot of Profit Margins for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Similarly to ROE and ROIC, a downturn is evident in 2014 for most companies, followed by steady growth for Lufthansa over the following years. A decrease in NOPAT lowered Lufthansa’s profit margin in 2014, while steady incline in both NOPAT and Net Revenue has positively impacted it afterwards. The following index and common size analyses will further examine the reasons behind these trends and isolate the value drivers of Lufthansa’s growth.

49 6.1.3 Trend and Common-Size Analysis of Income statement A trend analysis of Lufthansa’s income statement is conducted in order to isolate the items generating growth in Lufthansa’s profit. Trends in Lufthansa’s income statement positions are shown in Appendix 6.

An overall increase in Lufthansa’s Total Revenue is observed as a driver of increasing profit margin, which is, however, accompanied by an increase in costs. Largest impact on revenue growth is coming from revenue items Passenger Revenue (+17.13% from 2013 – 2017), Other Revenue (+31.52%) and Other Operating Income (+11.4%). Equivalently, increases are found in the cost items Other Operating Expenses (+28.04%) and Staff Costs (+11.09%), while Fuel Cost are declining due to decreasing oil prices (-26.47%).

The trend analysis, showing increases and decreases in Lufthansa’s income statement positions, is followed by a common-size analysis, which will express the size of the positions relative to revenue. This provides an in-depth understanding of value drivers in Lufthansa’s business. Appendix 6 shows both the trend analysis and the common-size analysis of Lufthansa’s income statement in the years 2013 - 2017. It is clear that the item Passenger Revenue is a large contributor to Lufthansa’s revenue providing more than 60% each year. The item Other Revenue also has a significant impact on Lufthansa’s revenue (around 20%), followed by Freight and Mail (8%) and Other Operating Income (6%). Other Revenue will further be decomposed in Section 6.1.3.2. The item Other Operating Costs is the largest expense account relative Lufthansa’s revenue by approximately 50% every year, while Staff Costs and Fuel are divided almost equally in years 2013 and 2014, with a relative decrease in the item Fuel in the following years. In light of these analysis, the revenue items Passenger Revenue and Other revenue and expense items Staff Costs and Fuel will be analyzed in depth in the following sections.

6.1.3.1 Passenger Revenue Passenger Revenue is Lufthansa’s largest income item, indicating its main revenue generating activity. In order to analyze what drives the growth in Lufthansa’s passenger revenue, three factors will be examined. As in other industries, revenue increases can be linked to increases in quantities sold or higher prices. Following equations express the relations between passenger revenue, price and quantity in the airline industry:

50 �� = �� × ��

�� = �� × �� × ��

ASK (Available Seat Kilometer) denotes one seat offered and flown for one kilometer, while RSK (Revenue Seat-Kilometer) denotes a paying passenger flown one kilometer. Furthermore, Passenger Load Factor measures the percentage of capacity utilization. Passenger Revenue is driven by one or more of the three previous mentioned factors.

Lufthansa ASK, RASK, RRPK and 2013 2014 2015 2016 2017 Load factor ASK (million) 262,682 268,105 273,973 286,555 322,821 Revenue per ASK (RASK) (EUR cents) 8.3 8 8.3 8.6 8.7 Revenue per RSK (RRSK) (EUR cents) 10.4 10 10.3 9.8 9.7 Load Factor (Percentage) 79.80% 80.10% 80.40% 79.10% 80.90% Table 4 - ASK, RASK, RRPK, and Load Factor for Lufthansa, Own Calculations Based on Annual Reports Table 5 gives an overview of the development of these factors and indicates large growth in available seat kilometer, particularly from the year 2016 to 2017. This is due to the use of larger aircrafts, consolidation of Brussels airlines, and deployment of aircrafts as part of a wet-lease contract with airberlin Group (Lufthansa Annual Report, 2017). The load factor, on the other hand, has remained around the same level of approximately 80%, which is also close to the industry’s average rate of 81.2% in 2017 (Statista, n.d.). A slight increase in revenue per ASK can be seen between 2014 – 2017, while a slight decrease is found in revenue per RSK during the same period, indicating declining ticket prices. Although declining ticket prices are usually negative for an airline’s business, it may be a natural tendency given the growth and competition in the industry as well as Lufthansa’s wet lease contracts and consolidations of low cost airlines. Analyzing these factors in relation to Lufthansa’s peers will provide an insight in the industries tendencies as well as indicate Lufthansa’s competitive advantages.

Trend Analysis ASK, RASK, 2013 2014 2015 2016 2017 RRPK and Load Factor ASK 100.00 102.06 104.30 109.09 122.89 Revenue per ASK (RASK) 100.00 96.39 100.00 103.61 104.82 Revenue per RSK (RRSK) 100.00 96.15 99.04 94.23 93.27 Load Factor 100.00 100.38 100.75 99.12 101.38 Table 5 - Trend Analysis of Lufthansa's ASK, RASK, RRPK, and Load Factor, Own Calculations Based on Annual Reports

51 Table 6 compares trends in passenger numbers between Lufthansa and its peers. 2013 is used as reference year for this and all following trend analyses.

Trend Analysis Passenger 2013 2014 2015 2016 2017 Numbers Lufthansa 100.00 101.33 102.95 104.85 124.33 Air France-KLM 100.00 100.16 102.18 103.67 108.56 easyJet 100.00 106.58 112.83 120.23 131.91 IAG 100.00 115.04 131.40 149.76 155.94 Ryanair 100.00 103.04 114.26 134.29 151.38 SAS 100.00 96.62 94.90 96.76 98.78 Table 6 - Trend Analysis in Passenger Numbers for Lufthansa and its Peers, Own Calculations Based on Annual Reports It is clear that the airline industry is facing growing demand, which lead to growth of most airlines. Large increases in passenger numbers of Ryanair, easyJet may be linked to an expanding demand for low cost airlines, while increases in IAG’s passenger numbers can be traced back to several acquisitions, including Air Lingus in 2015, as well as the expansion of their fleet. Lufthansa, however, had only slight increases in passenger numbers between 2013 – 2016, while the significant rise by almost 20% from 2016 to 2017 can be explained by previously mentioned consolidation with Brussel airlines and deployment of aircrafts in airberlin Group wet-lease contract.

6.1.3.2 Other Revenue The trend analysis of Lufthansa’s income statement showed a more than 30% increase in Other Revenue between 2013 - 2017. The item covers MRO (Maintenance Repair and Overhaul Services), Catering Services, Travel Services, IT Services, Ground Services and Other Services. Other Services include recognized revenue from work in progress related to service contracts and long term production (Lufthansa Annual Report, 2017), lounge operations and transport/warehouse logistics. It has had the largest increase in those years, while MRO Services and Catering Services still account for the largest part in terms of total number. Increases in MRO Services can be explained by new customers and contracts for maintenance services (Lufthansa Annual Report, 2017), by Lufthansa Technik which is a leading independent provider of MRO services for civilian commercial aircrafts (Lufthansa Annual Report, 2017). Catering Services revenue solely originates in the catering segment and was mostly driven by new and extended contracts in 2015. Travel Services is the only account which showed a decrease from 2013 to 2017, however, the impact on overall revenue is small, as the absolute numbers are relatively low.

52 Trend Analysis Other Revenue 2013 2014 2015 2016 2017 MRO Services 100.00 102.93 126.52 133.17 135.01 Catering Services 100.00 105.90 124.30 130.84 128.10 Travel Services (Commissions) 100.00 90.67 127.46 31.09 33.16 IT Services 100.00 103.14 100.00 103.48 103.83 Ground Services 100.00 99.03 119.42 117.48 130.10 Other Services 100.00 100.39 119.66 141.91 163.39 Total Other Revenue 100.00 103.00 123.36 128.21 131.53 Table 7 - Trend Analysis of Lufthansa’s Other Revenue, Own Calculations Based on Annual Reports 6.1.3.3 Cost Breakdown

6.1.3.3.1 Staff Costs As seen before, Staff Costs were large relative to revenue. Lufthansa’s staff costs overall increased more than 10% from 2013 to 2017, however, fluctuated each year as depicted in Figure 20. The decline in 2016 is mainly due to adjustments in the accounting numbers made to the cabin crew’s retirement and transitional benefits at Lufthansa Passenger Airlines (Lufthansa Annual Report, 2016).

Staff Costs (in EUR million) 8.300 8.200 8.100 8.000 7.900 7.800 7.700 7.600 7.500 7.400 7.300 7.200 2013 2014 2015 2016 2017

Figure 20 - Lufthansa's Staff Cost, Based on Annual Reports

Even though an increase in Staff Costs can be explained by higher passenger numbers, efficiency is becoming more important for Lufthansa in order to achieve a high profit margin and to remain competitive. Staff Costs are affected by different factors, primarily changes in employee numbers and increases in Salaries and Related Costs, which include pension and other benefits. Consequently, it is relevant to examine both factors.

Table 8 provides a trend analysis of key measures related to Lufthansa’s Staff Costs. It is evident that the number of employees has increased by 10% from year 2013 to 2017. Similarly,

53 Salaries and Related Costs increased overall, however, fluctuated together with total amount of Staff Costs as previously mentioned. It is noteworthy that salaries have decreased relative to revenue, indicating that revenue growth was higher than the increases in wages and salaries over the same time period. Furthermore, productivity measured in ASK per employee has shown a great acceleration from year 2016 to 2017.

Trend Analysis Staff Costs 2013 2014 2015 2016 2017 Number of Employees 100.00 100.74 101.83 105.87 110.23 Salaries and Related Costs 100.00 101.25 110.62 100.74 111.95 Salaries Relative to Revenue 100.00 101.41 101.59 95.66 95.04 ASK per Employee 100.00 101.31 102.43 103.04 111.49 (Productivity) Table 8 - Trend Analysis of Lufthansa's Staff Costs, Own Calculations Based on Annual Reports In the following tables, Lufthansa’s salaries relative to revenue and ASK per employee are measured and compared to its peers.

Salaries Relative to Revenue 2013 2014 2015 2016 2017 Lufthansa 22.82% 22.80% 23.01% 21.67% 21.53% Air France-KLM 28.66% 30.63% 30.13% 30.08% 29.57% easyJet 12.14% 12.50% 12.42% 12.94% 14.21% IAG 22.73% 22.73% 21.46% 21.38% 21.71% Ryanair 8.92% 9.20% 8.89% 8.96% 9.52% SAS 25.16% 23.07% 23.01% 21.87% 20.25% Table 9 - Salaries Relative to Revenue for Lufthansa and its Peers, Own Calculations Based on Annual Reports Salaries and Related Costs at Lufthansa accounted for 22.82% of Total Revenue in 2013 and declined to 21.53% in 2017. This indicates that wages and staff costs do not necessarily follow Lufthansa’s growth in revenue. Similar trends are seen for Lufthansa’s peers of which SAS has the largest decline from 25.16% in 2013 to 20.25% in 2017. Table 10 shows that Lufthansa’s employee productivity, measured by ASK per employee, has increased from 2.24 million in 2013 to 2.49 million in 2017. Similar trends appear for Lufthansa’s competitors. Only easyJet has a declining productivity. However, Lufthansa’s productivity per employee is lower than the one of all other peers. This can be attributed to the fact that Lufthansa, as a premium brand, offers higher customer service levels than its peers, making it the only 5 star airline in Europe (Skytrax, 2017), which results in a higher need of employees.

54 ASK per Employee 2013 2014 2015 2016 2017 Average (in million) Lufthansa 2.24 2.27 2.29 2.31 2.49 2.32 Air France-KLM 2.83 0.22 0.23 3.30 3.43 3.04 easyJet 8.90 8.85 8.55 8.54 8.22 8.61 IAG 3.84 4.24 4.48 4.69 4.78 4.41 Ryanair 12.94 13.20 13.65 12.28 12.10 12.83 SAS 3.16 3.66 3.92 4.54 5.06 3.92 Average 5.65 5.83 5.96 5.89 5.95 5.86 Table 10 - ASK per Employee for Lufthansa and its Peers, Own Calculations Based on Annual Reports

6.1.3.3.2 Fuel Costs From Lufthansa’s common-size analysis and trend analysis of Lufthansa’s income statement, it was also evident that fuel expenses, even though still accounting for a large part of total cost, declined in the period from 2013 to 2017. This decline in expenses is relevant to analyze as it increases Lufthansa’s profit margin significantly. Several factors can be linked to fuel costs. Mainly, fuel expenses are highly sensitive to the price of oil. In Figure 21, showing Lufthansa’s fuel expenses, a great decline can be seen from 2014 to 2016, followed by a slight increase in 2017. The same figure also gives the average crude oil price during this period (Statista.com, 2018). A similar decline is evident between 2014 to 2016, with an increase in 2017. This indicates that Lufthansa’s fuel expenses closely follow the average crude oil price in the world and the company’s profit margin therefore is heavily dependent on a low oil price.

Fuel Expenses (EUR million) and Average Crude Oil Price (USD/t) 8.000 120 7.000 100 6.000 80 5.000 4.000 60 Fuel Expenses 3.000 Average Crude Oil Price 40 2.000 20 1.000 0 0 2013 2014 2015 2016 2017

Figure 21 - Lufthansa's Fuel Expenses versus Average Crude Oil Price, Based on Annual Reports and Statista.com (2018)

Fluctuation in oil price impacts all airlines, making them subject to identical conditions. Cost control in this account is driven by internal characteristics such as hedging decisions or fuel

55 consumption, which may depend on the fleet and fleet efficiency. High fuel efficiency can be linked to newer aircrafts or specific types of aircrafts. On all flights in general, fuel is consumed regardless of revenue and load factors. Consequently, it is relevant to measure fuel expenses in relation to capacity in terms of ASK. Table 12 shows this measure for Lufthansa and its peers. Fuel expenses of easyJet and SAS have been translated to EUR million using the following FX rates from xe.com:

FX Rates 2013 2014 2015 2016 2017 EUR/GBP (December) 1.19818 1.28769 1.3554 1.17489 1.12553 SEK/EUR (October) 8.78065 9.25537 9.36082 9.91655 9.72937 Table 11 - FX Rates, Based on xe.com The industry-wide decrease in Fuel Expense per ASK for all airlines can be explained the previously seen drop in oil prices, together with higher fuel efficiencies for all fleets due to newer airplanes (Cooper, et al., 2018).

Fuel Expense per 2013 2014 2015 2016 2017 Average ASK (in EUR cents) Lufthansa 2.71 2.52 2.11 1.70 1.62 2.13 Air France-KLM 2.53 2.45 2.23 1.65 1.57 2.09 easyJet 1.91 2.03 1.94 1.49 1.25 1.72 IAG 2.58 2.38 2.21 1.62 1.51 2.06 Ryanair 1.61 1.61 1.55 1.47 1.21 1.49 SAS 2.31 2.11 2.03 1.45 1.45 1.87 Average 2.27 2.18 2.01 1.56 1.44 1.89 Table 12 - Fuel Expenses per ASK for Lufthansa and its Peers, Own Calculations Based on Annual Reports 6.1.4 Profit Margin Conclusion It is clear that growth observed in Lufthansa’s profit margin can be attributed to increases in passenger numbers and revenue of MRO services, while controlling the increase in expenses for salaries and wages and fuel. Furthermore, Lufthansa benefited from is consolidation with Brussel airways and its deployment of aircrafts on wet-lease contract with airberlin in 2017.

6.1.5 Asset Turnover Analysis: Turnover Rate of Invested Capital Having analyzed Lufthansa’s operations in terms of profit, it is relevant to further analyze Lufthansa’s Turnover Rate of Invested Capital as well as Turnover Rate of Assets. The Turnover Rate of Invested Capital measures how well Lufthansa utilizes its invested capital. Therefore, it is attractive to have a high Turnover Rate of Invested Capital, as this indicates

56 high revenues coming from investments. The ratio is calculated using the following formula and expresses the amount of revenue generated per invested Euro (Petersen & Plenborg, 2012):

�� = ��

Calculated Turnover Rates of Invested Capital for Lufthansa and the comparable companies can be seen in Table 13 below:

Turnover Rate of 2013 2014 2015 2016 2017 Average Invested Capital Lufthansa 2.23 2.01 1.83 1.73 1.87 1.93 Air France-KLM 2.10 1.67 1.75 1.46 1.50 1.70 easyJet 1.43 1.47 1.48 1.27 1.39 1.41 IAG 1.70 1.46 1.32 1.34 1.34 1.43 Ryanair 1.13 1.16 1.32 1.41 1.23 1.25 SAS 1.39 1.11 1.09 0.96 1.09 1.13 Average 1.66 1.48 1.46 1.36 1.40 1.47 Table 13 - Turnover Rates of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports Lufthansa’s Turnover Rate of Invested Capital was 1.87 in 2017, indicating revenues of EUR 1.87 are generated for every Euro the airline invested in operations (Petersen & Plenborg, 2012). Following this logic, Lufthansa had its invested capital tied up for 365/1.87 = 195 days in 2017. The decreasing trend for Lufthansa in the years 2013 to 2016 similarly expresses that the airline has become less efficient in utilizing its invested capital. From Lufthansa’s analytical balance sheet, it is observed that increases in Invested Capital exceed increases in Revenue, causing a declining turnover rate of invested capital. Looking at Turnover Rates of Invested Capital for Lufthansa’s peers, it is evident that this trend is general for the industry due to the same reasons. However, in 2017 slight increases in the turnover rates are observed for Lufthansa and most of its peers as illustrated in Figure 22.

57 Turnover Rate of Invested Capital 2,5

2 Lufthansa

1,5 Air France-KLM easyJet 1 IAG Ryanair 0,5 SAS

0 2013 2014 2015 2016 2017

Figure 22 - Turnover Rate of Invested Capital of Lufthansa and its Peers, Own Cculations Based on Annual Reports

Lufthansa managed to maintain the highest turnover rates compared to its peers over the entire period 2013 - 2017. Trend analyses and common-size analyses of Lufthansa’s and the peers’ analytical balance sheets, which can be found in Appendix 9, were conducted to further analyze the causes of these trends.

6.1.5.1 Trend Analysis and Common-Size Analysis of Lufthansa’s Analytical Balance Sheet The trend analysis of Lufthansa’s analytical balance sheets shows that Invested Capital increased by 40% from 2013 to 2017, as Total Operating Assets increased by 35.70% during this period, while Total Operating Liabilities appreciated by only 28.20%. Together with lower growth in Net Revenues it resulted in declining turnover rates for the period 2013 – 2016. Through higher net revenue growth in 2017, the rate improved again in 2017.

Additionally, it is relevant to analyze the positions of Lufthansa’s balance sheet accounting items in terms of impact and importance to Invested Capital. A variation of a common-size analysis is conducted, in which Days on Hand for each accounting item expresses the number of days the respective item consumes cash. Days on Hand for Lufthansa’s balance sheet accounting items are shown in Appendix 9 and are calculated using the following equation (Petersen & Plenborg, 2012):

365 �� = ��

58 Firstly, Days on Hand for Invested Capital for Lufthansa and its peers are shown in Table 14.

Days on Hand of 2013 2014 2015 2016 2017 Average Invested Capital Lufthansa 163.85 181.59 199.97 210.78 195.06 190.25 Air France-KLM 173.93 218.76 208.46 250.60 242.96 218.94 easyJet 254.59 248.01 246.92 286.90 263.25 259.93 IAG 214.88 250.38 277.54 271.87 272.72 257.48 Ryanair 322.70 316.01 277.27 259.06 295.77 294.16 SAS 262.22 328.42 334.30 380.57 335.65 328.23 Average 219.41 246.78 249.49 268.02 260.10 248.76 Table 14 - Days on Hand of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports An appreciation from year 2013 to 2016 followed by a decline in 2017 is observed, which could be expected given the similar decrease in Turnover Rates of Invested Capital in 2013 – 2016 followed by an increase in 2017. Days on Hand of 195.06 in 2017 reveals that it takes Lufthansa 195.06 days on average to turn Invested Capital into Revenue. Lufthansa generally has lower Days on Hand on Invested Capital than its peers, meaning that the company is quicker at generating revenue from invested capital. This is obvious given Lufthansa’s higher Turnover Rates of Invested Capital. Appendix 9 shows that large contributors to Days on Hand are the items Aircraft and Reserve Engines as well as Trade Receivables.

6.1.5.2 Aircrafts and Engines and Capitalized Operating Leases Given the nature of the aviation business, it is unsurprising that large investments are made in aircrafts and related assets. In 2017, Lufthansa’s book value of Aircraft and Reserve Engines amounted to EUR 15,959 million, representing more than half of Lufthansa’s total book value of Operating Assets (Appendix 3). Table 15 shows Days on Hand for Aircrafts and Engines for Lufthansa and its peers.

Days on Hand for 2013 2014 2015 2016 2017 Average Aircrafts & Engines Lufthansa 148.11 162.80 163.86 168.27 161.48 160.90 Air France-KLM 132.47 126.13 120.78 132.14 138.53 130.01 easyJet 192.77 202.15 221.02 250.74 251.44 223.62 IAG 198.29 210.32 215.33 195.05 185.64 200.93 Ryanair 361.62 361.64 348.35 344.91 390.65 361.43 SAS 73.79 71.31 64.36 75.24 66.70 70.28 Average 184.51 189.06 188.95 194.39 199.07 191.20 Table 15 - Days on Hand for Aircrafts and Engines for Lufthansa and its Peers, Own Calculations Based on Annual Reports

59 Lufthansa’s Days on Hand for this item was 161.48 in 2017, indicating the number of days before revenue is generated from the investment. Compared to its peers, Lufthansa is relatively effective in utilizing its investments, and in 2017 is only beaten by SAS, which has less than half of Lufthansa Days on Hand, and by Air France-KLM. This might be due to SAS having an older fleet than Lufthansa and the other competitors, resulting in lower book value of aircrafts for SAS.

An inclining trend in book value for Aircrafts and Engines is revealed in analytical financial statements (Appendix 3), which can be linked to Lufthansa’s business growth in 2017, mainly due to consolidations of Brussels Air and wet-lease contracts from airberlin (Lufthansa Annual Report, 2017). Moreover, on-going investments are done in new aircrafts that are more efficient in terms of fuel and passenger comfort.

Table 16 shows Days on Hand for Capitalized Operating Leases, revealing Lufthansa’s strong position in turning those investments into revenue in shorter time than its peers.

Days on Hand for Capitalized 2013 2014 2015 2016 2017 Average Operating Leases Lufthansa 7.34 7.05 7.66 11.77 10.47 8.86 Air France-KLM 144.89 174.60 174.40 185.48 178.74 171.62 easyJet 16.40 15.90 15.83 15.81 19.62 16.71 IAG 125.67 138.38 140.63 166.66 163.72 147.01 Ryanair 88.45 91.63 86.15 55.74 54.80 75.35 SAS 1.71 1.25 1.19 1.08 1.16 1.28 Average 64.077 71.47 70.98 72.76 71.42 70.14 Table 16 - Days on Hand for Capitalized Operating Leases for Lufthansa and its Peers, Own Calculations Based on Annual Reports Days on Hand for Capitalized Operating Leases are very low for Lufthansa, SAS, and easyJet, because they own most of their airplanes, while a large number of Air France-KLM and IAG’s fleet consists of leased aircrafts.

6.1.6 Conclusion Asset Turnover The analysis revealed a declining trend in the Turnover Rate of Invested Capital from year 2013 to 2016, followed by an increase in 2017 and equivalently an increase in Days on Hand for Invested Capital as well as for Capitalized Operating Leases from 2013 to 2016, followed by a small depreciation in 2017. These trends were driven by declines or only small increases in

60 passenger revenues, and increased asset value of aircrafts and engines as well as capitalized operating leases.

In conclusion, Lufthansa benefits from its strong investments, given its high turnover rate of invested capital. Lufthansa is able to utilize invested capital better than its peers and is therefore quicker at generating revenue from investments in owned and leased aircrafts than most of its peers.

6.2 Growth Analysis Lufthansa’s growth is measured from a financial perspective to assess the company’s relative performance in the industry. This helps to identify opportunities for future growth and to evaluate Lufthansa’s future performance. Lufthansa’s Sustainable Growth Rate and Economic Value Added (EVA) provide the basis for this growth analysis.

6.2.1 Sustainable Growth Rate The Sustainable Growth Rate measures the rate at which the company can grow its revenues, whilst maintaining its current financial risk. Moreover, it is useful for identifying operational and financial factors that contribute to Lufthansa’s growth. The Sustainable Growth Rate (g) takes into account Return on Equity and the Payout Ratio in the following equation (Petersen & Plenborg, 2012):

� = �� (1 − �� )

Where

�� ℎ�� = �� ℎ��

Table 17 shows previously found Return on Equity for Lufthansa, the airline’s Payout Ratio and Sustainable Growth Rate from 2013 to 2017.

Lufthansa 2013 2014 2015 2016 2017 ROE 5.34% 1.86% 29.46% 25.22% 24.98% Payout Ratio 66.18% 0.00% 13.62% 13.12% 15.90% g, Sustainable Growth Rate 1.81% 1.86% 25.45% 21.91% 21.01% Table 17 - Lufthansa's ROE, Payout Ratio, and Sustainable Growth Rate (g), Own Calculations Based on Annual Reports It is evident that Lufthansa’s Sustainable Growth Rates increased significantly in 2015 and stayed high during the next years because of high Return on Equity rates of almost 25% - 30%.

61 Due to good financial performance in 2015 and 2016, Lufthansa proposed to increase its dividend payout for 2017 (Lufthansa Annual Report, 2017). The slightly higher Payout Ratio in 2017 however did not have a large impact on Lufthansa’s Sustainable Growth Rate, due to the still very high ROE.

Table 18 gives the Sustainable Growth Rate and Payout Ratio of Lufthansa in relation to its peers.

2013 2014 2015 2016 2017 Average Payout Ratio 66.18% 0.00% 13.62% 13.12% 15.90% 21.77% Lufthansa g 1.81% 1.86% 25.45% 21.91% 21.01% 14.41% Air France- Payout Ratio 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% KLM g -79.23% 28.97% 46.52% 61.11% -9.12% 9.65% Payout Ratio 33.07% 39.65% 39.68% 48.51% 95.72% 51.33% easyJet g 15.86% 12.50% 14.70% 8.35% 0.47% 10.38% Payout Ratio 0.00% 0.00% 28.01% 26.05% 26.26% 16.07% IAG g 3.49% 26.44% 19.72% 25.47% 20.15% 19.05% Payout Ratio 86.19% 0.00% 59.91% 25.29% 0.00% 34.28% Ryanair g 2.40% 15.89% 8.61% 32.40% 29.75% 17.81% Payout Ratio 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% SAS g 42.10% -14.65% 15.08% 21.92% 14.26% 15.74% Average g -2.26% 11.84% 21.68% 28.53% 12.75% 14.51% Table 18 - Payout Ratio and Sustainable Growth rate (g) for Lufthansa and its Peers, Own Calculations Based on Annual Reports A comparison of Lufthansa with its peers should be done carefully as the Sustainable Growth Rate is affected by airlines’ dividend payout policy. A low Payout Ratio indicates that the company retains earnings and is valuable to investors if those funds get reinvested in profitable projects. Table 18 shows that most competitors either do not pay out dividends at all, or have a higher Payout Ratio than Lufthansa. However, even the peers with a high Payout Ratio, namely easyJet, Ryanair, and IAG, have higher Sustainable Growth Rates than Lufthansa in most years. This can be explained by the fact that Low Cost Carriers such as Ryanair and easyJet overall experience higher growth rates in their business than network carriers like Lufthansa, Air France-KLM and SAS.

Table 19 further shows the growth of selected accounting items for Lufthansa. Between 2013 – 2017, all positions grew on average, with Earnings Per Share (EPS) and Net Earnings After Tax showing the largest growth. Particularly in year 2015, Lufthansa experienced extreme growth of 2958% for EPS and 2196% for Net Earnings After Tax as well as 100% for Earnings

62 Before Interest and Tax (EBIT), due to significantly lower fuel expenses as well as lower tax payments. However, in the following years, growth of these items slowed down again.

Based on above findings, it is clear that Lufthansa as a network carrier experiences slower growth than Low Cost Carriers as Ryanair and easyJet, but still grows at the average industry pace.

Growth in Selected 2013 2014 2015 2016 2017 Average Accounts Earnings Per Share -74.63% -82.35% 2958.33% 3.81% 32.02% 727.95% (EPS) Total Revenue -2.44% -0.16% 9.06% -3.28% 11.85% 4.37% EBIT -43.67% -9.63% 100.38% 40.98% 43.26% 43.75% Net Earnings After -66.04% -76.99% 2196.00% 4.70% 33.00% 539.18% Tax Invested Capital -15.02% 18.44% 10.01% 4.11% 4.00% 9.14% Table 19 - Lufthansa's Growth in Selected Accounts, Own Calculations Based on Annual Reports 6.2.2 Value of Growth It is relevant to measure if the growth Lufthansa is experiencing actually adds value to the company, indicated by a positive Economic Value Added (EVA). Lufthansa’s ROIC must be larger than its Weighted Average Cost of Capital (WACC) in order to be value creating, as can be seen in the following equation:

�� = (�� − ��) � ��

WACC for 2017 will be calculated in Section 7 and is assumed to be the same for all previous years. Table 20 shows a positive EVA in 2015, 2016 and 2017, when ROIC exceeds WACC, indicating that the growth is valuable from a shareholder’s perspective, which is also reflected in the increasing share price during 2017.

Value of Growth Parameter 2013 2014 2015 2016 2017 ROIC 3.87% 2.20% 7.64% 9.76% 12.62% WACC 4.28% 4.28% 4.28% 4.28% 4.28% EVA -56.37 -311.57 589.73 1,001.85 1,585.54 Growth in EVA -107.41% -652.69% 289.28% 69.88% 58.26% Share Price (in EUR) 15.42 13.83 14.57 12.27 30.72 Table 20 - Lufthansa's Value of Growth Parameters, Own Calculations Based on Annual Reports

63 6.3 Risk Analysis The profitability and growth analyses in Sections 6.1 and 6.2 recognized Lufthansa’s value drivers and growth creators. It is furthermore essential to analyze the risk, which is associated with this growth and value creation. Risk for Lufthansa is connected to either operational or financial activities. This section will therefore focus on providing a financial risk analysis of Lufthansa’s activities by measuring its short term and long term liquidity, and will afterwards evaluate the currency and interest risks which are related to the airlines activities.

6.3.1 Liquidity Risk Analysis Assessing Lufthansa’s liquidity is crucial to determine the company’s ability to meet its financial obligations as well as making profitable investments. High risk of illiquidity can lead to increased financial expenses through credit risk rating while illiquidity can cause bankruptcy if the company becomes unable to meet its obligations. Consequently, it is necessary to analyze short-term and long-term liquidity of Lufthansa.

6.3.1.1 Short-Term Liquidity Risk Table 21 shows three essential ratios measuring Lufthansa’s ability to pay short-term obligations (short-term liquidity risk). Calculations are based on following formulas presented by Petersen & Plenborg (2012):

�� = ��

��ℎ + �� + �� = ��

��ℎ �� ℎ�� − �� ℎ �� = ��

Where

��ℎ �� = �� + �� + �ℎ��

64 Short-Term Risk Ratios 2013 2014 2015 2016 2017 Current Ratio 0.88 0.75 0.72 0.93 0.87 Quick Ratio 0.83 0.69 0.66 0.85 0.80 CFO to Short-Term Debt Ratio 0.30 0.19 0.28 0.27 0.30 Table 21 - Lufthansa's Short-Term Risk Ratios, Own Calculations Based on Annual Reports

6.3.1.1.1 Current Ratio and Quick Ratio The Current Ratio measures how well a company is able to pay off Current Liabilities with Current Assets if liquidated. Similarly, the Quick Ratio excludes Inventory, presenting a more conservative measure for Lufthansa to meet current liabilities. Consequently, the quick ratio is generally lower than the current ratio as presented in the Tables 22 and 23 below.

Current Ratio 2013 2014 2015 2016 2017 Average Lufthansa 0.88 0.75 0.72 0.93 0.87 0.83 Air France-KLM 0.73 0.61 0.63 0.75 0.82 0.71 easyJet 0.84 0.91 0.72 0.90 1.31 0.94 IAG 0.72 0.76 0.80 1.05 1.05 0.88 Ryanair 1.97 1.51 1.72 1.43 1.56 1.64 SAS 0.61 0.79 0.86 0.78 0.81 0.77 Average 0.96 0.89 0.91 0.97 1.07 0.96 Table 22 - Current Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Quick Ratio 2013 2014 2015 2016 2017 Average Lufthansa 0.83 0.69 0.66 0.85 0.80 0.76 Air France-KLM 0.69 0.56 0.58 0.69 0.77 0.66 easyJet 0.84 0.91 0.72 0.90 1.31 0.94 IAG 0.67 0.71 0.75 1.00 1.01 0.83 Ryanair 1.97 1.51 1.72 1.43 1.56 1.64 SAS 0.59 0.76 0.84 0.76 0.79 0.75 Average 0.93 0.86 0.88 0.94 1.04 0.93 Table 23 - Quick Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports High ratios above 1 are associated with high liquidity. For Lufthansa, the Current Ratio fell from 0.88 in 2013 to 0.72 in 2015. Looking at Lufthansa’s analytical balance sheet, this decrease is associated with a reduction in Current Assets, particularly in Securities as well as Cash and Cash Equivalents. However, those accounts equivalently grew in 2016 and 2017 along with Accounts Receivable, positively impacting Lufthansa’s ability to payoff Current Liabilities and consequently leading to higher Current and Quick Ratios in those years.

Overall, the industry is characterized by low Current and Quick Ratios below 1, indicating that the companies are not able to meet all short term financial obligations with its Current Assets. However, an increasing trend for Current Ratio and Quick Ratio for the industry is observed,

65 which can be traced back to changes in financial items, including growth in Short-Term Investments and Cash and Cash Equivalents as well as decreases in Derivative Securities. Those developments indicate the airlines’ increased control of financial investments and debts.

6.3.1.1.2 Cash Flow from Operations to Short-Term Debt Another way to assess Lufthansa’s liquidity risk is to measure the company’s ability to pay off current liabilities through Cash Flows from Operations (CFO). Similarly to previous ratios, a high CFO to Short-Term Debt Ratio indicates low liquidity risk. Moreover, Cash Flows from Operations are the actual cash flow Lufthansa generated during the year, rather than potential cash flows, and thus measures Lufthansa’s ability to meet Current Liabilities on an ongoing basis. Table 24 shows rather low ratios for Lufthansa as the ratio of 0.30 in 2017 reveals that the company can only pay off 30% of its Current Liabilities annually from its Operating Cash Flows (Petersen & Plenborg, 2012). This means it would take Lufthansa 3.3 years to payoff Current Liabilities of only one single year. The decline in the CFO to Short-Term Debt Ratio in 2014 is associated with the low NOPAT result that year as seen in the analytical income statement. However, a rise in the following years is a sign of the company’s strengthened liquidity position. Compared to its peers, Lufthansa appears to have lower fluctuations in the ratio, and a stronger liquidity position overall, indicated by higher ratios than the one’s of its peers.

CFO to Short-Term 2013 2014 2015 2016 2017 Average Debt Ratio Lufthansa 0.30 0.19 0.28 0.27 0.30 0.27 Air France-KLM -0.24 -0.44 -0.03 0.13 -0.17 -0.15 easyJet 0.19 0.39 0.37 0.32 0.02 0.26 IAG 0.20 0.21 0.23 0.47 0.35 0.29 Ryanair 0.14 0.08 -0.01 0.06 0.12 0.08 SAS 0.35 0.12 0.22 0.20 0.33 0.25 Average 0.16 0.09 0.18 0.24 0.16 0.17 Table 24 - CFO to Short-Term Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports

66 6.3.1.2 Long-Term Liquidity Risk Furthermore, Table 25 shows ratios measuring Lufthansa’s long-term liquidity risk.

Long-Term Liquidity Risk 2013 2014 2015 2016 2017 Financial Leverage 3.77 6.56 4.55 3.85 2.78 Solvency Ratio 0.21 0.13 0.18 0.21 0.26 Interest Coverage Ratio 4.48 3.11 -4.16 -126.15 2,119.13 Interest Coverage Ratio (Cash) 16.95 8.41 -9.04 -165.56 2,539.44 CFO to Debt Ratio 0.14 0.08 0.13 0.11 0.14 Table 25 - Long Term Liquidity Risk Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports Following formulations presented by (Petersen & Plenborg, 2012) are applied:

�� = ��

�� = �� + ��

�� (��) �� = ��

��ℎ �� (��ℎ) = ��

��ℎ �� = ��

6.3.1.2.1 Financial Leverage and Solvency Ratio Lufthansa’s Financial Leverage shows the company’s Total Liabilities in relation to its Equity. Table 26 reveals a declining trend from 6.56 in 2014 to 2.78 in 2017 for Lufthansa. Consequently, as seen in Table 27, Lufthansa’s Solvency Ratio is growing from 0.13 in 2014 to 0.26 in 2017, both indicating an increase in equity relative to liabilities.

Financial Leverage 2013 2014 2015 2016 2017 Average Lufthansa 3.77 6.56 4.55 3.85 2.78 4.30 Air France-KLM 14.57 -55.09 130.72 26.57 11.34 25.62 easyJet 1.91 1.68 1.62 1.52 1.59 1.66 IAG 5.47 7.28 5.71 5.68 4.10 5.65 Ryanair 2.10 2.07 2.36 2.40 1.94 2.17 SAS 15.07 11.19 9.05 10.35 7.59 10.65 Average 7.15 -4.38 25.67 8.40 4.89 8.34 Table 26 - Financial Leverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports

67 Solvency Ratio 2013 2014 2015 2016 2017 Average Lufthansa 0.21 0.13 0.18 0.21 0.26 0.20 Air France-KLM 0.06 -0.02 0.01 0.04 0.08 0.03 easyJet 0.34 0.37 0.38 0.40 0.39 0.38 IAG 0.15 0.12 0.15 0.15 0.20 0.15 Ryanair 0.32 0.33 0.30 0.29 0.34 0.32 SAS 0.06 0.08 0.10 0.09 0.12 0.09 Average 0.19 0.17 0.19 0.20 0.23 0.20 Table 27 - Solvency Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports These trends can be interpreted as reductions in long-term liquidity risk for Lufthansa, as the company is accumulating more equity to pay off its financial obligations. Similar trends are observed for Lufthansa’s peers as shown in Tables 26 and 27, indicating an industry-wide strong growth in equity relative to liabilities, driven by positive net income numbers in most years by most companies.

6.3.1.2.2 Interest Coverage Ratio Two different calculations of Interest Coverage Ratios are applied to measure Lufthansa’s ability to pay off its Net Financial Expenses (NFE) by EBIT and Cash Flow from Operations. Consequently, high ratios indicate low liquidity risk in terms of covering NFE. However, Tables 28 and 29 show fluctuating ratios for Lufthansa and most of its peers.

Interest Coverage 2013 2014 2015 2016 2017 Average Ratio Lufthansa 4.48 3.11 -4.16 -126.15 2,119.13 399.28 Air France-KLM 0.07 -0.46 1.46 3.30 0.09 0.89 easyJet 3.53 4.06 4.41 3.32 2.96 3.66 IAG 2.15 2.27 3.91 8.52 7.36 4.84 Ryanair 106.47 102.15 143.01 -59.63 146.10 87.62 SAS 2.31 0.73 2.54 1.97 2.99 2.11 Average 19.84 18.64 25.20 -28.11 379.77 83.07 Table 28 - Interest Coverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports Interest Coverage 2013 2014 2015 2016 2017 Average Ratio (Cash) Lufthansa 16.95 8.41 -9.04 -165.56 2,539.44 478.04 Air France-KLM -1.39 2.01 -0.32 2.82 -5.97 -0.57 easyJet 1.57 2.56 3.03 2.21 0.13 1.90 IAG 4.79 3.58 4.02 13.45 8.34 6.84 Ryanair 2.80 1.81 -0.31 -1.04 4.16 1.48 SAS 3.14 1.03 2.27 1.99 4.31 2.55 Average 4.64 3.24 -0.06 -24.36 425.07 81.71 Table 29 - Interest Coverage Ratio (Cash) for Lufthansa and its Peers, Own Calculations Based on Annual reports

68 Negative ratios in 2015 and 2016 indicate that financial income was higher than expenses in the given years, while the high ratio of 2,119.13 in 2017 is caused by a very low Net Financial Expense together with high operating performance results, consequently, disclosing low liquidity risk for Lufthansa in relation to Net Financial Expenses. This indicates that Lufthansa had a very strong position in terms of operating income compared to financial expenses in 2017. Moreover, it is shown that airlines are generally able to pay off their Net Financial Expenses with their operating profit and Cash Flow from Operations, as indicated by the ratios lying above 1.

6.3.1.2.3 Cash flow from Operations to Debt Ratio Similar to the short term risk analysis before, it is relevant to measure Lufthansa’s ability to cover long term liabilities with Cash Flows from Operations:

CFO to Debt Ratio 2013 2014 2015 2016 2017 Average Lufthansa 0.14 0.08 0.13 0.11 0.14 0.12 Air France-KLM -0.08 -0.14 -0.01 0.04 -0.05 -0.05 easyJet 0.08 0.15 0.18 0.13 0.01 0.11 IAG 0.07 0.07 0.08 0.14 0.11 0.10 Ryanair 0.04 0.03 0.00 0.02 0.04 0.03 SAS 0.10 0.03 0.05 0.05 0.08 0.06 Average 0.06 0.04 0.07 0.08 0.06 0.06 Table 30 - CFO to Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports The decline from 0.14 in 2013 to 0.08 in 2014 and the following incline to 0.14 in 2017 is linked to weaker financial performance in 2014, which increased since. Nevertheless, the ratio fluctuates around the mean of 0.12, disclosing that Lufthansa is able to payoff 12% of its long- term debt on an on-going basis. Compared to its peers, Lufthansa on average has the highest CFO to Debt Ratio, indicating the airline’s low risk of becoming illiquid in an industry in which the CFO to Debt Ratios generally lie between 0.03 and 0.10.

6.3.2 Fuel Price Risk Previous pages assessed Lufthansa’s risk related to the company’s financing. Nevertheless, the nature of the business additionally exposes the airline to risks related to fuel, exchange rates and interest rate. Lufthansa’s exposure to these risks will be analyzed in the following section.

As Lufthansa’s operations rely on fuel, prices can have a large impact on the financial results. Fuel costs made up around 15% of Lufthansa’s operating expenses in 2016 and 2017. Crude oil hedges are primarily applied to limit risk coming from changing oil prices. The company hedges

69 up to 5% of its exposure monthly by spread options and other combinations of hedges. The overall hedge level and time horizon depends on the risk profile. According to Lufthansa Annual Report (2017) the hedge level for 2018 is 70% and 20% in 2019. Nevertheless, Lufthansa aims to have a hedge level of 85%.

6.3.3 Exchange Rate Risk Lufthansa is furthermore exposed to risk associated with foreign exchange rates. The rate of US dollars plays a central role as fuel payments are denominated in this currency. Other currency risks are related to the company’s ongoing operations and consequently related to exchange rates between Euro and Chinese Renminbi, the Swiss Franc, British Pound Sterling, the Japanese Yen and the Indian Rupee, as they are the main foreign currencies used in their operations. Lufthansa hedges these exposures through future contracts, with the hedging level of currency exposure lying between 21% and 40% in 2017 (Lufthansa Annual Report, 2017). The level is continuously reviewed and increased if necessary.

6.3.4 Interest Rate Risk Lastly, Lufthansa is exposed to fluctuations in interest rates in international money and capital markets. The company uses interest rate swaps for borrowing and lease liabilities at fixed interest rates, as it aims to finance all of its financial liabilities at floating interest rates.

Furthermore, cross-currency interest rate swaps are used to hedge liabilities in foreign currencies. Lufthansa’s floating to fixed interest rates for long-term borrowings appear to be around 90% until 2028, supporting the goal of financing all of financial liabilities at floating interest rates (Lufthansa Annual Report, 2017).

6.4 Financial Analysis Conclusion The profitability analysis revealed that Lufthansa performs on the same level as its peers or slightly lower in terms of generating profit on Equity and Invested Capital. Nevertheless, Lufthansa was able to generate 25% profit on shareholders investments in 2017. Moreover, Lufthansa’s ROIC grew from 3.87% in 2013 to 7.22% in 2017, similar to the trends in the company’s profit margin. The increases were driven by growth in passenger numbers of which Lufthansa benefitted from consolidation with Brussel airways and deployment of aircrafts on wet-lease contract with airberlin in these years. Moreover, increased revenue in Lufthansa Technik’s MRO services and cost control were revealed. In this regard, lower salaries in relation to revenue and higher employee efficiency enabled the airlines to increase its profits.

70 Airlines additionally benefitted from low fuel expenses, especially between 2015 and 2017, while lower fuel cost per ASK also indicated higher fuel efficiency related to newer aircrafts. Furthermore, it was discovered that Lufthansa’s ability to generate revenue for every Euro invested in operations, is generally higher than for its peers between 2013 and 2017, and that Lufthansa generated EUR 1.87 per invested Euro in 2017. Compared to its peers, Lufthansa was relatively effective in generating revenue from its investments in Aircraft and Engines and from its Operating Leases. Higher efficiency for SAS and Air France-KLM may be due to older fleets and their focus on wet lease contracts, while Lufthansa owns a large part of its aircrafts.

The growth analysis in Section 6.2 showed that Lufthansa experienced average growth rates of 14.41% between 2013 -2017, which is close to the average growth in the industry (14.51%). Large growth in selected accounting items equivalently demonstrated Lufthansa’s growing earnings and profits. EVA was calculated to identify whether the growth was value creating for shareholders. This was then shown through positive and growing EVA, which also led to significant increases in the company’s share price between 2013 and 2017.

Furthermore, the liquidity analysis revealed that Lufthansa generally has a low risk of becoming illiquid. Overall, increasing trends on Lufthansa’s liquidity ratios were disclosed, indicating growing liquidity for the airline. Analyzing Lufthansa’s ability to pay off its short-term debt showed that the company is able to immediately convert capital to cash and is able to cover a large portion of its current liabilities by its current assets, also when subtracting inventories. However, smaller portion of debt can be paid back by the airline’s cash flow from operations. Additionally, the long-term debt analysis revealed an increase in equity in relation to long-term liabilities, consequently lowering risk of illiquidity for the company. Lufthansa’s long-term risk ratios generally appear to be representative for the industry, but Lufthansa still performs in the better end. The only larger deviations appear in Lufthansa’s interest coverage ratio, indicating high operating financial results and low financial expenses for the company. Moreover, Lufthansa hedges its exchange rate risk and interest rate risk and limits its exposure to fuel price fluctuations by which financial performance is highly impacted due to nature of the aviation business.

71 7 Cost of Capital

7.1 Weighted Average Cost of Capital (WACC) Formula The term “Cost of Capital” in general describes the risk-adjusted cost rate investors ask for as return for their investment and is therefore a key value driver in all valuations. When evaluating companies, which typically have both equity and debt on their balance sheet, the Weighted Average Cost of Capital (WACC) is usually applied as appropriate cost of capital (Schobinger & Filleux, 2018). The basic formula calculates WACC as the Cost of Equity and Cost of Debt, weighted by the market value of their share in total capital (Petersen & Plenborg, 2012):

�� = × � × (1 − �) + × � (�� + �) (�� + �)

Where

NIBD = Market value of Net Interest-Bearing Debt

E = Market Value of Equity rd = Required Rate of Return on NIBD re = Required Rate of Return on Equity t = Corporate Income Tax Rate

The Cost of Debt is reduced by the corporate income tax rate because interest income is deductible from tax and will therefore be excluded from Free Cash Flows later in the valuation (see Section 9.1). However, the interest tax shield must be incorporated in the final valuation of the company. In an enterprise Discounted-Cash-Flow (DCF) valuation, this is achieved by reducing the WACC by the corporate income tax (Koller, et al., 2010).

The WACC formula above does not include hybrid instruments, which are financial instruments that combine characteristics of both equity and debt instruments. It is appropriate to exclude such instruments, like preferred shares, from the WACC calculation of Lufthansa, as Lufthansa does not have any preferred shares as of December 31st, 2017 (Lufthansa Annual Report, 2017).

72 7.2 Weighted Average Cost of Capital for Lufthansa 7.2.1 Capital Structure Even though applying the WACC is simple and intuitive, some disadvantages exist. One difficulty is that companies usually do not maintain the same capital structure over years, while the WACC assumes a constant debt/equity ratio. In 2017, Lufthansa had 75% debt and 25% equity (Lufthansa Annual Report, 2017), while its target capital structure is set at 50% debt and 50% equity (Spohr, 2016). Koller, et al. (2010) as well as Rosenbaum, et al. (2013) recommend using the company’s target capital structure in the WACC calculation. For that reason, a split of 50% equity and 50% debt is used when calculating the WACC for Lufthansa.

7.2.2 Required Rate of Return on Equity In theory, the Rate of Return on Equity (or also called Cost of Equity) is determined by the Capital Asset Pricing Model (CAPM), which defines Cost of Equity as (Petersen & Plenborg, 2012):

� = � + b × (� − �)

Where re = Investors’ Required Rate of Return rf = Risk-Free Interest Rate be = Systematic Risk on Equity (levered beta) rm = Rate of Return of the Market Portfolio

Koller, et al. (2010) describe the CAPM-formula as the most commonly used model for the approximation of investors’ Required Rate of Return on Equity. Therefore, the next steps will be to estimate the input parameters for the CAPM-formula.

7.2.3 Risk-Free Interest Rate

The first parameter in the CAPM-formula is the risk-free interest rate (rf). “The risk-free rate of return is the rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time” (Investopia, n.d., p. 1). This shows, that the average investment period and the horizon of the risk-free rate should match. The Discounted-Free-Cash-Flow model, which uses

73 the WACC in its valuation as can be seen in Section 9.1, states a going-concern assumption for the valued firm, meaning that the average investment horizon is infinite. However, as no infinite risk-free investments exist, practitioners use horizons from five to thirty years (Rosenbaum, et al., 2013). Furthermore, it is common to use yields of government bonds from the same country the company operates in, as government bonds are viewed as a risk-free asset class (EY, 2015). Government bonds from the same geographic location as the company are also assumed to incorporate the same inflation expectations (ECB, 2014).

To estimate the WACC for Lufthansa, a German government bond of ten years maturity will therefore be used as reference for the Risk-Free Interest Rate. As of December 1st, 2107 the yield on a German 10-year government bond stood at 0.3%. In January 2018, however, it increased to 0.47% (FRED, 2018). Furthermore, as it can be seen in Figure 23, the actual risk- free interest rates lays significantly below the last ten years’ average of 1.77%.

Long-Term Government Bond Yields: 10-year 5,00

4,00

3,00

2,00

1,00

0,00 10.10.06 22.02.08 06.07.09 18.11.10 01.04.12 14.08.13 27.12.14 10.05.16 22.09.17 04.02.19 -1,00

Figure 23 - Yields on German 10-year Government Bond, Own Depiction Based on (FRED, 2018)

However, it is expected that interest rates will rise from 2018 on, which will also result in increased yields on government bonds (Braunberger, 2017). For that reason, the German government bond yields’ historical average of the last ten years (1.77%, as of December 2017) is used in Lufthansa’s WACC calculation.

7.2.4 Systematic Risk on Equity (Beta) The Systematic Risk on Equity (or Equity Beta) measures a securities “volatility due to market risk relative to the market as a whole, and thus captures the security’s sensitivity to the market” (Berk & DeMarzo, 2014, p. 382).

74 Lufthansa’s Equity Beta can be calculated as the covariance between the asset and the market, divided by the variance of the market (Berk & DeMarzo, 2014):

��(�, �) b = ��(�)

Several factors are important when calculating the beta of a company with historical data. First of all, beta estimations depend on the time horizon used, as well as the choice of interval length (Dadakas, et al., 2016). While longer estimation periods reduce fluctuations in the sample, the actual beta might have changed over time. Daves et al. (2000) come to the conclusion, that a time period of three years results in an optimal beta estimation. Furthermore, it is common in practice to use either weekly or monthly return intervals (Berk & DeMarzo, 2014).

Secondly, the appropriate market rate of returns must be selected. Usually, the S&P 500 is used as market portfolio, especially in the valuation of US companies (Berk & DeMarzo, 2014). An European equivalent to the S&P 500 is the S&P Europe 350 (S&P Capital IQ, 2016). Last three years’ returns and excess returns of Lufthansa and S&P Europe 350 were calculated from data of yahoo.finance (Appendix 10). The resulting covariance between returns of S&P Europe 350 and Lufthansa, the variance of S&P Europe 350 returns, as well as the then calculated equity beta for Lufthansa are shown in Table 31.

S&P Europe 350 Covariance with Lufthansa 0.00037882 Variance 0.0004434 Equity Beta Lufthansa 0.85254883 Table 31 - Beta Calculation for Lufthansa, Own Calculation Based on Stock and Index Price Data from yahoo.finance Therefore, Lufthansa’s equity beta of 0.8525 as of December 31st, 2017 is used in further calculations.

7.2.5 Market Risk Premium The last factor missing in the CAPM-formula is the market risk premium, which is calculated as the difference between the market return and the risk-free return:

�� = (� − �)

The market risk premium is a heavily discussed topic in literature and several researchers, including Koller et al. (2010), Brealey et al. (2015), and Bruno et al. (1998) proposed different numbers to be used, ranging from 4.5% to 10%. Their results are also supported by surveys

75 from KPMG (2018) and Fernandes, et al. (2016), who suggest a market risk premium of 5.3% to be used in Germany and statista.com (n.d.), proposing a market risk premium of 5.7% in Germany in 2017.

Therefore, the average suggested market risk premium of 5.5% is used when calculating Lufthansa’s Cost of Equity.

After deriving all input parameters, Lufthansa’s Cost of Equity can be computed as:

� = 1.77% + 0.8525 × 5.5% = 6.46%

7.2.6 Corporate Income Tax Rate In a next step, the Corporate Income Tax Rate for Lufthansa will be determined. During the past five years, Lufthansa’s actual tax rate fluctuated significantly from year to year, as seen in Section 5. However, Lufthansa is a German-based company, wherefore it is reasonable to use the German Corporate Income Tax Rate of approximately 30% in the WACC calculation (KPMG, 2018). This includes the National Corporate Tax Rate (Körperschaftssteuer) of 15%, as well as Solidarity Surcharges (Solidaritätszuschlag) of 5.5% levied on Corporate Income Tax. Furthermore, a Municipal Trade Tax (Gewerbesteuer) of 14% to 17% is added, leading to the aforementioned 30% Corporate Income Tax Rate (Deloitte, 2018).

7.2.7 Required Rate of Return on Net Interest-Bearing Debt (NIBD) The last input parameter needed in order to calculate Lufthansa’s WACC is the Required Rate of Return on Net-Interest Bearing Debt (NIBD), also called Cost of Debt. This is the effective rate that a company pays on its debt and can be calculated as (Petersen & Plenborg, 2012):

� = � + � × (1 − �)

Where rd = Required Rate of Return on Net Interest-Bearing Debt (NIBD) rf = Risk-Free Interest Rate rs = Credit Spread (Risk Premium on Debt) t = Corporate Income Tax Rate

The Risk-Free Interest Rate as well as the Corporate Tax Rate have been discussed in Sections 7.2.3 and 7.2.6 before and are known already. Therefore, the only other factor that needs to be

76 estimated in order to calculate Lufthansa’s Cost of Debt is the Credit Spread rs (also called Risk Premium on Debt). In practice, the Credit Spread is approximated by looking at the credit spread of bonds with the same rating as the company itself.

As of December 31st, 2017, Lufthansa had an investment grade rating from the rating agencies Standard & Poor’s (BBB-), Moody’s Investors Service (Baa3), and Scope Ratings (BBB-) (Lufthansa, n.d.). It is therefore appropriate to use the last ten years of the ICE BofAML US Corporate BBB Option-Adjusted Spread data from the Federal Reserve Bank of St. Louis (FRED, 2018) as basis for an estimation of Lufthansa’s Credit Spread. As of December 31st, 2017, the index stood at 1.27%, but it can be seen in Figure 24, that this is significantly below the average over the last ten years (FRED, 2018).

BofAML US Corporate BBB Option-Adjusted Spread 9,00

8,00

7,00

6,00

5,00

4,00

3,00

2,00

1,00

0,00

Figure 24 - BofAML US Corporate BBB Option-Adjusted Spread, Own Depiction Based on (FRED, 2018) The low credit spread in 2017 compared to the average credit spread over the last ten years is a result of the low-interest environment Lufthansa is operating in at the moment and is not assumed to prevail throughout the entire forecasting period. Therefore, the credit spread’s historical ten year average of 2.53% will be applied as a proxy when estimating Lufthansa’s Cost of Debt, resulting in a Required Return on NIBD of:

�� = (1.77% + 2.53%) ∗ (1 − 30%) = 3.01%.

77 7.3 Conclusion on Lufthansa’s Weighted Average Cost of Capital Following the estimation of the input parameters above, the Weighted Average Cost of Capital (WACC) for Lufthansa can be approximated by:

�� = × � × (1 − �) + × � (�� + �) (�� + �) = 0.5 × 3.01% × (1 − 30%) + 0.5 × 6.46% = 4.2835%

This can be rounded to 4.3% and is close to Lufthansa’s own WACC estimation of 4.2% in 2017 (Lufthansa, 2018).

78 8 Financial Modelling and Forecasting “The fundamental value of each investment is the present value of its expected, future cash flows discounted at an appropriate risk-adjusted rate” (Viebig, et al., 2008, p. 33)

For that reason, a two-stage Discounted Cash-Flow (DCF) valuation will be performed in order to evaluate the share price of Lufthansa Group as of December 31st, 2017. This kind of valuation is based on forecasts of certain positions of Lufthansa’s financial statements over an explicit forecast period (forecast horizon) and a long-term growth rate to determine the terminal value (Berk & DeMarzo, 2014). In practice, the explicit forecast period usually lies between three to ten years, whereas we decided to use an explicit forecast period of five years, based on the fact that Lufthansa is a solid company with a high brand recognition and has strong marketing channels (Investopia, n.d.).

As forecasting requires a good understanding of the business environment, the forecast of Lufthansa’s future performance will be made on the basis of the strategic and financial analyses in Sections 3 and 6, as well as other relevant information presented and discussed in the respective forecast subsection.

8.1 Revenue Forecast “Top line growth is arguably one of the most important value drivers of a firm. […] The art of modeling revenues is to identify and forecast the most relevant drivers which determine a firm’s future revenues” (Viebig, et al., 2008, p. 59). Financial analysts usually start their forecasts of financial statements with revenues, as several other positions are based on these forecasts.

Lufthansa’s historical revenues can be split into Traffic Revenue, which can further be divided into Passenger Revenue and Cargo Revenue, as well as Other Revenues, Changes in Inventories & Work Performed Capitalized, and Other Operating Income (Lufthansa Annual Report, 2017):

in EUR million 2013A 2014A 2015A 2016A 2017A Passenger Revenue 21,743 21,566 22,795 22,256 25,467 Cargo Revenue 2,825 2,822 2,711 2,405 2,932 Traffic Revenue 24,568 24,388 25,506 24,661 28,399 Other Revenue 5,459 5,623 6,550 6,999 7,180 Changes in Inventories 158 212 203 95 106 Other Operating Income 2043 1953 2832 2184 2276 Total Revenue 32,228 32,176 35,091 33,939 37,961 Table 32 - Lufthansa's Split of Total Revenue, Based on Annual Reports

79 It can be seen that Traffic Revenue, consisting of Passenger Revenue and Cargo Revenue, accounts for the largest part of Total Revenue (around 80% in FY13 – FY17). For that reason, Traffic Revenue will be the first item to be forecasted.

8.1.1 Traffic Revenue The following formulas are used to calculate Passenger and Cargo Revenue:

�� = �� (��) × �� (��)

Where

�� = �� × ��

�� = �� (��) × �� (��)

Where

�� = �� × ��

Table 33 gives an overview of the development of those numbers in the past five years:

in EUR million 2013A 2014A 2015A 2016A 2017A Available Seat Kilometers 262,682 268,105 273,993 286,555 322,821 Passenger Load Factor (%) 79.80% 80.10% 80.40% 79.10% 80.90% Revenue Seat Kilometers 209,652 214,643 220,400 226,639 261,156 Revenue per Revenue Seat 0.1037 0.1005 0.1034 0.0982 0.0975 Kilometer (in EUR) Passenger Revenue 21,743 21,566 22,611 22,256 25,467 Available Cargo Tonne- 14,893 14,659 14,971 15,117 15,619 Kilometers Cargo Load Factor (%) 69.10% 69.90% 66.30% 66.60% 69.30% Revenue Cargo Tonne- 10,285 10,249 9,930 10,071 10,819 Kilometers Revenue per Revenue Cargo 0.2747 0.2753 0.2730 0.2388 0.2710 Tonne-Kilometer (in EUR) Cargo Revenue 2,825 2,822 2,711 2,405 2,932 Traffic Revenue 24,568 24,388 25,506 24,661 28,399 Table 33 - Split and Development of Lufthansa's Traffic Revenue, Own Calculations Based on Annual Reports

80 8.1.1.1 Passenger Revenue From the formula above, it can be seen that Passenger Revenue is determined by three factors, namely Available Seat Kilometer (ASK), Load Factor, and Revenue per Revenue Seat Kilometer. The forecast of Lufthansa’s Passenger Revenue will therefore be based on those key value drivers.

8.1.1.1.1 Available Seat Kilometer “An available seat-kilometer (ASK) denotes one seat offered flown for one kilometer” (Lufthansa Annual Report, 2017, p. 222), and can generally be seen as a measure of capacity in the airline industry. Lufthansa expects its ASK to increase by 9.25% in 2018, due to organic growth (+7%) as well as inorganic growth (+2.50%) through the acquisition of LG Walter (Lufthansa Annual Report, 2017). In the following three years, we assume that Lufthansa will expand its capacity (ASK) in line with the average airline market growth rates in Lufthansa’s home markets Germany and Europe. Market growth numbers are forecasted by Marketline (2017) and have to be adjusted by the average inflation rate of 2%, because inflation affects the market size and therefore market growth rates without having an impact on capacity. However, no estimation is given for year 2022, wherefore we assume the market growth rates to be the average of the past ten year’s growth rates. The resulting growth rates of ASK are shown in Table 34:

In % 2018E 2019E 2020E 2021E 2022E Growth Rate Market (Europe) - 6.46% 7.51% 8.50% 5.55% Growth Rate Market - 4.79% 5.80% 6.73% 4.21% (Germany) Inflation Rate - 2.00% 2.00% 2.00% 2.00% Growth rate ASK 9.50% 3.62% 4.65% 5.61% 2.88% Table 34 – Forecast of Growth Rates of Lufthansa's Available Seat Kilometers

8.1.1.1.2 Passenger Load Factor and Revenue Seat Kilometers The second input factor needed to calculate Revenue Seat Kilometers is the Load Factor, which is a measure of capacity utilization in percent (Lufthansa Annual Report, 2017). Over the past five years, Lufthansa’s passenger load factor did not fluctuate much. Therefore, the average load factor is approximated to be 80.06% for the next five years, which is equal to Lufthansa’s average passenger load factor from FY13 – FY17. Passenger Load Factor and Available Seat Kilometers together result in a forecast of Revenue Seat Kilometers as seen in Table 35:

81 2018E 2019E 2020E 2021E 2022E Available Seat Kilometers (in 353,489 366,303 383,349 404,870 416,524 million) Passenger Load Factor (%) 80.06% 80.06% 80.06% 80.06% 80.06% Revenue Seat Kilometers (in 283,003 293,262 306,909 324,139 333,469 million) Table 35 - Forecast of Lufthansa's Revenue Seat Kilometers (in million)

8.1.1.1.3 Revenue per Revenue Seat Kilometer Lastly, the Revenue per Revenue Seat Kilometer (RRSK) has to be estimated. It can be seen in Table 36 that RRSK has been on a decreasing trend for the past five years. This seems reasonable, as the share of Low Cost Carriers worldwide is increasing (see Section 3.2), which sets ticket prices under pressure. As this trend is expected to continue in the (near) future, we estimate a RRSK growth rate of -1.00% in 2018, similar to Lufthansa’s own estimate, and -1.48% in the following years, which is equal to the past five years average RRSK growth rate. An overview of historical and future growth rates as well as absolute RRSK is given in Tables 36 and 37:

2013A 2014A 2015A 2016A 2017A Average RRSK (in EUR) 0.1037 0.1005 0.1034 0.0982 0.0975 Growth Rates -3.12% 2.94% -5.05% -0.70% -1.48% RRSK (%) Table 36 - Historical Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK), Based on Annual Reports 2018E 2019E 2020E 2021E 2022E Growth Rates RRSK (%) -1.00% -1.48% -1.48% -1.48% -1.48% RRSK (in EUR) 0.0965 0.0951 0.0937 0.0923 0.0909 Table 37 - Forecasted Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK) Based on these estimates of Revenue Seat Kilometers and Revenue per Revenue Seat Kilometer, the development of Passenger Revenue is forecasted as seen in Table 38:

2018E 2019E 2020E 2021E 2022E Revenue Seat Kilometers (in 283,003 293,262 306,909 324,139 333,469 million) RRSK (in EUR) 0.0965 0.0951 0.0937 0.0923 0.0909 Passenger Revenue (in EUR 27,321 27,892 28,757 29,921 30,326 million) Table 38 - Forecast of Lufthansa's Passenger Revenue 8.1.1.2 Cargo Revenue After the estimation of Passenger Revenue, we will continue with forecasting Lufthansa’s Cargo Revenue for the next five years. Cargo Revenue includes all revenues from freight and mail and is calculated according to the same logic as Passenger Revenue. Therefore, Available

82 Cargo Tonne-Kilometers, Cargo Load Factor, and Revenue per Revenue Cargo Tonne- Kilometer need to be estimated.

8.1.1.2.1 Available Cargo Tonne-Kilometer, Cargo Load Factor, and Revenue Cargo Tonne-Kilometer Lufthansa’s Available Cargo Tonne-Kilometers grew at an average rate of 1.21% between FY13 – FY17, as indicated in Table 33. We assume that this growth will also be achieved in the following five years.

Furthermore, as can be seen in Table 33, Lufthansa’s Cargo Load Factor fluctuated around 68.24% in FY13 – FY17, wherefore the Cargo Load Factor for Lufthansa is estimated to remain stable at this level for the next five years.

Lufthansa’s Revenue Cargo Tonne-Kilometers are then calculated based on those two factors, leading to the results shown in Table 39:

2018E 2019E 2020E 2021E 2022E Available Cargo Tonne- 15,809 16,000 16,194 16,391 16,590 Kilometer (in million) Cargo Load Factor (%) 68.24% 68.24% 68.24% 68.24% 68.24% Revenue Cargo Tonne- 10,788 10,919 11,051 11,185 11,321 Kilometers (in million) Table 39 - Forecast of Lufthansa's Revenue Cargo-Tonne Kilometers (in million)

8.1.1.2.2 Revenue per Revenue Cargo Tonne-Kilometer, Cargo Revenue, and Traffic Revenue The last component needed for the estimation of Lufthansa’s Traffic Revenue is a forecast of Revenue per Revenue Cargo Tonne-Kilometer (RRCTK). Over the past five years, RRCTK always stood at a value slightly above EUR 0.27, except for FY16, when it decreased to EUR 0.24, as seen in Table 33. As cargo operations and their prices at Lufthansa are not expected to change much in the near future, we forecast RRCTK to remain at the same level as it was in FY17 over the next five years. This means, that Cargo Revenue will only be driven by changes in Revenue Cargo Tonne-Kilometers.

Based on the forecasts from above, Cargo Revenue and finally Traffic Revenue is estimated to evolve in the following way in the period from FY18 - FY22:

83 2018E 2019E 2020E 2021E 2022E Passenger Revenue (in EUR 27,321 27,892 28,757 29,921 30,326 million) Revenue Cargo Tonne- 10,788 10,919 11,051 11,185 11,321 Kilometers (in million) RRCTK (in EUR) 0.2710 0.2710 0.2710 0.2710 0.2710 Cargo Revenue (in EUR 2,924 2,959 2,995 3,031 3,068 million) Traffic Revenue (in EUR 30,245 30,851 31,752 32,953 33,394 million) Table 40 - Forecast of Lufthansa's Traffic Revenue 8.1.2 Other Revenue, Changes in Inventories, Other Operating Income, and Total Revenue The forecast of Traffic Revenue is now followed by estimations of Other Revenue, Changes in Inventories, and Other Operating Income for the next five years. Other Revenue at Lufthansa consists of MRO Services, Catering Services, Travel Services, IT Services, Ground Services, and Other Services. Growth assumptions as well as forecasts for the period FY18 – FY22 are listed in Table 41 below:

in EUR million 2018E 2019E 2020E 2021E 2022E Growth Assumptions average % of traffic MRO Services 3,385 3,453 3,554 3,688 3,738 revenue over past five years average % of traffic Catering 2,392 2,440 2,512 2,607 2,642 revenue over past five Services years % of traffic revenue Travel Services from FY17, as it has 68 70 72 74 75 (Commissions) been decreasing over the past five years average over past five IT Services 293 293 293 293 293 year (absolute number) average % of traffic Ground 138 141 145 150 152 revenue over the past Services five years % of traffic revenue from FY17, as it has Other Services 1,345 1,372 1,412 1,466 1,485 been increasing over past five years Other Revenue 7,622 7,769 7,987 8,278 8,385 Percentage of Traffic 25.20% 25.18% 25.15% 25.12% 25.11% Revenue (in %) Table 41 - Forecast and Growth Assumptions of Lufthansa's Other Revenue

84 The forecast of Lufthansa’s Other Revenue is mostly based on the respective item’s percentage share in Traffic Revenue. It is not expected that Lufthansa increases or decreases its operations in one of those segments, and it therefore seems reasonable that Other Revenue remains at a level of slightly above 25% of Traffic Revenues, which is consistent with the average percentage share of 24.92% over the last five years.

Furthermore, both Changes in Inventories and Other Operating Income for the next five years are estimated as average percentage of Traffic Revenue from the period FY13 – FY17, being 0.61% and 8.3% respectively.

Adding up Traffic Revenue, Other Revenue, Changes in Inventories, and Other Operating Income gives Lufthansa’s expected Total Revenue for the explicit forecast period FY18 – FY22, as can be seen in Table 42:

in EUR million 2018E 2019E 2020E 2021E 2022E Traffic Revenue 30,245 30,851 31,752 32,953 33,394 Other Revenue 7,622 7,769 7,987 8,278 8,385 Changes in Inventories 186 189 195 202 205 Other Operating Income 2,510 2,560 2,635 2,735 2,771 Total Revenue 40,562 41,369 42,569 44,167 44,755 Table 42 - Forecast of Lufthansa's Total Revenue 8.2 Forecast of Operating Expenses After having forecasted revenues, the next step is to estimate Lufthansa’s operating expenses for the period FY18 – FY22. Operating expenses consist of Cost of Materials and Services, Staff Costs, and Other Operating Expenses (Lufthansa Annual Report, 2017).

8.2.1 Cost of Materials and Services The largest part of operating expenses are made up from Cost of Materials and Services, which are similar to Cost of Goods Sold (COGS) in producing companies. A key financial driver of Cost of Materials and Services for airlines is the crude oil price, which affects the Costs of Aircraft Fuel and Lubricants. Forecasting crude oil prices is an extremely difficult task, as prices are very volatile and depend on several factors, including the worldwide oil extraction per year, which is mainly influenced by the Organization of the Petroleum Exporting Countries (OPEC, (Deutsche Bundesbank, 2012). Therefore, predictions have been gathered from various sources, and an average of those estimates is used in order to forecast the crude oil price over the next five years. This can be seen in Table 43 below:

85 in USD/barrel 2018E 2019E 2020E 2021E 2022E Deloitte 62 62.5 62.5 65 67.5 World Bank 56 59 60 60.9 61.9 IMF 48.6 51.3 51.8 53.3 54.8 Canada Energy Board 56 65 68 71.8 73.5 Average 55.65 59.45 60.575 62.75 64.43 Table 43 - Expected Crude Oil Price, Based on World Bank, IMF, an Canada Energy Board (2017) as well as Deloitte (2018) Other factors influencing fuel costs are changes in ASK as well as fuel savings from a newer, more efficient fleet. Changes in ASK have been estimated in Section 8.1.1.1.1 before, while efficiency gains from a newer fleet are estimated to lie around 1.5% per year, based on Lufthansa’s own predictions in its Annual Report 2017. Taking all those factors into consideration, changes in Costs of Aircraft Fuel and Lubricants are estimated as seen in Table 44.

in % 2018E 2019E 2020E 2021E 2022E Change in Crude Oil Price 5.98% 6.83% 1.89% 3.59% 2.67% Change in ASK 9.50% 3.62% 4.65% 5.61% 2.88% Fleet Efficiency -1.50% -1.50% -1.50% -1.50% -1.50% Total Change of Fuel Costs 13.98% 8.95% 5.05% 7.70% 4.05% Table 44 - Forecasted Change in Lufthansa's Fuel Costs A fuel cost growth of 13.98%, translating into an increase in Fuel Costs of EUR 731 million in 2018 is only slightly above Lufthansa’s own prediction of EUR 700 million.

86 Fuel Costs and all other factors impacting Total Costs of Materials and Services together with their growth assumptions are depicted below:

In EUR million 2018E 2019E 2020E 2021E 2022E Growth Assumptions Aircraft Fuel 5,963 6,497 6,825 7,351 7,649 and Lubricants Other Raw average % of total revenue 3,096 3,157 3,249 3,371 3,415 Materials over past five years Purchased average over past five year 474 474 474 474 474 Goods (absolute number) Total Cost of 9,533 10,128 10,548 11,195 11,538 Raw Materials Fees and average % of total revenue 6,664 6,797 6,994 7,256 7,353 Charges over past five years Charter average % of total revenue 410 419 431 447 453 Expenses over past five years 2017 % of total revenue, External MRO 1,698 1,809 1,941 2,096 2,207 increasing by 0.19% every Services year In-flight average % of total revenue 403 411 423 439 445 Services over past five years Operating average % of total revenue 81 83 85 88 89 Lease Payments over past five years 2017 % of total revenue, External IT 457 516 583 659 723 increasing by 0.19% every Services year 2017 % of total revenue, Other Services 933 972 1,022 1,082 1,119 increasing by 0.19% every year Total Cost of Purchased 10,647 11,006 11,478 12,067 12,388 Services Total Cost of Materials and 20,179 21,135 22,026 23,263 23,926 Services Table 45 - Forecasts and Growth Assumptions for Lufthansa's Total Cost of Materials and Services 8.2.2 Staff Costs, Other Operating Expenses, Total Operating Expenses, and EBITDA Total Operating Expenses not only consist of Cost of Materials and Services, but also include Staff Costs and Other Operating Expenses.

In order to forecast Staff Costs for the period of FY18 – FY22, the average growth rate in number of employees over the past five years (3.64%, (Lufthansa Annual Report, 2017)) has been calculated, and the headcount has then been multiplied with the average salary per employee. In December 2017, Lufthansa and the Vereinigung Cockpit pilots’ union signed a

87 contract including new wage and retirement agreements until 2022. Lufthansa expects that this will reduce staff costs by 15% until 2022 (Lufthansa Annual Report, 2017), which means that the average salary will decrease by 3% each year from 2018 through 2022.

At last, Other Operating Expenses are forecasted as the average percentage share of Total Revenue over the past five years (15.9%).

Taking together all input estimates, Total Operating Expenses can be calculated as the sum of Cost of Materials and Services, Staff Costs, and Other Operating Expenses. Furthermore, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is estimated as the difference between Total Revenue and Total Operating Expenses, as seen below:

in EUR million 2018E 2019E 2020E 2021E 2022E Total Revenue 40,562 41,369 42,569 44,167 44,755 Cost of Materials and Services 20,179 21,135 22,026 23,263 23,926 Number of Employees 147,778 150,717 155,088 160,911 163,053 Average Salary / Employee (in 62,785 60,902 59,075 57,303 55,583 EUR) Staff Costs 9,278 9,179 9,162 9,221 9,063 Other Operating Expenses 6,449 6,577 6,768 7,022 7,116 Total Operating Expenses 35,907 36,891 37,955 39,505 40,105 EBITDA 4,656 4,478 4,613 4,662 4,651 EBITDA / Revenue (in %) 11.48% 10.82% 10.84% 10.55% 10.39% Table 46 - Forecasts of Lufthansa's EBITDA and EBITDA Input Parameters To validate the EBITDA calculation, the EBITDA margin is calculated as EBITDA / Total Revenue. EBITDA margin in the period FY18 – FY22 lies between 10.39% - 11.48%, and is therefore within the range of Lufthansa’s EBITDA margin from the previous five years (7.08% - 13.71%, calculation based on analytical financial statements in Appendices 2 and 3).

8.3 Forecast of Depreciation and Amortization Costs and EBIT In order to derive Earnings Before Interest and Tax (EBIT) from EBITDA, Depreciation and Amortization Costs need to be predicted for the next five years. Koller, et al. (2010, p. 196) suggest three different ways of forecasting Depreciation and Amortization Costs, as they can be estimated as “either a percentage of revenues or a percentage of property, plant, and equipment (PP&E) or, - if you are working inside the company – you can also generate depreciation forecasts based on equipment purchases and depreciation schedules.”

88 In the case of Lufthansa, Depreciation and Amortization Costs only slightly fluctuated around 5.14% of Total Revenue in the period FY13 – FY17, wherefore this constant percentage of revenue is assumed as Depreciation and Amortization Costs going forward.

Lufthansa’s EBIT can then be calculated as EBITDA (from previous section) less Depreciation and Amortization Costs, as it can be seen in Table 47:

in EUR million 2018E 2019E 2020E 2021E 2022E EBITDA 4,656 4,478 4,613 4,662 4,651 Depreciation and 2,084 2,125 2,187 2,269 2,299 Amortization Costs EBIT 2,572 2,353 2,426 2,393 2,351 Table 47 - Forecasts of Lufthansa's EBIT

8.4 Tax Forecast and Net Operating Profit After Tax As a next step, Tax Expenses have to be forecasted. Over the past five years, Lufthansa’s Tax Rate (calculated as income taxes divided by profit/loss before income tax) fluctuated significantly, as seen in Section 5 . However, the average tax rate over the last five years was 31.64%, which is close to the Corporate Income Tax Rate of approximately 30% in Germany (KPMG, 2018). In order to be consistent with the WACC calculation in Section 7 it is assumed that tax payments will average 30% of EBIT during the explicit forecast period FY18 – FY22. Applying a tax rate of 30% to Lufthansa’s EBIT results in a Net Operating Profit after Tax (NOPAT) as it can be seen in Table 48.

in EUR million 2018E 2019E 2020E 2021E 2022E EBIT 2,572 2,353 2,426 2,393 2,351 Tax (Tax Rate 30%) 772 706 728 718 705 NOPAT 1,800 1,647 1,698 1,675 1,646 Table 48 - Forecasts of Lufthansa's NOPAT

8.5 Forecast of Capital Expenditure Now that all positions of a pro forma income statement have been forecasted, the next step includes the estimation of Lufthansa’s Capital Expenditures (CapEx) as well as Changes in Net Working Capital (NWC) over the forecast horizon. Afterwards, Lufthansa’s Free Cash Flows (FCF) can be calculated using the following formula:

89 �� ℎ �� ) = �� (��) + �� − �� (��) − �� (��)

Lufthansa’s Capital Expenditure (CapEx) is separated into primary CapEx, meaning down- payments and final payments for aircrafts, aircraft overhauls, and equipment, as well as secondary CapEx, including CapEx for other Property, Plant, and Equipment (PPE) and Intangible Assets. We assume that CapEx will increase by 10% in both FY18 and FY19 due to the acquisition of airberlin as well as planned expansion of the fleet. From FY20 on, however, CapEx is expected to stay at a level of 6.22% of Total Revenue, the average in the period FY13 – FY17. Secondary CapEx, on the other hand, is forecasted to reach the average level of past five years in FY18, and increase with an expected inflation rate of 2% afterwards. Taken together, CapEx is forecasted to evolve as seen in Table 49:

in EUR million 2018E 2019E 2020E 2021E 2022E Primary CapEx -2,835 -3,118 -2,649 -2,749 -2,785 Secondary CapEx -420 -420 -428 -437 -446 Total CapEx -3,255 -3,538 -3,078 -3,186 -3,231 Table 49 - Forecasts of Lufthansa's Capital Expenditures (CapEx)

8.6 Forecasts of Changes in Net Working Capital As a last position, Net Working Capital (NWC) has to be forecasted for the period FY18 – FY22. Different definitions of Net Working Capital exist, reaching from a narrow definition of NWC being a company’s Accounts Receivable plus Inventory less Accounts Payable, to a broad definition of NWC as the difference between Current Assets less Cash and Current Liabilities less Debt (corporatefinanceinstitute, n.d.).

In this model, Inventories, Trade Receivables and Prepaid Expenses are included in the calculation of NWC, the same as Other Provisions (Current), Trade Payables, Liabilities from Unused Flight Documents, and Advance Payments Received. However, in accordance with Petersen & Plenborg (2012), we exclude Cash and all financial instruments from the calculation, as those are not are not part of the Operating Assets and Liabilities.

Lufthansa’s Inventories, Accounts Receivable, and Accounts Payable are forecasted using the Average Inventory Days (Inventory/Cost of Sales), Accounts Receivable Days (Accounts

90 Receivable/Revenue), and Accounts Payable Days (Accounts Payable/Cost of Sales) as seen in Table 50:

Average (Last 2013A 2014A 2015A 2016A 2017A Two Years) Inventory Days 13 15 16 17 17 17 Accounts 41 45 46 49 51 50 Receivable Days Accounts Payable 95 98 100 100 101 100 Days Table 50 - Lufthansa's Inventory Days, Accounts Receivable Days, and Accounts Payable Days, Own Calculations Based on Annual Reports The forecasts of all positions included in the NWC calculation as well as their growth assumptions are then stated in Table 51 below:

in EUR million 2018E 2019E 2020E 2021E 2022E Growth Assumptions average inventory days Inventories 940 984 1,026 1,083 1,114 over past two years Trade Receivables average accounts and Other 5,570 5,681 5,846 6,065 6,146 receivable days over Receivables past two years Deferred Charges average % of total and Prepaid 192 196 201 209 212 revenue over past five Expenses years average % of total Other Provisions 1,174 1,197 1,232 1,278 1,295 revenue over past five years Trade Payables and average accounts Other Financial 5,549 5,812 6,057 6,397 6,579 payable days over past Liabilities two years Liabilities From average % of total Unused Flight 3,585 3,656 3,762 3,904 3,956 revenue over past five Documents years Advance Payments Received, Deferred average % of total Income and Other 1,109 1,131 1,164 1,208 1,224 revenue over past five Non-Financial years Liabilities Net Working -4,715 -4,935 -5,142 -5,429 -5,582 Capital Increase in Net -128 -220 -207 -287 -153 Working Capital Table 51 – Forecasts of Lufthansa's Net Working Capital, Input Parameters, and Growth Assumptions

91 9 Valuation Methodologies

9.1 Lufthansa Free Cash Flow and Discounted Cash-Flow Valuation The forecast of balance sheet and income statement items is now followed by the calculation of Free Cash Flows for the next five years and the valuation of Lufthansa’s share price as of December 31st, 2017. According to Petersen & Plenborg (2012) as well as Berk & DeMarzo (2014), Free Cash Flow to the Firm (FCFF) can be calculated by the following formula:

�� ℎ �� (��) = �� + �� − �� − ��

The two-stage discount model then estimates the company’s Enterprise Value as seen in the following formula (Viebig, et al., 2008):

�� = + (1 + ��) ( 1 + ��)

Where

T = Last Period of Explicit Forecast Period

FCFF = Free Cash Flow to Firm

WACC = Weighted Average Cost of Capital

TV = �� = () g = Terminal Growth Rate

The Terminal Growth Rate of Lufthansa’s operation is set to 2%, which is similar to the ECB’s long-term inflation goal. Together with the WACC calculation of 4.28% from Section 7, and all other forecasts, Lufthansa’s Enterprise Value as of December 31st, 2017 is predicted to be EUR 22,205 million, which is calculated in Table 52.

92 Terminal in EUR million 2018E 2019E 2020E 2021E 2022E Value NOPAT 1,800 1,647 1,698 1,675 1,646 Plus: Depreciation 2,084 2,125 2,187 2,269 2,299 & Amortization Less: Increase in Net Working -128 -220 -207 -287 -153 Capital Less: Capital -3,255 -3,538 -3,078 -3,186 -3,231 Expenditures Free Cash Flow to 501 14 601 472 561 25,070 Firm Year 1 2 3 4 5 Present Value 481 13 530 399 455 20,327 FCFF WACC 4.28% Growth Rate 2% Enterprise Value 22,205 Lufthansa

Net Interest 9,416 Bearing Debt Equity Value 12,789 Lufthansa Table 52 - DCF Valuation of Lufthansa's Share Price as of December 31st, 2017 From the Enterprise Value of EUR 22,205 million, Net Interest Bearing Debt of EUR 9,416 million, as seen in Appendix 3, is deducted to reach an Equity Value of EUR 12,789 million for Lufthansa. With an Equity Value of EUR 12,789 million and 471.3 million shares outstanding as of December 31st, 2017 (Lufthansa Annual Report, 2017), this DCF model estimates a share price of EUR 27.13 for Lufthansa. The value is slightly below Lufthansa’s actual share price of EUR 30.72 as of December 31st, 2017. However, many variables and estimates are used in the model, so that the result should be regarded with precautions before reaching conclusions. Therefore, also a sensitivity analysis will be conducted in Section 9.3.

9.2 Multiple Valuation As we have seen in the previous section, the DCF valuation model relies heavily on several assumptions and is very sensitive to the underlying levers in the analyses that precede them. Small changes in the assumptions made in the DCF model can lead to significant variations in the predicted share price.

Therefore, in order to validate the result obtained in the DCF valuation and to strengthen the forecasted value range of Lufthansa, a multiple valuation (also called relative valuation method)

93 is performed in the following section. “There is a significant philosophical difference between discounted cash flow and relative valuation. In discounted cash flow valuation, we are attempting to estimate the intrinsic value of an asset based upon its capacity to generate cash flows in the future. In relative valuation, we are making a judgment on how much an asset is worth by looking at what the market is paying for similar assets” (Viebig, et al., 2008, p. 361).

Multiple valuations are quick, simple, and intuitive as they are subject to fewer assumptions. Furthermore, multiples are “much more likely to reflect the current mood of the market, since it is an attempt to measure relative and not intrinsic value” (Damodaran, 2012, p. 637). However, multiples also come at some disadvantages. A multiple captures a company’s value at a certain point in time and is only a single number aggregating several value drivers, which makes it difficult to identify single drivers of a company’s (market) value. Furthermore, in a multiple valuation a company’s market value is estimated relative to comparative firms’ market values (peer group method (Suozzo, et al., 2001)). However, this is based on the assumption that the market has correctly valued the comparable companies (Georg, 2017).

According to Damodaran (2012) and Koller, et al. (2010), comparable companies must be similar in the fundamentals that drive the multiple, such as business environment, profitability, growth rates, and risk. For this reason, multiples for Lufthansa are based on their peers identified in Section 4, namely Air France - KLM, IAG, easyJet, Ryanair, and SAS. The comparable companies’ key financials are presented below and are taken from the analytical financial statements in Appendix 2 and 3, and the respective annual reports. All companies prepare their annual reports in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, so no further adjustments have to be made. However, as SAS’ and easyJet’s financial statements are presented in Swedish Krona (SEK) and British Pound (GBP), these items are translated into Euro by using an FX rate of 9.72937 SEK/EUR as of October 31st, 2017 (reporting date SAS) and 1.12553 EUR/GBP as of December 31st, 2017 (xe.com):

94 Air Ryanair SAS 31. December 2017 France- IAG easyJet (March (October KLM 2017) 2017) Shares Outstanding (million) 300 2,058 397 1,207 330 Share Price 13.58 7.34 16.50 14.53 2.66 Market Capitalization (EUR 4,077 15,100 6,554 17,537 878 million) Net Interest Bearing Debt 14,146 9,768 945 964 3,198 (EUR million) Enterprise Value (EUR 18,223 24,868 7,499 18,501 4,075 million) Revenue (EUR million) 25,784 22,972 5,688 6,648 4,377 EBITDAR (EUR million) 4,352 4,799 799 2,118 712 EBIT (EUR million) 1,954 2,995 757 1,569 356 NOPAT 1,088 2,428 589 1,405 237 Earnings per Share (EPS, in 2.65 0.96 0.87 1.05 0.25 EUR) Net Income (EUR million) 797 2,021 344 1,316 118 Book Value of Equity (EUR 3,015 7,396 3,158 4,423 827 million) Table 53 - Multiple Valuation Input Parameters from Lufthansa’s Peers In 2017, Air France-KLM had Other Non-Current Income and Expenses of EUR -1,925 million, mostly due to modifications in pension plans in the Netherlands (EUR -1,889 million (Air France-KLM Annual Report, 2017)). As this significantly decreased the company’s EBIT, NOPAT, and Net Income, we added back the position to EBIT and applied the respective tax rate to derive at NOPAT and Net Income. This was done in order to disregard the non-recurring item, smooth out the income positions and arrive at the correct multiples for the company.

Multiples can be divided into Equity Value and Enterprise Value multiples. According to Petersen & Plenborg (2012), Enterprise Value (EV) multiples include EV/Revenue, EV/EBIT, EV/EBITDA, and EV/NOPAT, while Equity-based multiples are the Price-to-Earnings Ratio (P/E), and Market-to-Book-Value (M/B). One industry specific multiple is EV/EBITDAR, which is used when there are significant rental and lease expenses incurred in business operations (Massari, et al., 2014), as it is the case with the airlines’ leases of aircrafts.

Enterprise Value is then defined as (Petersen & Plenborg, 2012):

�� = �� + ��

Where

�� = �ℎ�� × �ℎ��

95 Koller, et al. (2005, pp. 9 - 10) point out that it is important to not only rely on enterprise multiples, because “they are systematically affected by capital structure [and] include many nonoperating items, such as restructuring charges and write-offs”. Therefore, we include both equity and enterprise multiples in our analysis, and normalize earnings whenever a non- recurring or non-operating item might be present.

Based on the collected data, the following Enterprise Value and Equity-based multiples have been calculated by applying the formulas stated in Table 54:

Equity Based Enterprise Value Multiples Multiples Market Market Cap. / EV / EV / EV / EV / Price per Formula Book Revenue EBITDAR EBIT NOPAT Share / Value of EPS Equity Air France-KLM 0.71 4.19 9.33 16.75 5.12 1.35 IAG 1.08 5.18 8.30 10.24 7.64 2.04 easyJet 1.32 9.38 9.90 12.72 18.91 2.08 Ryanair 2.78 8.74 11.79 13.17 13.80 3.96 SAS 0.93 5.72 11.44 17.18 10.70 1.06 Table 54 - Enterprise Value Multiples and Equity Based Multiples from Lufthansa's Peers The multiples’ medians and arithmetic means are listed below, together with maximum and minimum values, which indicate the range within which we might expect the multiples of Lufthansa to be.

Equity Based Enterprise Value Multiples Multiples Price / Market / Summary Statistic Revenue EBITDAR EBIT NOPAT Earnings Book High 2.78 9.38 11.79 17.18 18.91 3.96 Median 1.08 5.72 9.90 13.17 10.70 2.04 Mean 1.36 6.64 10.15 14.01 11.23 2.10 Low 0.71 4.19 8.30 10.24 5.12 1.06 Table 55 - Summary Statistic for Enterprise Value Multiples and Equity Based Multiples As a last step, the multiples can be applied on the respective Lufthansa data, to derive a relative value for Lufthansa. Input data and summary statistics for the multiple valuations as well as the according share prices for Lufthansa are shown in Tables 56 and 57.

96 Equity Values Enterprise Values Based on Enterprise Based on Equity Value Multiples Value Multiples Price / Market / Revenue EBITDAR EBIT NOPAT Summary Statistic Earnings Book Lufthansa Data 37,961 5,293 3,189 2,400 5.03 9,598 Valuation High 105,642 49,669 37,593 41,228 44,840 38,055 Median 41,095 30,286 31,573 31,603 25,372 19,596 Mean 51,791 35,156 32,374 33,628 26,634 20,146 Low 26,829 22,163 26,479 24,582 12,127 10,183 Table 56 - Calculation of Enterprise Value and Equity Value Based on Multiples Equity Based Enterprise Value Multiples Multiples Price / Market / Summary Statistic Revenue EBITDAR EBIT NOPAT Earnings Book Lufthansa Net Not Not Interest Bearing 9,416 9,416 9,416 9,416 relevant relevant Debt (EUR million) Shares Outstanding 471 471 471 471 471 471 (thousand) Valuation High (EUR) 204.17 85.41 59.79 67.50 95.14 80.75 Median (EUR) 67.22 44.28 47.01 47.08 53.83 41.58 Mean (EUR) 89.91 54.62 48.71 51.37 56.51 42.75 Low (EUR) 36.95 27.05 36.20 32.18 25.73 21.61 Table 57 - Share Price Calculation Based on Enterprise and Equity Based Multiples “A higher multiple is usually attributed to younger, high growth companies whereas a lower multiple can be attributed to a mature, slow growth or negative growth company” (Lin, n.d., p. 2). This is in line with the observation that Ryanair and easyJet, two companies which showed the largest growth over the last years, have the highest multiples of all peers. It can also be seen that the multiples for all peers vary significantly, leading to very different outcomes for Lufthansa’s equity value and share price based on those multiples. The share price of EUR 27.13 predicted by the DCF model in Section 9.1 lies at the lower end of the multiples’ valuation, meaning that Lufthansa’s share price seems to be somewhat undervalued compared to the ones of its peers. It is reasonable to classify Lufthansa at the lower end, because the company’s business model and growth rate are expected to be rather similar to the ones from other flag carriers like Air France-KLM and SAS, instead of Low Cost Carriers like Ryanair and easyJet, which showed higher multiples. However, this also supports Lufthansa’s strong results in 2017 and indicates an upward potential in its share price.

97 Of the various multiples available, Enterprise Value to EBITDAR is recognized as the most significant, since it used as an approximation for cash flows, which is the parameter of interest to investors, and since is not subject to differences in depreciation methods (Trunk, 2010).

9.3 Sensitivity Analysis The forecasted enterprise value, equity value and share price of Lufthansa derived by the DCF model in Section 9.1 is based on several input parameters, including the Terminal Growth Rate and the Weighted Average Cost of Capital calculated in Section 7. However, it might be valuable to know how the value of Lufthansa’s share price responds to changes in those value drivers. Considering that a great part of the valuation is determined by the terminal value, variations of the two factors Growth Rate and WACC, together with their impact on Lufthansa’s share price are presented in Table 58.

WACC Terminal Growth Rate 3.78% 4.03% 4.28% 4.53% 4.78% 2.50% 63.05 49.35 39.50 32.07 26.26 2.25% 50.01 40.06 32.56 26.70 21.99 2.00% 40.63 33.05 27.13 22.39 18.49 1.75% 33.55 27.58 22.78 18.85 15.57 1.50% 28.03 23.19 19.21 15.90 13.09 Table 58 - Share Price Sensitivity to Changes in Weighted Average Cost of Capital (WACC) and Terminal Growth Rate It can be seen that Lufthansa’s share price is highly depended on both WACC and growth rate assumptions. Relatively minor changes in these input parameters lead to noteworthy changes in the estimated share price, which ranges between EUR 13.09 and EUR 63.05 according to the model. This is due to the fact that the terminal value, which in this model accounts for 93.2% of total enterprise value in the base case, is largely impacted by the WACC and growth rate, because these determine the discount factor.

When determining the suggested value range, a WACC between 4.28% (calculated) and 4.78% seems reasonable, as Lufthansa’s reported historical WACC lied somewhere within this range and interest rates are at a very low level at the moment. Furthermore, the expected growth rate could possibly also be larger than the inflation rate of 2%, as the market is still growing at a slightly higher rate, as seen in Section 3.2. Taken together, this results in a forecasted share price of EUR 18.49 to EUR 39.50 for Lufthansa.

98 10 Acquisition of airberlin

10.1 Historical Events and Structure of the Deal The valuation of Lufthansa is – in parts – driven by the company’s acquisition of assets from insolvent airline airberlin Group and the resulting changes in the competitive landscape. Therefore, in this second part, the focus will be on the insolvency of airberlin, the acquisition by Lufthansa, how it got approved by the EU regulators, its effect on the industry and the development of Lufthansa’s share price during the same period. However, firstly an overview about the historical events and structure of the deal is given.

The roots of airberlin trace back to 1978, when Airberlin Inc was founded in the United States as a charter airline, flying mostly to the Mediterranean, the Canary Islands, and North Africa for German tour operators. At that time, the Four Power Agreement, which followed World War II, allowed only aircrafts by the Allied Powers to operate in Berlin. Therefore, Airberlin GmbH & Co Luftverkehrs KG (airberlin) was established right after the end of the Four Power Agreement. The airline, which in the following years became known for its flights between Germany and Mallorca, grew to become Germany’s second largest airline by 2003. Airberlin further strengthened this position with the acquisitions of NIKI Airlines, Deutschen BA (dba), LTU, and LG Walter (airberlin, n.d.). Furthermore, it started a co-operation with Etihad Airways in 2011, and Etihad in the following years became the largest shareholder in airberlin (29.21% of total shares as of June 2017 (airberlin, n.d.)). However, airberlin’s net results have been negative since 2008, with the largest net loss of EUR -782 million occurring in 2016 (Annual Reports airberlin), and a net loss of EUR -434 million in the first quarter of 2017 (airberlin Q1 2017 Report, 2017).

10.1.1 Reasons for airberlin Insolvency Several reasons can be found which led to those losses and the resulting insolvency of airberlin in 2017. First of all, in general it is difficult for airlines to survive in this highly competitive market. Net income is always a function of revenue minus costs. Most of the airlines’ costs cannot be influenced, as all airlines rely on planes from the same distributors (Airbus and Boeing), they all need to buy the same fuel, which is influenced by the oil price, and all of them have to pay the same charges to the airports for their departure and landing slots (Stelter, 2017).

Furthermore, revenues and profits rely on high passenger load factors, number of seats per plane (which is influenced by the space per seat), and flight hours per day. Whenever an airplane is

99 flying with empty seats, it is not making money on those seats. Low cost carriers are optimizing all of those three dimensions, as they lower the comfort on the airplane, conduct aggressive marketing for their tickets, and maximize flight times.

Several airberlin specific problems finally led to the insolvency of the company. These can be categorized in external and internal factors.

10.1.1.1 External Factors Firstly, airberlin planned on operating many flights from the newly build airport Berlin Brandenburg Willy Brandt (BER), which should have opened in June 2012. However, due to technical issues in the building process, the opening got delayed by several years and is now expected to happen in October 2020. As airlines plan their route network usually one year ahead of schedule, airberlin planned to use BER airport as a hub-airport and sold tickets from there already. When the opening of the airport got delayed, airberlin had to further operate from airport Berlin Tegel, which cannot be optimally used as a hub-airport (airliners, 2017).

A second problem was also caused at airport Berlin Tegel. When the airline changed its ground operator Wisag to Aeroground in March 2017, this led to significant delays in the luggage handling and losses of passengers’ luggage. Not only did this cause passenger dissatisfaction with airberlin services, but it also led to delayed departures from the airports and cancellation of flights (see Figure 25), resulting in high compensation costs for the airline.

140

120

100

80 Cancelled Delayed (more than 15 min) 60 On time 40

0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Figure 25 - Performance of airberlin Departures in July 2017 from Airport Berlin Tegel, Based on (airliners, 2017)

100 Another external factor is high taxes, e.g. the air traffic tax (Luftverkehrsteuer, between EUR 8 – 45 per passenger (Flugsteuer, 2011)), which airlines have to pay when departing from German airports. This lowered airberlin’s competitive position in comparison to foreign airlines, which have less flights departing from German airports and no or lower charges in their respective home markets (airliners, 2017).

10.1.1.2 Internal Factors For a long time, airberlin was known for being a “tourist airline”. However, this business model is very seasonal, wherefore airberlin decided to operate a “City-Shuttle” from 2002 on and started competing with Low Cost Carriers like Ryanair and easyJet. Furthermore, airberlin acquired dba in 2006, which operated mainly on routes within Germany, as well as intercontinental airline LTU in 2007. This led to several problems. Not only was the integration of two large airlines and all its employees very difficult, but also did airberlin more than triple its size during these two years and broadened its portfolio by offering flights for business people as well as intercontinental flights for the first time. The increased complexity in business operations did not match airberlin’s management style at this time, where CEO Joachim Hunold himself wanted to be involved in every decision (airliners, 2017). The fast expansion together with a wrong management style and no clear strategic vision were the first mistakes that airberlin made..

Another problem for airberlin was their fleet of aircrafts. To lower Capital Expenses, airberlin decided to lease their planes, instead of buying them. However, the leasing conditions, especially a 20-year contract with TUIfly GmbH, were economically disadvantageous for airberlin and significantly contributed to their losses over the years (Hegmann, 2017).

Furthermore, airberlin had high costs arising from their booking systems. Instead of using one single, integrated system like most other airlines, airberlin operated several booking systems, which cost the airline several hundred million Euros each year (airliners, 2017).

After Joachim Hunold left airberlin in 2011, Etihad Airways became the largest shareholder of the airline. Airberlin, which at this time had already reported negative results for three years in a row, was dependent on Etihad’s capital injections. However, the conditions for the capital injections were quite restrictive, as Etihad prohibited airberlin to operate in the (attractive) Asian market and made airberlin to take routes to Abu Dhabi into their network. In April 2017, Etihad gave another credit line of EUR 350 million to airberlin, which at that time needed

101 approximately EUR 3 million per day to finance their operating business. However in August 2017, even though EUR 100 million of the line were not used yet, Etihad did not allow the transfer of another EUR 50 million to airberlin. As airberlin could no longer finance its operations after Etihad had withdrawn its financial support, they had to file for insolvency on August 15th, 2017 (Flöther, 2018).

10.1.2 Historical Events of airberlin’s Insolvency After Etihad on August 9th, 2017 decided not to transfer any more money anymore to airberlin, they said they would offer another bridge loan, however, only under changed conditions, one of them being that other interest groups like politicians and Lufthansa also offer their help. Lufthansa thereafter made some small adjustments to their leasing agreement they previously signed with airberlin, but Etihad still denied further payments based on this offer on August 11th, 2017, which means that a going concern assumption for airberlin was not given anymore. Over the weekend, airberlin managers together with Freshfield lawyers and German politicians like Alexander Dobrindt (CSU) and Matthias Machnig discussed the insolvency process and how to keep airberlin running for another few months (Flöther, 2018). In the end, German Development Bank KfW (Kreditanstalt für Wiederaufbau, government-owned) gave a credit of EUR 150 million to airberlin, on which it has to pay 9% interest and give all their assets that are still available as securities. German chancellor Angela Merkel supported this deal, and said that with a very high probability, the German tax payer will not have to pay for it (Spiegel Online, 2017). Also the second largest political party in Germany, SPD, agreed with the decision, which was made during the summer vacation season. The KfW credit ensured that all travelers could return to Germany after their vacation and it also gave airberlin some time to negotiate with Lufthansa and other airlines in order to preserve all of airberlin’s 8.500 jobs (Schneider & Kahrs, 2017). However, this is not considered common practice in Germany, and the credit from the German government to airberlin was therefore criticized by other airlines, politicians, as well as the general public.

Airberlin filed for insolvency on August 15th, 2017, but continued its operations until October 28th, 2017. In the meantime, the bidding process for parts of airberlin started. Until September 15th, 2017, 79 parties, including Lufthansa but also other airlines, PE-funds etc., showed their interest to the insolvency trustee Flöther-Wissing. Finally, 15 investors handed in their bids, of which four did not fulfill the requirements. On November 1st, 2017, the district court of Charlottenburg opened the insolvency proceedings for airberlin (Flöther, 2017).

102 10.1.3 Acquisition of airberlin Assets Table 59 shows an overview of targets and acquirers of airberlin parts and subsidiaries:

Acquirer Target / acquired Source position (Flöther, 2017): ”Zeitfracht Leisure Group Zeitfracht Group übernimmt airberlin Tochter Leisure (Subsidiary) Cargo” (Flöther, 2018): ” NIKI: Lauda Motion NIKI Luftfahrt GmbH Geschäftsbetrieb an Lauda Motion übergeben” (FAZ, 2017): ” FAZ: Brüssel erlaubt Lufthansa LG Walter Übernahme von LG Walter durch Lufthansa” 25 aircrafts and landing (Sembhy, 2017): ” easyJet confirms easyJet slots at Berlin Tegel acquisition of Airberlin assets” airport Several bidders (through Airberlin trademarks and (Flöther, 2018): “Verkaufsprozess auctions) IP addresses für Marken hat begonnen” Several bidders (through Airberlin merchandise (Flöther, 2018): ” Airberlin - hohe auctions) and other small assets Beteiligung bei weiteren Auktionen” Table 59 – Overview: Acquirers of Certain airberlin Assets

10.2 Approval by the Regulator On October 11th, 2017, airberlin together with Lufthansa agreed that Lufthansa Group would take over airberlin subsidiaries Luftverkehrsgesellschaft Walter (LGW, a feeder airline for Düsseldorf and Berlin airports) and NIKI Luftfahrt GmbH (NIKI), as well as 20 airplanes from airberlin.

However, as both companies are governed by the European Union, they needed permission of the creditors’ committee, the insolvency administrator Prof. Dr. Lucas Flöther (Attorney-at- Law), as well as the European competition authority (European Commission, the regulator (Flöther, 2017)). After the notification, the European Commission then proceeded with a multi- step analysis of the industry and the competitive position of the firms, because the purchase price exceeded EUR 250 million (Németh & Niemeier, 2012). In the passenger airline industry, “every combination of a point of origin and a point of destination should be considered to be a separate market” (EU COM 2004a-b), thus requiring an analysis of all combinations of which the airlines fly. This is referred to as the ‘point of origin/point of destination’ or O&D approach.

In the case of Lufthansa and airberlin, which is seen as having a Community dimension according to Article 1 (2) of the Merger Regulation, the European Commission raised concerns

103 regarding limited competition on 70 routes and quasi-monopoly for seat supply on 50 routes, as this would further increase Lufthansa’s already strong market position (financialtimes, 2018). Of particular interest of the commission was the extended portfolio of slots that Lufthansa would obtain through the purchase and its impact on competition. Investigations concluded that the competitive position of Lufthansa at Düsseldorf airport would be too strong due to a large number of slot times which potentially could increase entry barriers for other airlines and fares for passengers in the long term and could also lead to reduced consumer choice (European Commission, 2017). Therefore, the regulator did not approve Lufthansa’s request for derogation from the suspension obligation provided for in Article 7 (1) of the Merger Regulation, which Lufthansa had applied for in October 2017. According to EU officials, “it was clear from the start, that Lufthansa and Airberlin overlap on a very significant number of routes, with clear risks to Austria, German and Swiss consumers and to effective competition” (Toblensky & Buck, 2018, p. 1). The bidding company Lufthansa was therefore responsible to propose “adequate remedies” to the regulators concerns. Responsively, Lufthansa submitted a set of commitments limiting their competition on December 13th, 2017, which were reviewed by the commission and market participants. The proposed concessions submitted to the European Commission included giving up slots belonging to NIKI and LG Walter (LGW), especially at the Düsseldorf airport and abandoned Lufthansa’s plan of buying NIKI (Lauer, 2017).

Following Lufthansa’s decision to drop NIKI, the European Commission gave its formal approval on the acquisition of LGW on December 21st, 2017, subject to upholding the condition that Lufthansa reduces its acquisition of slots at Düsseldorf airport, which are now reduced to slots used by two aircrafts. “Lufthansa’s slot portfolio [at Düsseldorf airport] would now only increase by 1% and half of all the slots [at the airport] would be held by Lufthansa’s competitors” (Vestager, 2018, p. 1).

Through the acquisition of LGW, Lufthansa can add 33 aircrafts to the Eurowings Group fleet, and all LGW employees will be transferred to the Lufthansa subsidiary (Lufthansa, 2017).

10.3 Changes in Industry and Competition As the EU Commission said, there existed several concerns regarding Lufthansa’s acquisition of airberlin and the resulting strengthening of the company’s market position.

104 In general, the EU Commission is interested whether an acquisition has a pro-competitive or anti-competitive effect on consumers. As Carlton, et al. (2017) point out, “the argument for anti-competitive effects is that the [acquisitions] have reduced competition and thereby led to higher airline fares and lower output. The argument for pro-competitive effects is that the [acquisitions] have enabled the airlines to take advantage of network effects, with the improved network of service improving product quality, and thereby attracting more passengers leading to greater output” (p.2).

10.3.1 Literature Review It can be seen that one of the EU Commission’s concerns is that the decrease in airline competition would lead to higher airfares for passenger. When studying recent US mergers, Carlton, et al (2017) found that “recent legacy carrier mergers have been associated with pro- competitive outcomes” (p.3), as all of them lead to increase in output and capacity as well as significant nominal decreases in airfares, while the majority of older studies by Werden, et al (1991), Borenstein (1990), Peters (2006), and Shen (2017) found that airline mergers are associated with increased passenger fares and decreased competition in the market. In the European market, Alderighi, et al. (2012) found “that the competition between FSCs [full- service carriers like Lufthansa and airberlin] reduces the price levels of the business and leisure segments with a significant stronger effect on the business fares” (p.232). In reverse this means that lower competition increases airfares for passengers. However, Brueckner, et al. (2013) found that – at least in the US market – the effect of legacy competition (competition between full-service carriers) on prices is significantly lower than effects coming from the entry of low- cost carriers.

10.3.2 Changes in Lufthansa’s Main Markets Following the Insolvency of airberlin After the insolvency of airberlin, the portal mydealz.com found that Lufthansa airfares within Germany increased by 32.5% on average between October and November 2017, with highest increases of plus 300% to be found on the route between Munich and Düsseldorf (Neuerer, 2017). According to Lufthansa, this is due to their algorithms reacting to increased demand for their flights on frequently traveled routes and the new competitive situation on those routes (Schmolke, 2018). Before the insolvency, airberlin flew a total of 140 airplanes. The grounding of 80 of those airplanes right after the insolvency led to a reduction of up to 60,000 available passenger seats every day, which could not be picked up by other airlines immediately, leading to the aforementioned increased demand for Lufthansa (Wirtschaftswoche, 2017). In total,

105 available passenger seats decreased by -1.3 million (-21%) between October and December 2017, but are expected to reach their original level again in April 2018 (BDL, n.d.). However, the German Federal Cartel Office (Bundeskartellamt) now requested information on Lufthansa’s pricing structure and will check the data on Lufthansa’s price setting mechanisms. Increasing competition again and decreasing consumer prices were reasons for the EU Commission to force Lufthansa of giving up some valuable slots and routes and only allowing them to take over LG Walter, but not NIKI Luftfahrtgesellschaft GmbH. Interesting to see, even though airfares in Germany increased after the insolvency of airberlin, mydealz.com points out that Lufthansa and its subsidiary Eurowings now became price leaders for flights within Germany, offering the lowest fares compared to its competitors (mydealz, 2017). Experts conclude, that the normalization of ticket prices could take until autumn 2018 (Spiegel Online, 2017).

10.3.2.1 Lufthansa’s Market Position on Intra-German Flights The aforementioned studies only examine the effects of US mergers, while Hsu & Flourish (2017) focus on recent mergers within the EU. According to their logic, which classifies mergers into two categories (1) focusing and (2) diversifying, Lufthansa’s acquisition of LGW belongs to the first, as the airlines mainly operate in the same markets. Lufthansa therefore tries to increase shareholder value by enhancing its market share, especially in Germany.

According to Deutsches Zentrum für Luft- und Raumfahrt, Lufthansa Group will increase its market share on flights within Germany from 69% in 2017 to 87% in 2018 (Lufthansa German Airline 55.6% and Eurowings 31.5%), while its biggest competitor on those routes, easyJet, will only reach a market share of 8%. Out of 122 intra-German routes, 94 will be flown solely by Lufthansa Group, 18 routes by other airlines, and only 10 routes (between Hamburg, Düsseldorf, Frankfurt, Munich, Stuttgart, and Berlin-Tegel) will be served by more than one airline (DLR, 2018).

However, 60% of Lufthansa passengers are flying within Germany only as part of their international journey and have a connection flight to another destination. On European and intercontinental flights, Lufthansa has a much lower market presence and higher competition is given (Lufthansa, 2017). Additionally, according to Lufthansa “it is not uncommon in aviation for specific routes to be operated by just one airline. In fact, there are many hundreds of routes on which there is only one airline operating. […] The competition is not undermined by this as,

106 in most cases, passengers can reach their destination via alternative connections” (Heinrich & Tolksdorf, 2017, p. 3).

10.3.2.2 Lufthansa’s Market Position on Flights from/to Germany Also on all flights from/to Germany, Lufthansa Group increased its market share from 44.4% in 2017 to over 50% in 2018, which is similar to Ryanair’s market share in Ireland (48% (Heinrich & Tolksdorf, 2017)) and Air France-KLM’s market share in France (43%) and The Netherlands (56% (Glynn, et al., 2017)). While Lufthansa German Airlines will increase its connections on those routes by 8.1% and Eurowings by 33%, easyJet will more than double its activities from/to Germany and Ryanair and Condor will have increases of about 20% (DLR, 2018). Higher growth rates on those routes by Lufthansa’s competitors can be seen as an indicator for increasing competition in the next years. Furthermore, market shares of German airlines within Germany decreased by 7% between 2014 – 2017, while foreign (especially Low Cost Carriers) increased their market shares from 38% in 2014 to 46% in 2017 (BDL, n.d.).

Lieshout, et al. (2017) found, that “since the liberalization of the intra-European market airline competition has increased in most parts of Europe, especially due to the penetration of low cost carriers into a wider array of airports” (p.81).

This is supported by recent figures from Bundesverband der Deutschen Luftwerkehrswirtschaft (BDL, n.d.), showing the development of the European flight market from 2016 to 2017:

Europe 2016: 138 Aviation Companies in the Market, Based on Available Passenger Seats

Lufthansa Group 16% Ryanair IAG 37% EasyJet 15% Air France / KLM Others

13% 9% 10%

107 Europe 2017: 146 Aviation Companies in the Market, based on Available Passenger Seats

Lufthansa Group 16% Ryanair IAG 36% EasyJet 16% Air France / KLM Others

9% 13% 10%

Figure 26 - Market Shares of Aviation Companies in the European Market in 2016 and 2017 (Based on Available Passenger Seats), Own depiction based on BDL (n.d.) It can be seen that Lufthansa Group, while still being the largest airline in Germany, did not increase its market share in 2017.

When looking at another metric, flown passengers, instead of available passenger seats, the competitive situation looks even more intense, with Ryanair being the market leader in Europe. This can be seen in Figure 27.

Europe 2017: 146 Aviation Companies in the Market, Based on Flown Passengers

Ryanair 13% Lufthansa

9% IAG EasyJet

8% Air France / KLM 57% Others 8% 5%

Figure 27 - Market Share of Aviation Companies in the European Market in 2017 (Based on Flown Passengers), Own depiction based on Lufthansa (2017)

108 Furthermore, compared to the US market, the European market is highly fragmented, as indicated by Figure 28:

USA 2017: 53 Aviation Companies in the Market, Based on Available Passenger Seats

American Airlines 15% 23% Southwest Airlines 5% Delta Air Lines United Airlines Alaska Airlines 16% Others 21%

20%

Figure 28 - Market Shares of Aviation Companies in the US Market in 2017, Based on Available Passenger Seats, Own depiction based on BDL (n.d.) The European market has 146 aviation companies in total, and the top 5 firms account for 64% of the total market in 2017, while the US airline market consist of only 53 competitors, and the largest 5 companies account for 85% of the market. However, according to BDL, even the US market is still highly competitive, and so is the European market, due to free market access, even after Lufthansa’s acquisition of LG Walter (BDL, n.d.).

10.4 Share Price Development In contrary to the regulator, Lufthansa’s investors were clearly in favor of the economic and business developments in 2017. 20 years ago Lufthansa had an Adjusted Close Share Price of EUR 6.48, as can be seen in Figure 29 (Yahoo Finance, 2018).

109 Adjusted Close 35,00 €

30,00 €

25,00 €

20,00 €

15,00 €

10,00 €

5,00 €

0,00 € 16.12.96 12.09.99 08.06.02 04.03.05 29.11.07 25.08.10 21.05.13 15.02.16

Figure 29 - Development of Lufthansa's Share Price (Adjusted Close) Since 1996, Own Depiction Based on Yahoo Finance (2018) In the following years before 2017, the share price (adjusted close) varied between EUR 4.46 (March 11th, 2003), and EUR 19.06 (June 9th, 2014), with an average share price of EUR 11.21 during this period.

However, during 2017, Lufthansa’s share price increased from EUR 12.46 on January 2nd, 2017 to EUR 30.72 on December 29th, 2017, with an all-time high of EUR 31.12 on December 28th, 2017. This resulted in an annual return of 146.56%, and reflects the positive business development of Lufthansa during this year.

Adjusted Close 35,00 €

30,00 €

25,00 €

20,00 €

15,00 €

10,00 €

5,00 €

0,00 € 26.11.16 15.01.17 06.03.17 25.04.17 14.06.17 03.08.17 22.09.17 11.11.17 31.12.17 19.02.18

Figure 30 - Development of Lufthansa's Share Price (Adjusted Close) in 2017, Own Depiction Based on Yahoo Finance (2018)

110 Low oil prices, increased passenger numbers in all passenger airlines, the consolidation of Brussels airlines, higher passenger load factors (+1.8 percentage points) and stabilized ticket prices, leading to a record high Net Income in 2017 (see Section 6), let investors be positive about the future development of the airline (onvista, 2017). Additionally, the insolvency of airberlin and the resulting changes in the industry (see Sections 10.1 and 10.3) further boosted Lufthansa’s performance (Schmidt, 2017).

The DCF valuation in Section 9.1, which is based on Lufthansa’s financial statements 2017, predicted a fair share price of EUR 27.13 for Lufthansa as of December 31st, 2017, slightly below the actual share price of EUR 30.72.

As it can be seen in Table 60, other analysts forecast stock price targets between EUR 20 – EUR 35 for Lufthansa in the future (finanzen.net, 2018):

Company Stock Price Target (in EUR) BNP Paribas 31.00 S&P Capital IQ 29.00 Société Générale Group S.A. 33.00 Goldman Sach Group Inc. 20.00 Morgan Stanley 30.15 JP Morgan Chase & Co 28.50 HSBC 35.00 Oddo Seydler Bank AG 32.50 Citigroup Corp. 35.00 Independent Research GmbH 29.00 Barclays Capital 23.00 Credit Suisse Group 32.55 DZ Bank 34.00 Norddeutsche Landesbank (Nord/LB) 31.00 UBS AG 31.00 Commerzbank AG 32.00 Bernstein Research 30.00 Kepler Cheuvreux 22.70 Table 60 - Lufthansa's Stock Price Targets from Other Analysts, Own Depiction Based on Finanzen.net (2018) However, not even the best model can predict share prices with 100% certainty, and all forecasts and targets should be used only as an indication.

111 11 Conclusion This paper aimed to evaluate Lufthansa Group in its current market position and to provide an overview of changes in the industry as a result of the insolvency of airberlin. The fair share price for Lufthansa as of December 31st, 2017 was determined through a strategic assessment as well as financial valuation methodologies consisting of the discounted cash flow model and a multiple valuation, followed by a sensitivity analysis. Consisting of 331 subsidiaries in December 2017, Lufthansa has gone from being a merger of only two aviation companies owned by the German government to becoming the largest airline by passengers in Europe (O'Shea, 2018). Organic and inorganic growth have enabled Lufthansa Group to serve various geographical areas and different customer segments.

Strategically, Lufthansa has gained a strong market position as a leading network carrier providing a diversified portfolio and great growth opportunities. An analysis of Lufthansa’s external factors revealed that economic growth in emerging markets and the fact that air travel is becoming a necessity in peoples’ daily lives effectively increases demand for air travel. However, most customers are quite price sensitive when it comes to flying, resulting in high pressure on ticket prices. Furthermore, competition is intensified through Open Skies agreements and the growing presence of Middle East Carriers as well as Low Cost Carries. Responsively, airlines are initiated to consolidate and enter into alliances. Lufthansa’s strong position in terms of network coverage and its ability to serve various market segments are strengthened through acquisition of both Low Cost Carriers and other network carriers, its position in Star Alliance and its multi-hub strategy. Consequently, Lufthansa’s strategic position will enable the airline to grow, capitalizing on a growing market in emerging economies as well as meeting demand for lower fares.

This was further supported by a financial analysis indicating high profitability, valuable growth and low liquidity risk for Lufthansa compared to its peers. The peer group, consisting of Air France-KLM, easyJet, IAG, Ryanair and SAS, was found based on BrandFinances list of top 50 most valuable airlines and selected criteria enabling an appropriate comparable base for Lufthansa’s valuation. Lufthansa had a Return on Equity of 24.98% and therefore showed the ability of generating almost 25% profit on shareholders’ investments in 2017, and similarly a high Return on Invested Capital of 12.62% in the same year. Lufthansa’s growing profitability is driven by increased Passenger rRvenue through consolidation of Brussel Air and airberlin,

112 together with tight cost control and low fuel prices. However, efficiency per employee was low compared to peers, due to higher service offerings by Lufthansa. On the other hand, low Days on Hand for Aircrafts and Engines as well as Capitalized Operating Leases were found, indicating that Lufthansa profits from its ability to utilize invested capital. Lufthansa’s average Sustainable Growth Rate of 14.41% between 2013 and 2017 reflects the average growth rate amongst its comparable companies. The risk analysis further showed that while Lufthansa’s growth is at low risk, the company is able to pay off less of its short-term debt but more of its long-term debt than its peers. Moreover, it is evident than the company’s liquidity position is strengthening.

For the financial valuation of the company, a Weighted Average Cost of Capital (WACC) of 4.3% was determined. Lufthansa’s future Free Cash Flows were forecasted based on historical data and discounted using the estimated WACC. Taken together, the Discounted Cash Flow model (DCF model) resulted in a fair share price of EUR 27.13 for Lufthansa, which is below its actual share price of EUR 30.72 as of December 31st, 2017. In the multiple valuation, the share price was recognized as being in the lower end of a possible value range and seemed somewhat undervalued compared to its peers.

The following sensitivity analysis revealed that Lufthansa’s share price is highly sensitive to the applied WACC as well as the terminal growth rate.

Lufthansa’s actual share price closed at EUR 30.72 as of December 31st, 2017. This thesis estimated the airlines fair value to be 11.7% lower at EUR 27.13. Conclusively, the share of Lufthansa seems to be mispriced in the stock market. In this case, investors would benefit from taking a short position or selling the share as it is expected that the share will drop to its fair value. The valuation was carefully conducted using various valuation methods, however, should be critically regarded due to the need of approximation and estimation of various key values. Nevertheless, it is clear that while extensive information is available to investors, deviations from the actual share price from the calculated fair share price show that other factors can have an influence as well. Such factors may be explained by behavioral finance as investors underestimate Lufthansa’s risk or overestimate the airline’s future cash flows.

In this regard, this paper furthermore focused on Lufthansa’s recent acquisition of airberlin to provide a holistic view of Lufthansa and its market position. Following Etihad’s termination of money transfers to airberlin, the company went insolvent on August 15th, 2017, providing

113 opportunities for other airlines, including Lufthansa, to acquire parts of the company, its aircrafts and slots. Lufthansa’s initial agreement of acquiring 20 aircrafts and airberlin subsidiaries Luftfahrtgesellschaft Walter (LGW) and NIKI was denied by the European Commission due to potential resulting limitation of competition on particular routes. The commission later approved Lufthansa proposal of acquiring LGW including all employees as well as 33 aircrafts, but limited the company’s acquisition of slots at Düsseldorf airport. Examination of Lufthansa’s acquisition revealed the airline’s increase in market share from 67% to 87% on intra-German flights and from 44% to over 50% on flights to/from the country. Nevertheless, continuous intense competition on European and International flights is present, as there still exist almost 150 aviation companies in the European market, indicating that it is more fragmented than the US market.

It is clear that Lufthansa aims to strengthen its portfolio through acquisitions as well as mergers with smaller airlines and that this enables the Group to serve an extended market. Furthermore, it ensures that Lufthansa can compete with Low Cost Carriers as well as other network carriers such as Middle east carriers that otherwise may pose threats to the established European airlines. In this regard, further research concerning potential acquisition of other airlines for Lufthansa will contribute to a holistic view of the company’s value and its competitive position.

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136 13 List of Figures Figure 1 - Shareholder Structure By Nationality 2017, Based on (Lufthansa, n.d.) ...... 12 Figure 2 - Corporate Governance Structure, Based on (Lufthansa, n.d.) ...... 13 Figure 3 - Three Pillars of Lufthansa's Corporate Strategy, Based on (Lufthansa, n.d.) ...... 15 Figure 4 - "7-to-1 - Our Way Forward" Strategy, Based on (Lufthansa, n.d.) ...... 16 Figure 5 - LCC Share of Total Seats by Region, Own Depiction Based on Boeing (2017) ....18 Figure 6 - Recently Launched Start-Ups by Region, August 2015 – August 2016, Own Depiction Based on CAPA (2017) ...... 19 Figure 7 - Recently Ceased Operations by Region, August 2015 – August 2016, Own Depiction Based on CAPA (2017) ...... 19 Figure 8 - Market Share by Region in 2017, Own Depiction Based on IATA (2017) ...... 20 Figure 9 - Leading Airline Alliances in 2016, by Market Share, Own Depiction Based on Statista.com ...... 21 Figure 10 - Annual Growth in Global Air Traffic Passenger Demand from 2005 to 2018, Own Depiction Based on IATA (2017) ...... 22 Figure 11 - Porter's Five Forces for Lufthansa ...... 26 Figure 12 - Global Market Share by Retail Sale Price (RPS) in 2017, Own Depiction Based on Euromonitor (2017) ...... 29 Figure 13 - European Airlines Market Share in 2017 (Based on Available Passenger Seats), Own Depiction Based on (BDL) ...... 30 Figure 14 - Point-to-Point vs Hub-and-Spoke System, Based on (Schule für Touristik, 2017) ...... 33 Figure 15 - US Treasury High Quality Market Corporate 10-Year Bond Yields 2013 - 2018, Own Depiction Based on (treasury.gov, 2018) ...... 44 Figure 16 - DuPont Model for Lufthansa, Own Depiction Based on Petersen & Plenborg (2012) ...... 46 Figure 17 - Return on Equity of Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 47 Figure 18 – Plot of Return On Invested Capital (ROIC) of Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 48 Figure 19 - Plot of Profit Margins for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 49 Figure 20 - Lufthansa's Staff Cost, Based on Annual Reports ...... 53 Figure 21 - Lufthansa's Fuel Expenses versus Average Crude Oil Price, Based on Annual Reports and Statista.com (2018) ...... 55 Figure 22 - Turnover Rate of Invested Capital of Lufthansa and its Peers, Own Cculations Based on Annual Reports ...... 58 Figure 23 - Yields on German 10-year Government Bond, Own Depiction Based on (FRED, 2018) ...... 74 Figure 24 - BofAML US Corporate BBB Option-Adjusted Spread, Own Depiction Based on (FRED, 2018) ...... 77 Figure 25 - Performance of airberlin Departures in July 2017 from Airport Berlin Tegel, Based on (airliners, 2017) ...... 100 Figure 26 - Market Shares of Aviation Companies in the European Market in 2016 and 2017 (Based on Available Passenger Seats), Own depiction based on BDL (n.d.) ...... 108

137 Figure 27 - Market Share of Aviation Companies in the European Market in 2017 (Based on Flown Passengers), Own depiction based on Lufthansa (2017) ...... 108 Figure 28 - Market Shares of Aviation Companies in the US Market in 2017, Based on Available Passenger Seats, Own depiction based on BDL (n.d.) ...... 109 Figure 29 - Development of Lufthansa's Share Price (Adjusted Close) Since 1996, Own Depiction Based on Yahoo Finance (2018) ...... 110 Figure 30 - Development of Lufthansa's Share Price (Adjusted Close) in 2017, Own Depiction Based on Yahoo Finance (2018) ...... 110

138 14 List of Tables Table 1 - Selection of Comparable Companies, Based on Annual Reports ...... 40 Table 2 - Return on Invested Capital (ROIC) for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 47 Table 3 - Profit Margins for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 49 Table 4 - ASK, RASK, RRPK, and Load Factor for Lufthansa, Own Calculations Based on Annual Reports ...... 51 Table 5 - Trend Analysis of Lufthansa's ASK, RASK, RRPK, and Load Factor, Own Calculations Based on Annual Reports ...... 51 Table 6 - Trend Analysis in Passenger Numbers for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 52 Table 7 - Trend Analysis of Lufthansa’s Other Revenue, Own Calculations Based on Annual Reports ...... 53 Table 8 - Trend Analysis of Lufthansa's Staff Costs, Own Calculations Based on Annual Reports ...... 54 Table 9 - Salaries Relative to Revenue for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 54 Table 10 - ASK per Employee for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 55 Table 11 - FX Rates, Based on xe.com ...... 56 Table 12 - Fuel Expenses per ASK for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 56 Table 13 - Turnover Rates of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 57 Table 14 - Days on Hand of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 59 Table 15 - Days on Hand for Aircrafts and Engines for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 59 Table 16 - Days on Hand for Capitalized Operating Leases for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 60 Table 17 - Lufthansa's ROE, Payout Ratio, and Sustainable Growth Rate (g), Own Calculations Based on Annual Reports ...... 61 Table 18 - Payout Ratio and Sustainable Growth rate (g) for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 62 Table 19 - Lufthansa's Growth in Selected Accounts, Own Calculations Based on Annual Reports ...... 63 Table 20 - Lufthansa's Value of Growth Parameters, Own Calculations Based on Annual Reports ...... 63 Table 21 - Lufthansa's Short-Term Risk Ratios, Own Calculations Based on Annual Reports ...... 65 Table 22 - Current Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 65 Table 23 - Quick Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 65

139 Table 24 - CFO to Short-Term Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 66 Table 25 - Long Term Liquidity Risk Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 67 Table 26 - Financial Leverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 67 Table 27 - Solvency Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 68 Table 28 - Interest Coverage Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 68 Table 29 - Interest Coverage Ratio (Cash) for Lufthansa and its Peers, Own Calculations Based on Annual reports...... 68 Table 30 - CFO to Debt Ratios for Lufthansa and its Peers, Own Calculations Based on Annual Reports ...... 69 Table 31 - Beta Calculation for Lufthansa, Own Calculation Based on Stock and Index Price Data from yahoo.finance ...... 75 Table 32 - Lufthansa's Split of Total Revenue, Based on Annual Reports ...... 79 Table 33 - Split and Development of Lufthansa's Traffic Revenue, Own Calculations Based on Annual Reports ...... 80 Table 34 – Forecast of Growth Rates of Lufthansa's Available Seat Kilometers ...... 81 Table 35 - Forecast of Lufthansa's Revenue Seat Kilometers (in million)...... 82 Table 36 - Historical Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK), Based on Annual Reports ...... 82 Table 37 - Forecasted Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK) ...... 82 Table 38 - Forecast of Lufthansa's Passenger Revenue ...... 82 Table 39 - Forecast of Lufthansa's Revenue Cargo-Tonne Kilometers (in million) ...... 83 Table 40 - Forecast of Lufthansa's Traffic Revenue ...... 84 Table 41 - Forecast and Growth Assumptions of Lufthansa's Other Revenue ...... 84 Table 42 - Forecast of Lufthansa's Total Revenue ...... 85 Table 43 - Expected Crude Oil Price, Based on World Bank, IMF, an Canada Energy Board (2017) as well as Deloitte (2018) ...... 86 Table 44 - Forecasted Change in Lufthansa's Fuel Costs ...... 86 Table 45 - Forecasts and Growth Assumptions for Lufthansa's Total Cost of Materials and Services ...... 87 Table 46 - Forecasts of Lufthansa's EBITDA and EBITDA Input Parameters ...... 88 Table 47 - Forecasts of Lufthansa's EBIT ...... 89 Table 48 - Forecasts of Lufthansa's NOPAT ...... 89 Table 49 - Forecasts of Lufthansa's Capital Expenditures (CapEx) ...... 90 Table 50 - Lufthansa's Inventory Days, Accounts Receivable Days, and Accounts Payable Days, Own Calculations Based on Annual Reports ...... 91 Table 51 – Forecasts of Lufthansa's Net Working Capital, Input Parameters, and Growth Assumptions ...... 91 Table 52 - DCF Valuation of Lufthansa's Share Price as of December 31st, 2017 ...... 93 Table 53 - Multiple Valuation Input Parameters from Lufthansa’s Peers ...... 95 Table 54 - Enterprise Value Multiples and Equity Based Multiples from Lufthansa's Peers ..96

140 Table 55 - Summary Statistic for Enterprise Value Multiples and Equity Based Multiples ....96 Table 56 - Calculation of Enterprise Value and Equity Value Based on Multiples ...... 97 Table 57 - Share Price Calculation Based on Enterprise and Equity Based Multiples ...... 97 Table 58 - Share Price Sensitivity to Changes in Weighted Average Cost of Capital (WACC) and Terminal Growth Rate ...... 98 Table 59 – Overview: Acquirers of Certain airberlin Assets ...... 103 Table 60 - Lufthansa's Stock Price Targets from Other Analysts, Own Depiction Based on Finanzen.net (2018) ...... 111

141 15 Appendix

Appendix 1 - Brand Finance's Top 50 most valuable airlines

Rank Rank Brand name 2017 2016 1 3 American Airlines 2 2 Delta 3 5 United Airlines 4 1 Emirates 5 8 Southwest Airlines 6 6 China Southern 7 10 China Eastern 8 7 Air China 9 4 British Airways 10 15 ANA 11 14 Lufthansa 12 9 Qatar Airways 13 12 Qantas 14 13 Japan Airlines 15 20 Air Canada 16 11 Turkish Airlines 17 25 Alaska Airlines 18 26 Jetblue Airways 19 21 Easyjet 20 23 Hainan Airlines 21 22 Ryanair 22 16 Singapore Airlines 23 18 Etihad Airways 24 19 Air France 25 24 Korean Air Lines 26 29 Aeroflot 27 17 Cathay Pacific 28 32 Thai Airways 29 New LATAM 30 41 Shenzhen Airlines 31 44 Norwegian Air 32 48 Spirit Airlines 33 39 Westjet Airlines 34 36 Air New Zealand 35 31 Iberia 36 New Eva Airways 37 28 KLM 38 27 Virgin Atlantic 39 34 Saudia 40 35 Asiana Airlines 41 37 Garuda Indonesia 42 New Juneyao Airlines 43 50 China Airlines 44 33 Virgin Australia 45 49 Aeromexico 46 New Airasia 47 43 Swiss 48 New Jetstar 49 47 Scandinavian Airlines 50 45 Avianca Appendix 2 – Lufthansa & Peers Analytical Income Statements

Lufthansa In Euro million 2013 2014 2015 2016 2017 Revenues Passenger revenue 21,743 21,566 22,611 22,256 25,467 Freight and mail 2,825 2,822 2,711 2,405 2,932 Other Revenue 5,459 5,623 6,734 6,999 7,180 Other operating income 2,043 1,953 2,832 2,184 2,276 Changes in inventory 158 212 203 95 106 Total revenue 32,228 32,176 35,091 33,939 37,961

Staff costs -7,356 -7,335 -8,075 -7,354 -8,172 Fuel -7,115 -6,751 -5,784 -4,885 -5,232

Other operating expenses Raw materials, consumables & supplies -2,212 -2,252 -2,670 -2,896 -3,095 Purchased goods -440 -476 -549 -444 -460 Fees and charges -5,167 -5,265 -5,651 -5,736 -6,357 Charter expenses -321 -215 -235 -343 -651 MRO services -1,050 -1,133 -1,341 -1,335 -1,519 In-flight services -317 -317 -347 -343 -379 External IT-services -166 -174 -285 -329 -381 Other services -616 -648 -728 -740 -851 Other operating expenses -4,756 -5,279 -6,106 -5,517 -5,571 Total other operating expenses -15,045 -15,759 -17,912 -17,683 -19,264

EBITDAR 2,712 2,331 3,320 4,017 5,293 Operating lease payments -94 -52 -50 -58 -88 Reported EBITDA 2,618 2,279 3,270 3,959 5,205 Implied interest on capitalized op leases 21 21 24 36 36 Adjusted EBITDA 2,639 2,300 3,294 3,995 5,241 Depreciation & amortization -1,767 -1,512 -1,715 -1,769 -2,052 EBIT 872 788 1,579 2,226 3,189

Tax rate 40.29% 58.33% 15.00% 19.80% 24.76% Corporation tax 351 460 237 441 789

NOPAT 521 328 1,342 1,785 2,400 Result of equity investments 124 121 121 85 157 Interest income 162 135 186 64 178 Interest expense -508 -414 -356 -282 -373 Other financial items -83 -429 520 191 72 Implied interest on capitalized op leases -21 -21 -24 -36 -36 Net Financial Expense -326 -608 447 22 -2 Tax shield 131 355 -67 -4 0 Net Financial Expense After Tax -195 -253 380 18 -2

Net Earnings 326 75 1,722 1,803 2,398 Air France-KLM in Euro million 2013 2014 2015 2016 2017 Revenues Passenger sales 20,112 19,570 20,541 19,682 Cargo sales 2,816 2,681 2,425 2,069 Network 21,561 Other network sales 919 Network sales (incl Passenger & cargo) 22,928 22,251 22,966 21,751 22,480 Maintenance sales 1,225 1,251 1,577 1,834 1,823 Transavia 0 1,056 1,099 1,218 1,436 Others sales 1,367 354 417 41 42 Total sales 25,520 24,912 26,059 24,844 25,781 Other Revenue 10 18 3 2 3 Total revenue 25,530 24,930 26,062 24,846 25,784

External expenses Aircraft fuel -6,897 -6,629 -6,183 -4,597 -4,507 Chartering costs -455 -438 -430 -424 -403 Landing fees & en route charges -1,839 -1,840 -1,947 -1,900 -1,905 Catering -589 -591 -655 -445 -784 Handling charges & other operating costs -1,405 -1,476 -1,536 -1,565 -1,753 Aircraft maintenance costs -1,303 -1,356 -2,372 -2,469 -2,424 Commercial and distribution costs -852 -870 -896 -905 -935 Other External expenses -1,744 -1,718 -1,663 -1,958 -1,574

Salaries and related costs -7,482 -7,316 -7,852 -7,474 -7,624 Taxes other than income taxes -186 -169 -167 -164 -158

Other income & expenses -10 -65 1,113 842 635

Total expenses -22,762 -22,468 -22,588 -21,059 -21,432

EBITDAR 2,768 2,462 3,474 3,787 4,352

Aircraft operating lease costs -913 -873 -1,027 -1,073 -1,088 Reported EBITDA 1,855 1,589 2,447 2,714 3,264 Implied interest on capitalized op lease 359 423 442 448 448 Adjusted EBITDA 2,214 2,012 2,889 3,162 3,712 Depreciation, amortization & impairment -1,725 -1,718 -1,631 -1,665 -1,776 Sales of aircraft equipment -12 -6 21 18 Other non-current income and expenses -345 880 305 46 -1,925

EBIT 132 1,174 1,557 1,564 29

Tax rate -181.00% 332.00% 21.50% 36.00% 44.00% Corporation tax -239 3,898 335 563 13

NOPAT 371 -2,724 1,222 1,001 16

Cost of financial debt -481 -446 -373 -309 -249 Income from cash & cash equivalents 77 76 63 49 35 Other financial income & expenses 103 -318 -605 -33 116 Implied interest on capitalized op leases -359 -423 -442 -448 -448 Net Financial Expenses -660 -1,111 -1,357 -741 -546 Tax shield -1,195 3,689 292 267 240 Net Financial Expenses After Tax -1,855 2,578 -1,065 -474 -306 Share of profits/loses of associates -211 -39 -30 -7 21 Net income from discounted operations -122 -4 270 -8

Net Earnings -1,817 -189 127 790 -277 easyJet in GBP Mio 2013 2014 2015 2016 2017 Revenues Seat revenue 4,194 4,462 4,616 4,587 4,958 Non-seat revenue 64 65 70 82 89 Total revenue 4,258 4,527 4,686 4,669 5,047

Employee costs -748 -786 -818 -878 -1,026 Fuel, oil costs & emissions charges -1,182 -1,251 -1,199 -1,114 -1,062

External expense Airports & ground handling -1,078 -1,107 -1,122 -1,267 -1,465 Maintenance -212 -212 -229 -237 -274 Selling and marketing -101 -103 -102 -107 -122 Other costs -226 -245 -276 -296 -389 Total other operating expenses -1,617 -1,667 -1,729 -1,907 -2,250

EBITDAR 711 823 940 770 709 Aircraft dry leasing -102 -124 -114 -91 -110 Reported EBITDA 609 699 826 679 599 Implied interest on capitalized op lease 227 271 270 269 268 Adjusted EBITDA 836 970 1,096 948 867 Depreciation, amortization & impairment -112 -118 -138 -169 -195 EBIT 724 852 958 779 672

Tax rate 16.74% 22.55% 20.12% 13.81% 20.78% Corporation tax 121.1715 192.126 192.7496 107.5799 139.6416

NOPAT 603 660 765 671 532

Interest receivable & other fin income 5 11 9 10 10 Interest payable & other fin charges -24 -11 -11 -13 -29 Implied interest on capitalized op lease -227 -271 -270 -269 -268 Net Financial Expenses -246 -271 -272 -272 -287 Tax shield 41 61 55 38 60 Net Financial Expenses After Tax -205 -210 -217 -234 -227

Net Earnings 398 450 548 437 305 IAG In Euro million 2013 2014 2015 2016 2017 Revenues Passenger revenue 16,158 17,825 20,350 19,924 20,245 Cargo revenue 1,073 992 1,024 1,022 1,084 Other revenue 1,338 1,353 1,484 1,621 1,643 Total revenue 18,569 20,170 22,858 22,567 22,972

Employee costs -4,221 -4,585 -4,905 -4,824 -4,988 Fuel, oil costs and emissions charges -5,945 -5,987 -6,031 -4,831 -4,610

Other expenses Handling, catering & other operating costs -1,932 -2,063 -2,371 -2,664 -2,714 Landing fees & en-route charges -1,422 -1,555 -1,882 -2,151 -2,151 Engineering & other costs -1,252 -1,276 -1,395 -1,701 -1,792 Property, IT & other costs -927 -927 -1,033 -870 -922 Selling costs -785 -859 -912 -896 -982 Currency differences -45 -221 -45 -100 -14 Total other expenses -6,363 -6,901 -7,638 -8,382 -8,575

EBITDAR 2,040 2,697 4,284 4,530 4,799 Aircraft operating lease costs -499 -551 -659 -759 -888 Reported EBITDA 1,541 2,146 3,625 3,771 3,911 Implied interest on capitalized op lease 227 271 270 269 268 Adjusted EBITDA 1,768 2,417 3,895 4,040 4,179 Depreciation, amortization & impairment -1,014 -1,117 -1,307 -1,287 -1,184 EBIT 754 1,300 2,588 2,753 2,995

Tax rate 0.00% -21.14% 15.82% 17.36% 18.93% Corporation tax 0 -275 409 478 567

NOPAT 754 1,575 2,179 2,275 2,428

Finance costs -301 -237 -294 -279 -225 Finance income 31 32 42 33 45 Retranslation (charges) 12 -27 -56 -25 27 Net gain rel. to available-for sale fin assets 2 93 5 4 7 Share of profits in investments accounted for using the equity method 6 6 3 unrealised losses on derivatives 67 -14 realised losses on derivatives 43 -49 -170 -7 -19 Share of post-tax profits in associates -8 2 Loss on sale of prop., plant & equip. & inv. -26 -11 -38 67 -30 Net financing charge relating to pensions -53 -4 -12 12 -28 Implied interest on capitalized op. lease -227 -271 -270 -269 -268 Net Financial Expenses -527 -472 -787 -391 -502 Tax shield 0 -100 125 68 95 Net Financial Expenses After Tax -527 -572 -662 -323 -407 Loss after tax from discontinued op. -4 Net Earnings 223 1,003 1,516 1,952 2,021

Ryanair In Euro million 2013 2014 2015 2016 2017 Revenues Scheduled revenues 3,820 3,790 4,260 4,967 4,868 Ancillary revenues 1,064 1,247 1,394 1,569 1,780 Total operating revenues 4,884 5,037 5,654 6,536 6,648

Fuel and oil -1,886 -2,013 -1,992 -2,071 -1,913 Staff costs -436 -464 -503 -585 -633

Operating expenses Airport and handling charges -612 -617 -713 -831 -865 Route charges -487 -522 -547 -623 -656 Marketing, distribution and other -198 -193 -234 -293 -322 Maintenance, materials and repairs -120 -116 -135 -130 -141 Total operating expense -1,417 -1,448 -1,629 -1,877 -1,984

EBITDAR 1,145 1,112 1,530 2,003 2,118 Aircraft rentals -98 -102 -109 -115 -86 Reported EBITDA 1,047 1,010 1,421 1,888 2,032 Implied interest on capitalized op. lease 42 45 47 35 35 Adjusted EBITDA 1,089 1,055 1,468 1,923 2,067 Depreciation -330 -352 -378 -427 -498 EBIT 759 703 1,090 1,496 1,569

Tax rate 12.60% 11.68% 11.81% 9.47% 10.48% Corporation tax 96 82 129 142 164

NOPAT 663 621 962 1,355 1,405 Gain on disposal of av. for sale fin. asset 318 Finance Income 27 17 18 18 4 Finance expenses -99 -83 -74 -71 -67 foreign exchange (loss)/gain 5 -1 -4 -3 -1 Implied interest on capitalized op lease -42 -45 -47 -35 -35 Net Financial Expenses -109 -112 -107 227 -99 Tax shield 14 13 13 -21 10 Net Financial Expenses After Tax -95 -99 -95 205 -89

Net Earnings 568 522 867 1,560 1,316

SAS In SEK million 2013 2014 2015 2016 2017 Revenues Passenger revenue 31,739 28,710 30,496 30,371 32,644 Charter 2,066 2,108 1,742 1,791 1,964 Mail and freight 1,289 1,279 1,265 1,253 1,470 Other traffic revenue 2,353 1,803 2,066 2,293 2,419 Other operating revenue In-flight sales 169 242 253 252 269 Ground handling services 1,161 1,322 1,294 1,041 1,028 Technical maintenance 179 183 163 152 314 Terminal and forwarding services 412 369 370 351 354 Sales commissions and charges 758 735 548 556 569 Other operating revenue 2,056 1,255 1,453 1,399 1,623

Income from sale of shares in subsidiaries, affiliated companies and operations 700 6 0 -7 -21 Share of income in affiliated companies 25 30 37 39 4

Total revenue 42,907 38,042 39,687 39,491 42,637

Payroll expenses -11,307 -9,181 -9,622 -9,105 -9,205 Jet fuel expenses -9,046 -8,806 -8,430 -6,449 -6,836

Other operating expenses Selling costs -2,444 -2,228 -2,518 -2,372 -2,417 Government user fees -4,154 -3,962 -4,087 -4,106 -4,262 Catering costs -981 -756 -836 -948 -1,075 Handling costs -1,649 -1,703 -1,998 -2,477 -2,704 Technical aircraft maintenance -2,566 -2,468 -2,757 -3,292 -3,515 Wet-lease costs -1,123 Computer and telecommunications costs -981 -1,067 -1,159 -1,382 -1,569 Income for sale of aicraft and buidlings -118 -16 777 265 995 Other operating expenses -3,621 -4,132 -2,773 -3,526 -3,988 Total operating expenses -16,514 -16,332 -15,351 -17,838 -19,658

EBITDAR 6,040 3,723 6,284 6,099 6,938 Rental lease expense -1,786 -2,127 -2,593 -2,840 -3,116 Reported EBITDA 4,254 1,596 3,691 3,259 3,822 Implied interest on capitalized op. lease 876 1,068 1,169 1,283 1,283 Adjusted EBITDA 5,130 2,664 4,860 4,542 5,105 Depreciation, amortization & impairment -1,658 -1,443 -1,466 -1,367 -1,635 EBIT 3,472 1,221 3,394 3,175 3,470

Tax rate 17.60% 21.68% 32.53% 7.69% 33.39% Corporation tax 611 265 1,104 244 1,159

NOPAT 2,861 956 2,290 2,931 2,311 Income from other holdings of securities 1 -43 -300 1 1 Financial Income 50 102 124 91 148 Financial expenses -999 -1,130 -632 -553 -611 Implied interest on capitalized op lease -876 -1,068 -1,169 -1,283 -1,283 Net Financial Expenses -1,824 -2,139 -1,977 -1,744 -1,745 Tax shield 321 464 643 134 583 Net Financial Expenses After Tax -1,503 -1,675 -1,334 -1,610 -1,162

Net Earnings 1,358 -719 956 1,321 1,149 Appendix 3 – Lufthansa & Peers Analytical Balance Sheet

Lufthansa In Euro million 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Intangible assets with indefinite useful life 1,188 1,197 1,235 1,265 1,343 Other intangible assets 381 390 422 472 492 Aircraft and reserve engines 12,354 13,572 14,591 14,798 15,959 spare parts 959 1,083 1,388 1,604 1,758 Property, plant and other equipment 2,058 2,109 2,173 2,199 2,186 Investments acc. for using equity method 458 445 520 516 585 Deferred charges and prepaid expenses 16 11 12 11 9 Effective income tax receivables 39 31 19 4 12 Deferred tax assets 622 1,489 1,200 1,413 1,523 Capitalized operating lease 612 588 682 1,035 1,035

Current Assets Inventories 641 700 761 816 907 Trade receivables and other receivables 3,577 3,995 4,389 4,570 5,314 Deferred charges and prepaid expenses 146 147 158 167 197 Effective income tax receivables 72 122 85 37 58

Total Operating Assets 23,123 25,879 27,635 28,907 31,378

Operating Liabilities non-current liabilities Other provisions (non-current) 581 601 526 503 601 Advance payment received, deferred income, non-financial liabilities 1,187 1,179 1,223 1,246 1,289 Deferred tax liabilities 146 239 346 437 449

Current liabilities Other provisions (current) 861 953 1,075 1,066 990 Trade payables 3,026 2,943 2,948 3,067 3,432 Liabilities from unused flight documents 2,635 2,848 2,901 3,040 3,773 Advance payments received, deferred income, non-financial liabilitied 961 924 918 875 992 Effective income tax obligations 247 228 136 390 838

Total Operating Liabilities 9,644 9,915 10,073 10,624 12,364

Invested Capital (Net Operating Assets) 13,479 15,964 17,562 18,283 19,014

Financing side Total shareholders equity 6,108 4,031 5,845 7,149 9,598

Interest-bearing debt Non-current liabilities Pension provisions 4,718 7,231 6,626 8,364 5,116 Borrowings 4,823 5,364 5,031 5,811 6,142 Other financial liabilities 148 136 121 124 243 Derivative financial instruments 426 719 307 54 190 Capitalized operating lease 612 588 682 1,035 1,035

Current liabilities Borrowings 1,514 594 1,339 764 672 Other financial liabilities 1,520 1,692 1,899 1,622 1,818 Derivative financial instruments 183 766 1,221 185 124 Liabilities related to assets held for sale 0 26 0 0 0

Total interest-bearing debt 13,944 17,116 17,226 17,959 15,340

Interest-bearing assets Non-current assets Other equity investments 500 776 201 212 221 Non-current securities 20 10 15 23 32 Loans and non-current receivables 491 515 516 513 475 Derivative financial instruments 335 599 1,234 1,474 642

Current assets Derivative financial instruments 460 456 440 534 600 Securities 3,146 1,785 1,994 2,681 2,551 Cash and cash equivalents 1,550 953 1,099 1,256 1,397 assets held for sale 71 89 10 132 6

Total interest-bearing assets 6,573 5,183 5,509 6,825 5,924

Net interest-bearing assets 7,371 11,933 11,717 11,134 9,416

Invested Capital 13,479 15,964 17,562 18,283 19,014

Air France-KLM In Euro million 2013 2014 2015 2016 2017 Operating side Operating Assets Non-current assets Goodwill 237 243 247 218 216 Intangible assets 896 1,009 1,018 1,066 1,122 Flight equipment 9,391 8,728 8,743 9,119 9,921 Other property, plant and euipment 1,819 1,750 1,670 1,480 1,492 Deferred tax assets 434 1,042 702 176 234 Other non-current assets 113 243 295 448 239 Capitalized operating lease 10,271 12,082 12,624 12,800 12,800 Investments in equity associates 177 139 118 292 301

Current Assets Inventories 511 538 532 566 557 Trade receivables 1,775 1,728 1,800 1,868 2,136 Other current assets 845 961 1,138 1,105 1,264

Total Operating Assets 26,469 28,463 28,887 29,138 30,282

Operating Liabilities Long-term liabilities (non-current) Other provisions 1,404 1,513 1,673 1,710 Provisions and retirement benefits 3,102 deferred tax liabilities 178 14 11 -12 11 Other non-current liabilities 397 536 484 284 361

Current liabilities Other provisions 731 742 654 488 Current portion of long term debt 2,137 1,885 2,017 1,021 1,378 Trade payables 2,369 2,444 2,395 2,359 2,365 Deferred revenue on ticket sales 2,371 2,429 2,515 2,517 2,889 Frequent flyer programs 755 759 760 810 819 Other current liabilities 2,329 3,330 3,567 2,775 3,100 Provisions 670

Total Operating Liabilities 14,308 13,532 14,004 12,081 13,121

Invested Capital (Net Operating Assets) 12,161 14,931 14,883 17,057 17,161

Financing side Total shareholders equity 2,293 -653 273 1,296 3,015

Interest-bearing debt Non-current liabilities Pension Provisions 2,119 1,995 2,119 2,202 Long term debt 8,596 7,994 7,060 7,431 6,064 Capitalized operating lease 10,271 12,082 12,624 12,800 12,800

Current liabilities Bank overdraft 166 249 3 5 6 Liabilities relating to assets held for sale 58

Total interest-bearing debt 19,091 22,444 21,682 22,355 21,072

Interest-bearing assets Non-current assets Other financial assets 1,963 1,502 1,224 1,064 1,242 Pension assets 2,454 1,409 1,773 1,462 590

Current Assets Assets held for sale 91 3 4 Other short term financial assets 1,031 787 967 130 421 Cash and cash equivalents 3,684 3,159 3,104 3,938 4,673

Total interest-bearing assets 9,223 6,860 7,072 6,594 6,926 Net interest-bearing assets 9,868 15,584 14,610 15,761 14,146

Invested Capital 12,161 14,931 14,883 17,057 17,161 easyJet In GBP million 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Goodwill 365 365 365 365 365 Other intangible assets 102 113 127 152 179 Property, plant and equipment 2,280 2,542 2,877 3,252 3,525 Other non-current assets 185 152 130 112 74 Capitalized operating lease 1,459 1,341 1,071 1,294 1,294

Current Assets Trade and other receivables 194 200 206 205 275

Total Operating Assets 4,585 4,713 4,776 5,380 5,712

Operating Liabilities non-current liabilities Non-current deferred income 68 62 47 36 25 Provisions for liabilities and charges 171 147 165 235 218 Deferred tax 144 186 176 237 249

Current liabilities Trade and other payables 1,093 1,110 495 565 714 Unearned revenue 619 568 727 Current tax payable 58 53 43 16 35 Provisions for liabilities and charges 61 53 104 Maintenance provisions 81 79

Total Operating Liabilities 1,615 1,637 1,606 1,710 2,072

Invested Capital (Net Operating Assets) 2,970 3,076 3,170 3,670 3,640

Financing side Total shareholders equity 2,017 2,172 2,249 2,694 2,802

Interest-bearing debt Non-current liabilities Borrowings 592 472 322 664 963 Derivative financial instruments 41 23 101 49 44 Capitalized opetating lease 1,459 1,341 1,071 1,294 1,294

Current liabilities Borrowings 87 91 182 92 8 Derivative financial instruments 60 87 368 275 82 Total interest-bearing debt 2,239 2,014 2,044 2,374 2,391

Interest-bearing assets Non-current assets Derivative financial instruments 13 36 44 154 87 Restricted Cash 12 9 6 7 7 Loan notes 7 4

Current assets Derivative financial instruments 17 53 128 268 131 Money market deposits 224 561 289 255 617 Cash and cash equivalents 1,013 424 650 714 711 Restricted cash 23 6

Total interest-bearing assets 1,286 1,110 1,123 1,398 1,553

Net interest-bearing assets 953 904 921 976 838

Invested Capital 2,970 3,076 3,170 3,670 3,640

IAG in Euro million 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Property, plant and equipment 10,228 11,784 13,672 12,227 11,846 Intangible assets 2,196 2,438 3,246 3,037 3,018 Investments acc. for using equity method 25 27 41 29 30 Employee benefit assets 485 855 957 1,028 1,023 Deferred tax assets 501 769 723 526 521 Other non-current assets 197 188 365 499 376 Capitalized operating lease 6,482 7,753 8,929 10,447 10,447

Current Assets Non-current assets held for sale 12 18 5 38 Inventories 411 424 520 458 432 Trade receivables 1,196 1,252 1,196 1,405 1,494 Other current assets 631 602 1,235 899 958 Current tax receivable 9 79 228 258 total current assets 2,250 2,305 3,035 3,028 3,142 Total Operating Assets 22,364 26,119 30,968 30,821 30,403

Operating Liabilities non-current liabilities Employee benefit obligations 738 1,324 858 2,363 792 Deferred tax liability 884 278 419 176 531 Provisions for liabilities and charges 1,796 1,967 2,049 1,987 2,113 Other long-term liabilities 225 226 223 238 222 Current liabilities Current portion of long-term borrowings 587 713 1,132 926 930 Trade abd other payables 3,297 3,281 3,803 3,305 3,766 Deferred revenue of ticket sales 3,496 3,933 4,374 4,145 4,159 Current tax payables 11 57 124 101 179 Provisions for liabilities and charges 398 504 605 771 547

Total Operating Liabilities 11,432 12,283 13,587 14,012 13,239

Invested Capital (Net Operating Assets) 10,932 13,836 17,381 16,809 17,164

Financing side Total shareholders equity 4,216 3,793 5,534 5,664 7,396

Interest-bearing debt Non-current liabilities Interest-bearing long-term borrowings 4,535 5,904 7,498 7,589 6,401 Derivative financial instruments 66 359 282 20 114 Capitalized opetating lease 6,482 7,753 8,929 10,447 10,447

Current liabilities Derivative financial instruments 528 1,313 1,328 88 111

Total interest-bearing debt 11,611 15,329 18,037 18,144 17,073

Interest-bearing assets Non-current assets Derivative financial instruments 35 80 62 169 145 Available for sale financial assets 1,092 84 74 73 79

Current assets Cash and cash equivalents 1,541 1,528 2,909 3,337 3,292 Other current interest-bearing deposits 2,092 3,416 2,947 3,091 3,384 Derivative financial instruments 135 178 198 329 405 total current assets 3,768 5,122 6,054 6,757 7,081

Total interest-bearing assets 4,895 5,286 6,190 6,999 7,305

Net interest-bearing assets 6,716 10,043 11,847 11,145 9,768

Invested Capital 10,932 13,836 17,381 16,809 17,164

Ryanair in Eurom 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Property, plant and equipment 4,906 5,060 5,471 6,262 7,214 Intangible assets 47 47 47 47 47 Capitalized operating lease 1,200 1,282 1,353 1,012 1,012

Current Assets Inventories 3 3 2 3 3 Other assets 68 124 139 149 222 Current tax 1 1 Trade receivables 56 58 60 66 54 total current assets 127 186 202 218 279 Total Operating Assets 6,280 6,575 7,073 7,539 8,552

Operating Liabilities non-current liabilities Provisions 136 134 181 149 138 Deferred tax 347 369 462 386 473

Current liabilities Trade payables 138 150 197 231 294 Accrued expenses and other liabilities 1,341 1,561 1,938 2,113 2,257 Current tax 21 3

Total Operating Liabilities 1,962 2,214 2,778 2,900 3,165

Invested Capital (Net Operating Assets) 4,318 4,361 4,295 4,639 5,387

Financing side Total shareholders equity 3,273 3,286 4,035 3,597 4,423

Interest-bearing debt Non-current liabilities Derivative financial instruments 50 43 73 112 3 Other creditors 128 90 56 33 12 Non-current maturities of debt 3,098 2,616 4,032 3,573 3,929 Capitalized opetating lease 1,200 1,282 1,353 1,012 1,012

Current liabilities Current maturities of debt 400 468 400 450 456 Derivative financial instruments 32 95 812 555 2 total current liabilities 432 563 1,212 1,005 458

Total interest-bearing debt 4,908 4,594 6,726 5,735 5,414

Interest-bearing assets Non-current assets Available for sale assets 221 260 371 derivative financial instruments 5 555 89 23

Current assets Derivative financial instruments 78 17 744 269 286 Restricted cash 25 13 7 13 12 Financial assets 2,293 1,498 3,605 3,062 2,905 Cash and cash equivalents 1,241 1,730 1,185 1,259 1,224 Total current assets 3,637 3,258 5,541 4,603 4,427

Total interest-bearing assets 3,863 3,518 6,467 4,692 4,450

Net interest-bearing assets 1,045 1,076 259 1,043 964

Invested Capital 4,318 4,362 4,294 4,640 5,387

SAS In SEK million 2013 2014 2015 2016 2017 Operating side Operating Assets Non-current assets Intangible assets 1,802 1,905 1,798 1,923 1,581 Land and Building 241 243 560 527 549 Aircraft 8,795 7,535 7,095 8,254 7,900 Spare engines and spare parts 147 76 31 48 57 Workshop and aircraft servicing equipment 117 85 101 93 88 Other equipment and vehicles 105 128 137 105 95 Investment in progress 21 71 190 33 16 Prepayment rel. to tangible fixed assets 251 763 1,482 2,135 1,987 Capitalized operating lease 25,023 30,506 33,412 36,659 36,659 Deferred tax assets 800 1,111 375 854 219 Other long-term receivables 2,249 1,928 1,951 2,331 2,512

Current Assets Expendable spare parts and inventories 359 342 345 312 321 Prepayments to suppliers 2 8 0 0 0 Accounts receivable 1,376 1,067 1,249 1,406 1,363 Receivables from affiliated companies 1 0 2 1 2 Other receivables 866 1,263 867 1,193 931 Prepaid expenses and accrued income 858 937 1,093 1,153 850

Total Operating Assets 43,013 47,968 50,688 57,027 55,130

Operating Liabilities Long-term liabilities (non-current) Deferred tax liability 0 0 0 0 361 Other provisions 1,361 2,088 1,992 2,089 3,461 Other Liabilities 161 161 188 3 0

Current liabilities Prepayments from Customers 16 4 22 0 11 Accounts Payable 1,689 1,499 1,528 1,755 1,448 Liabilities to affiliated companies 0 0 0 0 0 Tax liabilities 36 0 0 21 32 Unearned Transportation revenue 3,932 4,244 4,482 5,318 5,064 Current Portion of other provisions 855 709 479 457 1,499 Other Liabilities 722 679 964 872 712 Accrued expenses and prepaid income 3,416 4,355 4,684 5,336 3,334

Total Operating Liabilities 12,188 13,739 14,339 15,851 15,922

Invested Capital (Net Operating Assets) 30,825 34,229 36,349 41,176 39,208

Financing Side Total Shareholders' equity 3,226 4,907 6,339 6,026 8,058

Interest-bearing debt Long-term liabilities Subordinated Loans 956 1,003 1,104 1,157 1,067 Bond Loans 2,641 2,713 2,184 2,183 386 Other Loans 5,054 4,419 4,807 4,390 4,088 Capitalized operating lease 25,023 30,506 33,412 36,659 36,659

Current liabilities Current Portion of long-term loans 2,517 2,082 1,264 1,827 2,868 Short term loans 231 462 229 320 166 total current liabilities 2,748 2,544 1,493 2,147 3,034

Total Interest-bearing debt 36,422 41,185 43,000 46,536 45,234

Interest-bearing assets Non-current assets Equity in affiliated companies 352 395 421 398 374 Other holdings of securities 292 273 3 3 3 Pension funds, net 3,428 3,778 4,368 2,615 4,871

Current assets Short-term Investments 2,080 3,703 5,151 6,067 5,932 Cash 2,671 3,714 3,047 2,303 2,904 total current assets 4,751 7,417 8,198 8,370 8,836

Total Interest-bearing assets 8,823 11,863 12,990 11,386 14,084

Net Interest-bearing debt 27,599 29,322 30,010 35,150 31,150

Invested Capital 30,825 34,229 36,349 41,176 39,208 Appendix 4 - Lufthansa & Peers Corporation Tax & Capitalized Operating Leases

Lufthansa In Euro million 2013 2014 2015 2016 2017 Income before tax 546 180 2,026 2,248 3,187 Income taxes 220 105 304 445 789 Profit/loss after income taxes 326 75 1,722 1,803 2,398 Corporate tax rate 40.29% 58.33% 15.00% 19.80% 24.76%

Air France-KLM In Euro million 2013 2014 2015 2016 2017 Income before tax -528 63 200 823 -517 Income taxes -957 -209 -43 -294 229 Profit/loss after income taxes -1485 -146 157 529 -288 Corporate tax rate -181.25% 331.75% 21.50% 35.72% 44.29% easyJet In GBP million 2013 2014 2015 2016 2017 Income before tax 478 581 686 507 385 Income taxes -80 -131 -138 -70 -80 Profit/loss after income taxes 398 450 548 437 305 Corporate tax rate 16.74% 22.55% 20.12% 13.81% 20.78%

IAG IAG (Euro millions) 2013 2014 2015 2016 2017 Income before tax 227 828 1,801 2,362 2,493 Income taxes -76 175 -285 -410 -472 Profit/loss after income taxes 151 1,003 1,516 1,952 2,021 Corporate tax rate 33.48% -21.14% 15.82% 17.36% 18.93%

Ryanair In Euro million 2013 2014 2015 2016 2017 Income before tax 651 591 982 1,722 1,470 Income taxes 82 69 116 163 154 Profit/loss after income taxes 569 522 866 1,559 1,316 Corporate tax rate 12.60% 11.68% 11.81% 9.47% 10.48%

SAS In SEK million 2013 2014 2015 2016 2017 Income before tax 1,648 -918 1,417 1,431 1,725 Income taxes 290 199 461 110 576 Profit/loss after income taxes 1,358 -1,117 956 1,321 1,149 Corporate tax rate 17.60% -21.68% 32.53% 7.69% 33.39% Lufthansa In Euro millions 2013 2014 2015 2016 2017 Rental expense (t+1) 52 50 58 88 88 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 612 588 682 1,035 1,035 Implied interest expense 21 21 24 36 36 Depreciation 31 29 34 52 52

Air France-KLM In Euro million 2013 2014 2015 2016 2017 Rental expense (t+1) 873 1027 1073 1088 1088 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 10,271 12,082 12,624 12,800 12,800 Implied interest expense 359 423 442 448 448 Depreciation 514 604 631 640 640 easyJet In GBP million 2013 2014 2015 2016 2017 Rental expense (t+1) 124 114 91 110 110 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 1,459 1,341 1,071 1,294 1,294 Implied interest expense 51 47 37 45 45 Depreciation 73 67 54 65 65

IAG In Euro millions 2013 2014 2015 2016 2017 Rental expense (t+1) 551 659 759 888 888 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 6,482 7,753 8,929 10,447 10,447 Implied interest expense 227 271 313 366 366 Depreciation 324 388 446 522 522

Ryanair In Euro millions 2013 2014 2015 2016 2017 Rental expense (t+1) 102 109 115 86 86 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 1,200 1,282 1,353 1,012 1,012 Implied interest expense 42 45 47 35 35 Depreciation 60 64 68 51 51 SAS in SEK millions 2013 2014 2015 2016 2017 Rental expense (t+1) 2,127 2,593 2,840 3,116 3,116 Cost of secured debt 3.50% 3.50% 3.50% 3.50% 3.50% Asset life 20 20 20 20 20 Asset value 25,024 30,506 33,412 36,659 36,659 Implied interest expense 876 1,068 1,169 1,283 1,283 Depreciation 1,251 1,525 1,671 1,833 1,833 Appendix 5 - Return on Equity for Lufthansa & Peers

2013 2014 2015 2016 2017 Lufthansa 5.34% 1.86% 29.46% 25.22% 24.98% AirFrance-KLM -79.23% 28.97% 46.52% 61.11% -9.12% EasyJet 23.70% 20.72% 24.37% 16.22% 10.89% IAG 3.49% 26.44% 27.39% 34.45% 27.33% RyanAir 17.36% 15.89% 21.48% 43.36% 29.75% SAS 42.10% -14.65% 15.08% 21.92% 14.26% Appendix 6 - Lufthansa Income Statement Trend & Common Size Analysis

Lufthansa Income Statement Trend Analysis 2013 2014 2015 2016 2017 Revenues Passenger revenue 100 99 104 102 117 Freight and mail 100 100 96 85 104 Other Revenue 100 103 123 128 132 Other operating income 100 96 139 107 111 Changes in inventory 100 134 128 60 67 Total revenue 100 100 109 105 118

Staff costs 100 100 110 100 111 Fuel 100 95 81 69 74

Other operating expenses Raw materials, consumables & supplies 100 102 121 131 140 Purchased goods 100 108 125 101 105 Fees and charges 100 102 109 111 123 Charter expenses 100 67 73 107 203 MRO services 100 108 128 127 145 In-flight services 100 100 109 108 120 External IT-services 100 105 172 198 230 Other services 100 105 118 120 138 Other operating expenses 100 111 128 116 117 Total other operating expenses 100 105 119 118 128

EBITDAR 100 86 122 148 195 Operating lease payments 100 55 53 62 94 Reported EBITDA 100 87 125 151 199 Implied interest on capitalized op leases 100 100 114 171 171 Adjusted EBITDA 100 87 125 151 199 Depreciation & amortization 100 86 97 100 116 EBIT 100 90 181 255 366

Tax rate 100 145 37 49 61 Corporation tax 100 131 67 125 225

NOPAT 100 63 258 343 461 Result of equity investments 100 98 98 69 127 Interest income 100 83 115 40 110 Interest expense 100 81 70 56 73 Other financial items 100 517 -627 -230 -87 Implied interest on capitalized op leases 100 100 114 171 171 Net Financial Expense 100 187 -137 -7 1 Tax shield 100 270 -51 -3 0 Net Financial Expense After Tax 100 130 -195 -9 1

Net Earnings 100 23 528 553 736 Lufthansa Income Common Size Analysis 2013 2014 2015 2016 2017 Revenues Passenger revenue 67.47% 67.03% 64.44% 65.58% 67.09% Freight and mail 8.77% 8.77% 7.73% 7.09% 7.72% Other Revenue 16.94% 17.48% 19.19% 20.62% 18.91% Other operating income 6.34% 6.07% 8.07% 6.44% 6.00% Changes in inventory 0.49% 0.66% 0.58% 0.28% 0.28% Total revenue 100.00% 100.00% 100.00% 100.00% 100.00%

Staff costs -22.82% -22.80% -23.01% -21.67% -21.53% Fuel -22.08% -20.98% -16.48% -14.39% -13.78%

Other operating expenses Raw materials, consumables & supplies -6.86% -7.00% -7.61% -8.53% -8.15% Purchased goods -1.37% -1.48% -1.56% -1.31% -1.21% Fees and charges -16.03% -16.36% -16.10% -16.90% -16.75% Charter expenses -1.00% -0.67% -0.67% -1.01% -1.71% MRO services -3.26% -3.52% -3.82% -3.93% -4.00% In-flight services -0.98% -0.99% -0.99% -1.01% -1.00% External IT-services -0.52% -0.54% -0.81% -0.97% -1.00% Other services -1.91% -2.01% -2.07% -2.18% -2.24% Other operating expenses -14.76% -16.41% -17.40% -16.26% -14.68% Total other operating expenses -46.68% -48.98% -51.04% -52.10% -50.75%

EBITDAR 8.42% 7.24% 9.46% 11.84% 13.94% Operating lease payments -0.29% -0.16% -0.14% -0.17% -0.23% Reported EBITDA 8.12% 7.08% 9.32% 11.67% 13.71% Implied interest on capitalized op leases 0.07% 0.07% 0.07% 0.11% 0.09% Adjusted EBITDA 8.19% 7.15% 9.39% 11.77% 13.81% Depreciation & amortization -5.48% -4.70% -4.89% -5.21% -5.41% EBIT 2.71% 2.45% 4.50% 6.56% 8.40%

Tax rate 0.13% 0.18% 0.04% 0.06% 0.07% Corporation tax 109.02% 142.86% 67.52% 129.83% 207.98%

NOPAT 1.62% 1.02% 3.82% 5.26% 6.32% Result of equity investments 0.38% 0.38% 0.34% 0.25% 0.41% Interest income 0.50% 0.42% 0.53% 0.19% 0.47% Interest expense -1.58% -1.29% -1.01% -0.83% -0.98% Other financial items -0.26% -1.33% 1.48% 0.56% 0.19% Implied interest on capitalized op leases -0.07% -0.07% -0.07% -0.11% -0.09% Net Financial Expense -1.01% -1.89% 1.27% 0.06% -0.01% Tax shield 0.41% 1.10% -0.19% -0.01% 0.00% Net Financial Expense After Tax -0.60% -0.79% 1.08% 0.05% 0.00%

Net Earnings 1.01% 0.23% 4.91% 5.31% 6.32% Appendix 7 - Passenger numbers & Load factors for Lufthansa & Peers

Passenger numbers (in thousands) 2013 2014 2015 2016 2017 Lufthansa 104,593 105,988 107,679 109,670 130,039 Air France-KLM 77,328 77,450 79,016 80,163 83,947 easyJet 60,800 64,800 68,600 73,100 80,200 IAG 67,224 77,334 88,333 100,675 104,829 Ryanair 79,256 81,668 90,556 106,431 119,978 SAS 30,436 29,408 28,884 29,449 30,065

Passenger Load factor 2013 2014 2015 2016 2017 Lufthansa (Eurocents) 79.80% 80.10% 80.40% 79.10% 80.90% Air France-KLM 83.80% 84.70% 85.10% 85.40% 86.80% easyJet 89.30% 90.60% 91.50% 91.60% 92.60% IAG 80.80% 80.40% 81.40% 81.60% 82.60% Ryanair 82.00% 83.00% 88.00% 93.00% 94.00% SAS 75.00% 76.90% 76.30% 76.00% 76.80% Appendix 8 - Operational key figures for Lufthansa

2013 2014 2015 2016 2017 Number of employees 117,414 118,285 119,559 124,306 129,424 Salaries and related costs (in Euro million) 7,300 7,391 8,075 7,354 8,172 Salaries relative to revenue 0.23 0.23 0.23 0.22 0.22 ASK per employee (productivity) 2.24 2.27 2.29 2.31 2.49 Appendix 9 - Lufthansa Balance Sheet Trend, Turnover rate & Days on hand analysis

Lufthansa Balance Sheet Trend Analysis 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Intangible assets with indefinite useful life 100.00 100.76 103.96 106.48 113.05 Other intangible assets 100.00 102.36 110.76 123.88 129.13 Aircraft and reserve engines 100.00 109.86 118.11 119.78 129.18 spare parts 100.00 112.93 144.73 167.26 183.32 Property, plant & other equipment 100.00 102.48 105.59 106.85 106.22 Investments acc. for using equity method 100.00 97.16 113.54 112.66 127.73 Deferred charges and prepaid expenses 100.00 68.75 75.00 68.75 56.25 Effective income tax receivables 100.00 79.49 48.72 10.26 30.77 Deferred tax assets 100.00 239.39 192.93 227.17 244.86 Capitalized operating lease 100.00 96.08 111.44 169.12 169.12

Current Assets Inventories 100.00 109.20 118.72 127.30 141.50 Trade receivables and other receivables 100.00 111.69 122.70 127.76 148.56 Deferred charges and prepaid expenses 100.00 100.68 108.22 114.38 134.93 Effective income tax receivables 100.00 169.44 118.06 51.39 80.56

Total Operating Assets 100.00 111.92 119.51 125.01 135.70

Operating Liabilities non-current liabilities Other provisions 100.00 103.44 90.53 86.57 103.44 Advance payment received, deferred income, non-financial liabilities 100.00 99.33 103.03 104.97 108.59 Deferred tax liabilities 100.00 163.70 236.99 299.32 307.53

Current liabilities Other provisions 100.00 110.69 124.85 123.81 114.98 Trade payables 100.00 97.26 97.42 101.35 113.42 Liabilities from unused flight documents 100.00 108.08 110.09 115.37 143.19 Advance payments received, deferred income, non-financial liabilitied 100.00 96.15 95.53 91.05 103.23 Effective income tax obligations 100.00 92.31 55.06 157.89 339.27

Total Operating Liabilities 100.00 102.81 104.45 110.16 128.20

Invested Capital (Net Operating Assets) 100.00 118.44 130.29 135.64 141.06

Financing side Total shareholders equity 100.00 66.00 95.69 117.04 157.14

Interest-bearing debt Non-current liabilities Pension provisions 100.00 153.26 140.44 177.28 108.44 Borrowings 100.00 111.22 104.31 120.49 127.35 Other financial liabilities 100.00 91.89 81.76 83.78 164.19 Derivative financial instruments 100.00 168.78 72.07 12.68 44.60 Capitalized opetating lease 100.00 96.08 111.44 169.12 169.12

Current liabilities Borrowings 100.00 39.23 88.44 50.46 44.39 Other financial liabilities 100.00 111.32 124.93 106.71 119.61 Derivative financial instruments 100.00 418.58 667.21 101.09 67.76 Liabilities related to assets held for sale Total interest-bearing debt 100.00 122.75 123.54 128.79 110.01

Interest-bearing assets Non-current assets Other equity investments 100.00 155.20 40.20 42.40 44.20 Non-current securities 100.00 50.00 75.00 115.00 160.00 Loans and non-current receivables 100.00 104.89 105.09 104.48 96.74 Derivative financial instruments 100.00 178.81 368.36 440.00 191.64

Current assets Derivative financial instruments 100.00 99.13 95.65 116.09 130.43 Securities 100.00 56.74 63.38 85.22 81.09 Cash and cash equivalents 100.00 61.48 70.90 81.03 90.13 assets held for sale 100.00 125.35 14.08 185.92 8.45 Total interest-bearing assets 100.00 78.85 83.81 103.83 90.13

Net interest-bearing assets 100.00 161.89 158.96 151.05 127.74

Invested Capital 100.00 118.44 130.29 135.64 141.06

Lufthansa Analytical Balance Sheet Turnover rate 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Intangible assets with indefinite useful life 25.28 25.07 25.96 25.03 26.49 Other intangible assets 78.81 76.95 75.96 67.08 72.32 Aircraft and reserve engines 2.43 2.21 2.2 2.14 2.23 spare parts 31.31 27.71 23.1 19.74 20.24 Property, plant & other equipment 14.59 14.23 14.75 14.4 16.28 Investments acc. for using equity method 65.56 67.44 61.65 61.36 60.82 Deferred charges and prepaid expenses 1,876.69 2,728.27 2,671.33 2,878.18 3,953.22 Effective income tax receivables 769.92 968.1 1,687.16 7,915.00 2,964.92 Deferred tax assets 48.27 20.16 26.71 22.41 23.36 Capitalized operating lease 49.06 51.04 47 30.59 34.38

Current Assets Inventories 46.84 42.87 42.12 38.8 39.23 Trade receivables & other receivables 8.39 7.51 7.3 6.93 6.7 Deferred charges & prepaid expenses 205.66 204.16 202.89 189.58 180.6 Effective income tax receivables 417.04 245.99 377.13 855.68 613.43

Total Operating Assets 1.3 1.16 1.16 1.1 1.13

Operating Liabilities non-current liabilities Other provisions 51.68 49.94 60.94 62.94 59.2 Advance payment received, deferred income, non-financial liabilities 25.3 25.45 26.21 25.41 27.6 Deferred tax liabilities 205.66 125.57 92.65 72.45 79.24

Current liabilities Other provisions 34.87 31.49 29.82 29.7 35.94 Trade payables 9.92 10.2 10.87 10.32 10.37 Liabilities from unused flight documents 11.4 10.54 11.05 10.41 9.43 Advance payments received, deferred income, non-financial liabilitied 31.25 32.48 34.92 36.18 35.87 Effective income tax obligations 121.57 131.63 235.71 81.18 42.46

Total Operating Liabilities 3.11 3.03 3.18 2.98 2.88

Invested Capital (Net Operating Assets) 2.23 1.88 1.83 1.73 1.87

Financing side Total shareholders equity 4.92 7.45 5.48 4.43 3.71

Interest-bearing debt Non-current liabilities Pension provisions 6.36 4.15 4.84 3.79 6.95 Borrowings 6.23 5.59 6.37 5.45 5.79 Other financial liabilities 202.89 220.67 264.93 255.32 146.42 Derivative financial instruments 70.49 41.74 104.42 586.3 187.26 Capitalized operating lease 49.06 51.04 47 30.59 34.38

Current liabilities Borrowings 19.83 50.52 23.94 41.44 52.94 Other financial liabilities 19.75 17.74 16.88 19.52 19.57 Derivative financial instruments 164.08 39.18 26.25 171.14 286.93 Liabilities related to assets held for sale 1,154.27

Total interest-bearing debt 2.15 1.75 1.86 1.76 2.32

Interest-bearing assets Non-current assets Other equity investments 60.05 38.67 159.48 149.34 160.99 Non-current securities 1,501.35 3,001.10 2,137.07 1,376.52 1,111.84 Loans and non-current receivables 61.15 58.27 62.12 61.72 74.9 Derivative financial instruments 89.63 50.1 25.98 21.48 55.42 Current assets Derivative financial instruments 65.28 65.81 72.85 59.29 59.3 Securities 9.54 16.81 16.08 11.81 13.95 Cash & cash equivalents 19.37 31.49 29.17 25.21 25.47 Assets held for sale 422.92 337.2 3,205.60 239.85 5,929.83

Total interest-bearing assets 4.57 5.79 5.82 4.64 6.01

Net interest-bearing assets 4.07 2.51 2.74 2.84 3.78

Invested Capital 2.23 1.88 1.83 1.73 1.87

Lufthansa Analytical Balance Sheet Days on hand 2013 2014 2015 2016 2017 Operating side Operating assets Non-current assets Intangible assets with indefinite useful life 14.24 14.36 13.87 14.38 13.59 Other intangible assets 4.57 4.68 4.74 5.37 4.98 Aircraft and reserve engines 148.11 162.8 163.86 168.27 161.48 Spare parts 11.5 12.99 15.59 18.24 17.79 Property, plant & other equipment 24.67 25.3 24.4 25 22.12 Investments acc. for using equity method 5.49 5.34 5.84 5.87 5.92 Deferred charges & prepaid expenses 0.19 0.13 0.13 0.13 0.09 Effective income tax receivables 0.47 0.37 0.21 0.05 0.12 Deferred tax assets 7.46 17.86 13.48 16.07 15.41 Capitalized operating lease 7.34 7.05 7.66 11.77 10.47

Current Assets Inventories 7.69 8.4 8.55 9.28 9.18 Trade receivables & other receivables 42.89 47.92 49.29 51.96 53.77 Deferred charges & prepaid expenses 1.75 1.76 1.77 1.9 1.99 Effective income tax receivables 0.86 1.46 0.95 0.42 0.59

Total Operating Assets 277.23 310.43 310.35 328.7 317.49

Operating Liabilities non-current liabilities Other provisions 6.97 7.21 5.91 5.72 6.08 Advance payment received, deferred income, non-financial liabilities 14.23 14.14 13.73 14.17 13.04 Deferred tax liabilities 1.75 2.87 3.89 4.97 4.54

Current liabilities Other provisions 10.32 11.43 12.07 12.12 10.02 Trade payables 36.28 35.3 33.11 34.87 34.73 Liabilities from unused flight documents 31.59 34.16 32.58 34.57 38.18 Advance payments received, deferred income, non-financial liabilitied 11.52 11.08 10.31 9.95 10.04 Effective income tax obligations 2.96 2.73 1.53 4.43 8.48

Total Operating Liabilities 115.62 118.94 113.12 120.8 125.1

Invested Capital (Net Operating Assets) 161.6 191.5 197.23 207.89 192.39

Financing side Total shareholders equity 73.23 48.35 65.64 81.29 97.12

Interest-bearing debt Non-current liabilities Pension provisions 56.57 86.74 74.41 95.11 51.77 Borrowings 57.82 64.34 56.5 66.08 62.15 Other financial liabilities 1.77 1.63 1.36 1.41 2.46 Derivative financial instruments 5.11 8.62 3.45 0.61 1.92 Capitalized opetating lease 7.34 7.05 7.66 11.77 10.47

Current liabilities Borrowings 18.15 7.13 15.04 8.69 6.8 Other financial liabilities 18.22 20.3 21.33 18.44 18.4 Derivative financial instruments 2.19 9.19 13.71 2.1 1.25 Liabilities related to assets held for sale 0.31

Total interest-bearing debt 167.18 205.32 193.45 204.21 155.22

Interest-bearing assets Non-current assets Other equity investments 5.99 9.31 2.26 2.41 2.24 Non-current securities 0.24 0.12 0.17 0.26 0.32 Loans & non-current receivables 5.89 6.18 5.79 5.83 4.81 Derivative financial instruments 4.02 7.19 13.86 16.76 6.5

Current assets Derivative financial instruments 5.52 5.47 4.94 6.07 6.07 Securities 37.72 21.41 22.39 30.49 25.81 Cash & cash equivalents 18.58 11.43 12.34 14.28 14.14 Assets held for sale 0.85 1.07 0.11 1.5 0.06

Total interest-bearing assets 78.81 62.17 61.87 77.61 59.94

Net interest-bearing assets 88.37 143.14 131.59 126.6 95.27

Invested Capital 161.6 191.5 197.23 207.89 192.39 Appendix 10 - Lufthansa and S&P Share Prices and Excess returns Adj. Close share prices (in EUR) Returns Excess returns Date LH S&P 350 LH S&P 350 rF LH S&P 350 04-01-2015 13.445848 1381.060059 0.18% -1.08% 0.04 -0.04 -0.05 11-01-2015 13.622766 1442.089966 1.32% 4.42% 0.04 -0.03 0.00 18-01-2015 14.249155 1515.109985 4.60% 5.06% 0.04 0.01 0.01 25-01-2015 14.397385 1501.630005 1.04% -0.89% 0.04 -0.03 -0.05 01-02-2015 13.259364 1528.530029 -7.90% 1.79% 0.04 -0.12 -0.02 08-02-2015 12.881619 1541.459961 -2.85% 0.85% 0.05 -0.07 -0.03 15-02-2015 12.714263 1563.300049 -1.30% 1.42% 0.04 -0.05 -0.03 22-02-2015 12.527781 1603.359985 -1.47% 2.56% 0.04 -0.05 -0.01 01-03-2015 12.513436 1610.430054 -0.11% 0.44% 0.04 -0.04 -0.04 08-03-2015 12.470402 1619.140015 -0.34% 0.54% 0.04 -0.04 -0.03 15-03-2015 13.359778 1651.02002 7.13% 1.97% 0.04 0.03 -0.02 22-03-2015 12.479965 1616.5 -6.59% -2.09% 0.03 -0.11 -0.06 29-03-2015 12.159598 1626.73999 -2.57% 0.63% 0.03 -0.07 -0.03 05-04-2015 12.389114 1688.319946 1.89% 3.79% 0.03 -0.02 0.00 12-04-2015 11.667093 1649.079956 -5.83% -2.32% 0.03 -0.10 -0.06 19-04-2015 11.743599 1669.089966 0.66% 1.21% 0.03 -0.03 -0.03 26-04-2015 11.858356 1612.359985 0.98% -3.40% 0.03 -0.03 -0.07 03-05-2015 12.656883 1633.76001 6.73% 1.33% 0.03 0.03 -0.03 10-05-2015 13.182859 1616.089966 4.16% -1.08% 0.03 0.00 -0.05 17-05-2015 12.742952 1662.26001 -3.34% 2.86% 0.03 -0.07 -0.01 24-05-2015 12.240885 1630.22998 -3.94% -1.93% 0.03 -0.08 -0.06 31-05-2015 11.824886 1587.689941 -3.40% -2.61% 0.03 -0.07 -0.07 07-06-2015 11.662312 1587.060059 -1.37% -0.04% 0.03 -0.05 -0.04 14-06-2015 11.112429 1571.920044 -4.72% -0.95% 0.03 -0.09 -0.05 21-06-2015 11.318038 1617.02002 1.85% 2.87% 0.03 -0.02 -0.01 28-06-2015 11.098083 1560.410034 -1.94% -3.50% 0.03 -0.06 -0.08 05-07-2015 11.734036 1584.550049 5.73% 1.55% 0.03 0.02 -0.02 12-07-2015 12.260011 1651.76001 4.48% 4.24% 0.03 0.00 0.00 19-07-2015 12.212195 1604.23999 -0.39% -2.88% 0.03 -0.04 -0.07 26-07-2015 11.810541 1614.339966 -3.29% 0.63% 0.03 -0.07 -0.03 02-08-2015 11.609715 1615.109985 -1.70% 0.05% 0.03 -0.06 -0.04 09-08-2015 11.332382 1568.589966 -2.39% -2.88% 0.02 -0.06 -0.07 16-08-2015 10.371282 1464.949951 -8.48% -6.61% 0.02 -0.13 -0.11 23-08-2015 10.5482 1476.030029 1.71% 0.76% 0.02 -0.02 -0.03 30-08-2015 10.959417 1429.660034 3.90% -3.14% 0.03 0.00 -0.07 06-09-2015 11.255877 1437.26001 2.71% 0.53% 0.03 -0.01 -0.03 13-09-2015 11.231968 1435.040039 -0.21% -0.15% 0.03 -0.04 -0.04 20-09-2015 11.313255 1410.199951 0.72% -1.73% 0.03 -0.03 -0.06 27-09-2015 12.121346 1407.180054 7.14% -0.21% 0.03 0.03 -0.04 04-10-2015 12.85771 1471.079956 6.07% 4.54% 0.03 0.02 0.01 11-10-2015 13.015503 1473.47998 1.23% 0.16% 0.03 -0.03 -0.04 18-10-2015 13.307181 1529.670044 2.24% 3.81% 0.03 -0.02 0.00 25-10-2015 12.843367 1522.949951 -3.49% -0.44% 0.03 -0.08 -0.04 01-11-2015 13.340652 1538.410034 3.87% 1.02% 0.02 0.00 -0.03 08-11-2015 12.771642 1495.530029 -4.27% -2.79% 0.02 -0.08 -0.07 15-11-2015 13.135043 1544.339966 2.85% 3.26% 0.02 -0.01 -0.01 22-11-2015 12.790769 1551.569946 -2.62% 0.47% 0.02 -0.07 -0.04 29-11-2015 13.249801 1495.98999 3.59% -3.58% 0.02 0.00 -0.08 06-12-2015 12.742952 1433.640015 -3.83% -4.17% 0.02 -0.08 -0.08 13-12-2015 13.488881 1455.880005 5.85% 1.55% 0.02 0.02 -0.02 20-12-2015 13.847501 1477.550049 2.66% 1.49% 0.02 -0.01 -0.03 27-12-2015 13.928788 1474.060059 0.59% -0.24% 0.02 -0.03 -0.04 03-01-2016 14.268281 1373.900024 2.44% -6.79% 0.01 -0.02 -0.11 10-01-2016 13.015503 1328.380005 -8.78% -3.31% 0.01 -0.13 -0.07 17-01-2016 13.589295 1364.910034 4.41% 2.75% 0.01 0.00 -0.01 24-01-2016 12.876837 1380.52002 -5.24% 1.14% 0.01 -0.09 -0.03 31-01-2016 12.317391 1315.560059 -4.34% -4.71% 0.01 -0.08 -0.09 07-02-2016 11.853577 1262.829956 -3.77% -4.01% 0.01 -0.08 -0.08 14-02-2016 13.010722 1317.819946 9.76% 4.35% 0.01 0.06 0.00 21-02-2016 13.053756 1338.099976 0.33% 1.54% 0.01 -0.04 -0.02 28-02-2016 13.857064 1381.670044 6.15% 3.26% 0.02 0.02 -0.01 06-03-2016 14.325661 1383.410034 3.38% 0.13% 0.02 -0.01 -0.04 13-03-2016 13.885754 1379.48999 -3.07% -0.28% 0.01 -0.07 -0.04 20-03-2016 13.402814 1351.290039 -3.48% -2.04% 0.01 -0.08 -0.06 27-03-2016 13.436284 1340.75 0.25% -0.78% 0.01 -0.04 -0.05 03-04-2016 13.245021 1337.47998 -1.42% -0.24% 0.02 -0.05 -0.04 10-04-2016 13.57495 1386.47998 2.49% 3.66% 0.02 -0.02 0.00 17-04-2016 13.331088 1408.959961 -1.80% 1.62% 0.02 -0.06 -0.02 24-04-2016 12.967688 1378.839966 -2.73% -2.14% 0.02 -0.07 -0.06 01-05-2016 12.35535 1337.969971 -4.72% -2.96% 0.02 -0.09 -0.07 08-05-2016 12.221592 1350.819946 -1.08% 0.96% 0.02 -0.05 -0.03 15-05-2016 12.236454 1362.23999 0.12% 0.85% 0.02 -0.04 -0.03 22-05-2016 12.543604 1410.199951 2.51% 3.52% 0.02 -0.02 -0.01 29-05-2016 12.320673 1375.630005 -1.78% -2.45% 0.02 -0.06 -0.06 05-06-2016 11.225832 1344.609985 -8.89% -2.25% 0.02 -0.13 -0.06 12-06-2016 11.146567 1315.119995 -0.71% -2.19% 0.01 -0.05 -0.06 19-06-2016 10.85428 1301.959961 -2.62% -1.00% 0.01 -0.07 -0.05 26-06-2016 10.804739 1348.170044 -0.46% 3.55% 0.01 -0.04 0.00 03-07-2016 10.745291 1328.780029 -0.55% -1.44% 0.01 -0.05 -0.05 10-07-2016 11.295188 1371.400024 5.12% 3.21% 0.01 0.01 -0.01 17-07-2016 10.21521 1381.780029 -9.56% 0.76% 0.01 -0.14 -0.03 24-07-2016 10.532268 1384.589966 3.10% 0.20% 0.01 -0.01 -0.04 31-07-2016 10.383646 1381.630005 -1.41% -0.21% 0.01 -0.05 -0.04 07-08-2016 10.92859 1400.27002 5.25% 1.35% 0.01 0.01 -0.03 14-08-2016 10.304382 1376.170044 -5.71% -1.72% 0.00 -0.10 -0.06 21-08-2016 10.28952 1390.76001 -0.14% 1.06% 0.00 -0.04 -0.03 28-08-2016 10.62144 1417.459961 3.23% 1.92% 0.00 -0.01 -0.02 04-09-2016 11.027671 1397.699951 3.82% -1.39% 0.00 0.00 -0.05 11-09-2016 10.363831 1365.280029 -6.02% -2.32% 0.01 -0.10 -0.06 18-09-2016 10.3886 1396.579956 0.24% 2.29% 0.01 -0.04 -0.02 25-09-2016 9.813933 1387.859985 -5.53% -0.62% 0.01 -0.10 -0.05 02-10-2016 9.214496 1376.380005 -6.11% -0.83% 0.01 -0.10 -0.05 09-10-2016 10.140899 1378.48999 10.05% 0.15% 0.01 0.06 -0.04 16-10-2016 11.186199 1396.97998 10.31% 1.34% 0.01 0.06 -0.03 23-10-2016 11.597383 1382.719971 3.68% -1.02% 0.01 0.00 -0.05 30-10-2016 11.577568 1331.97998 -0.17% -3.67% 0.01 -0.04 -0.08 06-11-2016 12.637731 1370.540039 9.16% 2.89% 0.00 0.05 -0.01 13-11-2016 12.761581 1375.219971 0.98% 0.34% 0.00 -0.03 -0.04 20-11-2016 12.503971 1389.910034 -2.02% 1.07% 0.00 -0.06 -0.03 27-11-2016 12.023431 1378.030029 -3.84% -0.85% 0.00 -0.08 -0.05 04-12-2016 12.61296 1444.48999 4.90% 4.82% 0.00 0.01 0.01 11-12-2016 12.806168 1464.150024 1.53% 1.36% 0.00 -0.02 -0.03 18-12-2016 12.761581 1464.170044 -0.35% 0.00% 0.00 -0.04 -0.04 25-12-2016 12.15719 1468.689941 -4.74% 0.31% 0.00 -0.09 -0.04 01-01-2017 12.28104 1486.25 1.02% 1.20% 0.00 -0.03 -0.03 08-01-2017 11.369499 1488.859985 -7.42% 0.18% 0.00 -0.11 -0.04 15-01-2017 11.99866 1473.829956 5.53% -1.01% 0.00 0.02 -0.05 22-01-2017 12.637731 1488.76001 5.33% 1.01% 0.00 0.01 -0.03 29-01-2017 12.127465 1478.130005 -4.04% -0.71% 0.00 -0.08 -0.05 05-02-2017 12.489109 1490.619995 2.98% 0.84% 0.00 -0.01 -0.03 12-02-2017 13.375881 1502.76001 7.10% 0.81% 0.00 0.03 -0.03 19-02-2017 13.58395 1500.349976 1.56% -0.16% 0.00 -0.02 -0.04 26-02-2017 13.76725 1523.130005 1.35% 1.52% 0.00 -0.03 -0.03 05-03-2017 14.208158 1512.800049 3.20% -0.68% 0.00 -0.01 -0.05 12-03-2017 15.149424 1535.689941 6.62% 1.51% 0.00 0.03 -0.03 19-03-2017 14.916584 1527.290039 -1.54% -0.55% 0.00 -0.06 -0.05 26-03-2017 15.060251 1546.550049 0.96% 1.26% 0.00 -0.03 -0.03 02-04-2017 14.763009 1545.699951 -1.97% -0.05% 0.00 -0.06 -0.04 09-04-2017 15.060251 1540.339966 2.01% -0.35% 0.00 -0.02 -0.04 16-04-2017 15.951977 1528.719971 5.92% -0.75% 0.00 0.02 -0.05 23-04-2017 15.694366 1563.890015 -1.61% 2.30% 0.04 -0.06 -0.02 30-04-2017 16.165001 1594.26001 3.00% 1.94% 0.04 -0.01 -0.02 07-05-2017 16.650496 1600.51001 3.00% 0.39% 0.04 -0.01 -0.04 14-05-2017 16.295 1583.640015 -2.14% -1.05% 0.04 -0.06 -0.05 21-05-2017 17.09 1582.439941 4.88% -0.08% 0.04 0.01 -0.04 28-05-2017 17.785 1586.27002 4.07% 0.24% 0.05 0.00 -0.04 04-06-2017 18.6 1577.910034 4.58% -0.53% 0.04 0.01 -0.05 11-06-2017 18.594999 1570.01001 -0.03% -0.50% 0.04 -0.04 -0.05 18-06-2017 18.629999 1566.52002 0.19% -0.22% 0.04 -0.04 -0.04 25-06-2017 19.924999 1533.650024 6.95% -2.10% 0.04 0.03 -0.06 02-07-2017 20.5 1536.949951 2.89% 0.22% 0.04 -0.01 -0.04 09-07-2017 20.9 1563.75 1.95% 1.74% 0.03 -0.02 -0.02 16-07-2017 18.555 1535.869995 -11.22% -1.78% 0.03 -0.15 -0.06 23-07-2017 18.395 1529.72998 -0.86% -0.40% 0.03 -0.05 -0.04 30-07-2017 19.610001 1548.02002 6.61% 1.20% 0.03 0.03 -0.03 06-08-2017 19.605 1504.650024 -0.03% -2.80% 0.03 -0.04 -0.07 13-08-2017 20.735001 1512.180054 5.76% 0.50% 0.03 0.02 -0.04 20-08-2017 20.764999 1512.780029 0.14% 0.04% 0.03 -0.04 -0.04 27-08-2017 21.76 1520.880005 4.79% 0.54% 0.03 0.01 -0.03 03-09-2017 22.08 1518.619995 1.47% -0.15% 0.03 -0.03 -0.04 10-09-2017 22.459999 1539.680054 1.72% 1.39% 0.03 -0.02 -0.03 17-09-2017 22.875 1550.23999 1.85% 0.69% 0.03 -0.02 -0.03 24-09-2017 23.51 1570.530029 2.78% 1.31% 0.03 -0.01 -0.03 01-10-2017 24 1576.660034 2.08% 0.39% 0.03 -0.02 -0.04 08-10-2017 25.040001 1583.800049 4.33% 0.45% 0.03 0.00 -0.04 15-10-2017 25.719999 1580.890015 2.72% -0.18% 0.03 -0.01 -0.04 22-10-2017 27.280001 1592.97998 6.07% 0.76% 0.03 0.02 -0.03 29-10-2017 28.040001 1604.530029 2.79% 0.73% 0.03 -0.01 -0.03 05-11-2017 26.915001 1574.280029 -4.01% -1.89% 0.03 -0.08 -0.06 12-11-2017 28.135 1553.52002 4.53% -1.32% 0.03 0.01 -0.05 19-11-2017 28.625 1563.859985 1.74% 0.67% 0.03 -0.02 -0.03 26-11-2017 29.26 1551.969971 2.22% -0.76% 0.02 -0.02 -0.05 03-12-2017 30.129999 1574.459961 2.97% 1.45% 0.02 -0.01 -0.03 10-12-2017 29.785 1570.280029 -1.15% -0.27% 0.02 -0.05 -0.04 17-12-2017 31.055 1578.650024 4.26% 0.53% 0.03 0.00 -0.03 24-12-2017 30.719999 1572.97998 -1.08% -0.36% 0.03 -0.05 -0.04 31-12-2017 30.26 1606.119995 -1.50% 2.11% 0.03 -0.06 -0.02