Expert Session Eurowings Management Presentation
10.06.2016 | London Disclaimer in respect of forward-looking statements
Information published in this presentation concerning the future development of the Lufthansa Group and its subsidiaries consists purely of forecasts and assessments and not of definitive facts. These forward-looking statements are based on all discernible information, facts and expectations available at the time. They can, therefore, only claim validity up to the date of their publication. Since forward-looking statements are by their nature subject to uncertainties and imponderable risk factors – such as changes in underlying economic conditions – and rest on assumptions that may not occur, or may occur differently, it is possible that the Group’s actual results and development may differ materially from the forecasts. Lufthansa makes a point of checking and updating the information it publishes. However, the Company is under no obligation to update forward- looking statements or adapt them to subsequent events or developments. Accordingly, it neither explicitly nor implicitly accepts liability, nor gives any guarantee for the actuality, accuracy or completeness of this data and information. 3 Anwendungsbeispiele PowerPoint Agenda
1 Market environment and positioning of Eurowings
2 Commercial strategy
3 Organizational setup and financials
4 Growth opportunities through innovative Eurowings cooperation model
5 Summary and next steps
4 Expert Session Eurowings I 10.06.2016 Eurowings builds on the success of Germanwings Development of Eurowings in three phases
New Eurowings Growth 1 Germanwings 2 Group 3 opportunities
. Transfer of non-hub . CR9 conversion to . Organic growth: traffic from Lufthansa homogenous A320 fleet re-fleeting, additional to ‘New Germanwings’ aircraft and Lufthansa . Greenfield LCC operating from 2013 (30 aircraft) Group internal platform EW Europe consolidation . New fare concept . First base outside . External growth option: BASIC, SMART, BEST Germany in VIE various alternatives . Start of long-haul (strategic partnerships and M&A) . Financial turn-around / operations . Innovative cooperation break-even in 2015 . EW Group bundling model to foster profitable activities for all AOCs growth and benefit from . Eurowings as lead brand consolidation in Europe
5 Expert Session Eurowings I 10.06.2016 The business model has proven successful Financial turnaround achieved in 2015
EBIT development RASK / CASK development
in m EUR in eurocents break-even RASK CASK
2012 2013 2014 2015 2015 vs. 2013 10.8 10.6 CASK -7%
RASK -4% 10.0 excludes other operating income 9.9 9.9 (wetlease revenues, > +13pts. FX gains, etc.) EBIT-margin 9.5 ASK Share:
Germanwings / Eurowings
Lufthansa Lufthansa Direct Services Direct Services Germanwings / Eurowings > -200 m EUR 2013 2014 2015
. Successful turnaround despite increased LCC competition . CASK improvement overcompensates RASK decline . Constantly increasing load factor since 2013
6 Expert Session Eurowings I 10.06.2016 Eurowings holds #1 or #2 positions in all relevant German catchments Strong competitive position in Germany
Cologne Hamburg
= 14 = 21 HAM 23% 39% 44% = 55 = 90 62% 18% 17%7% = ~5.9m 15% = ~3.1m
Stuttgart HAJ BER Berlin DTM = 14 DUS 11% = 8 33% 10% 50% = 59 57% = 30 6% CGN 32% 17% = ~4.4m = ~1.5m
Düsseldorf Hanover
12% 25% = 30 = 1 20% 46% 7% = 77 STR 59% = 18 29% 29% = ~6.7m = ~0.7m
Germany (non-hub airports) Eurowings operates from the heart of Europe
Other EW • Decentral structure of German market; several large catchments = 89* 20%
= 135 48% 11% LH • Premium position in high-yield markets with high purchasing power = ~22.5m* 21% • Shorter average sector length due to central geographic location in Europe AB
Market shares based on offered outbound seats to Europe 2015; number of short- and long-haul fleet per base and number of destinations as of Jun 2016; *incl. Dortmund
7 Expert Session Eurowings I 10.06.2016 Eurowings leverages legacy advantages at lower cost Positioning of Eurowings within Lufthansa Group and LCC market
Eurowings within LH Group Eurowings Positioning within the LCC Segment
Eurowings leverages Ultra Traditional Modern LH Group advantages… Low Cost Low Cost Low Cost • LH status & corporate customer base . Single class, . Point-to-point . Point-to-point and • Frequent flyer program maximized seat network density . High frequency • Joint procurement . Leisure travelers and . Aggressive seat . Leisure travelers and price sensitive • Fleet management pricing, with strong price sensitive business travelers focus on ancillaries • Codesharing business travelers . Premium cabin, • Lounge access . Focus on leisure compromised seat travelers . Mainly primary und density … while maintaining secondary airports autonomy . Mainly secondary and . Frequently primary tertiary airports airports • P2P focus • Unbundled fares • Revenue management • Independent labour agreements • Non-legacy cost base • Separate IT system Cost Revenue (Navitaire) Position & Product 8 Expert Session Eurowings I 10.06.2016 Eurowings is able to retain LH Group customers and increase demand FFP data and travel profile of a frequent traveler
Eurowings’ hybrid role
Retain loyal Increase demand Raise purchase Lufthansa Group frequency and tap into new customer base target groups
Example: flight travel pattern of a Miles&More Frequent flyer program Gold Status passenger from Hamburg Passengers with FFP-Membership Number of trips per year Lufthansa Eurowings Other Airlines 93% M&M 100 90 No FFP 76% 24% FFP 80 7% 70 Boomerang Club 60 Average revenue per segment 50 229 € 40 162 € 131 € 30 112 € 100 € 96 € 20 10 0 Non FFP Boomerang M&M FTL SEN HON Club Member 2011 2012 2013 2014 2015
FFP = Frequent Flyer Program; M&M = Miles&More; BC = Boomerang Club; FTL = Frequent Traveler (Silver Status); SEN = Senator (Gold Status); HON = Hon Circle Member (Platinum Status)
9 Expert Session Eurowings I 10.06.2016 Eurowings is one of the three pillars of the Lufthansa Group Stand-alone business within the leading Aviation Group
First choice in aviation
Premium network Eurowings Group Aviation Services carrier system
#1 in Europe #1 in home markets* #1 worldwide
• À-la-carte-concept • Point-to-point traffic • Pan-European
and more
* Germany, Austria, Switzerland and Belgium
10 Expert Session Eurowings I 10.06.2016 1 Market environment and positioning of Eurowings
2 Commercial strategy
3 Organizational setup and financials
4 Growth opportunities through innovative Eurowings cooperation model
5 Summary and next steps
11 Expert Session Eurowings I 10.06.2016 Eurowings serves more than 130 destinations High frequency domestic and European trunks plus attractive leisure routes
Non-hub network 2011 Eurowings network 2016
LH+4U destinations ~110 EW destinations ~135 LH+4U seats offered ~24m EW seats offered ~26m
• Primary European leisure destinations • High frequency on domestic and European served by Germanwings trunks (LON, PAR, MIL, BCN) • Primary domestic and European trunks • Touristic routes within central Europe served by Lufthansa (partly seasonal service) • 4U and LH networks not aligned • Leisure long-haul routes with a mix of „city“ and „beach“ destinations
12 Expert Session Eurowings I 10.06.2016 Eurowings strategy designed to fully exploit strong home market Domestic route network and KPI benchmark
Domestic network 2016 Daily cycles, flight time and RASK 2015
Easyjet Comparable data for A320FAM aircraft Eurowings Vueling Wizz Air 9.5
7.2 6.5 5.9 5.6 5.7 5.0 4.2
1.6 1.9 1.3 1.5
Daily cycles Avg. flight duration RASK [flight hours] [eurocents / ASK]
• High frequency domestic service • More daily cycles than competition and shorter (e.g. up to 10x daily CGN – TXL) average sector length • On average ~1,000 domestic • Structurally higher unit revenue than flights per week competitors plus additional premium
• Domestic services account for ~30% • Potential to increase productivity with broader of total capacity European P2P network
Source: Airbus; Annual Airline Reports 2015
13 Expert Session Eurowings I 10.06.2016 Network continuously enhanced to optimize schedule and mix Growth focus on leisure routes
Our new Edinburgh European United Kingdom routes EDI
NQT
Faro Portugal Varna PSA PUY Bulgaria VAR BIA VLC FCO KVA SZF MAH BDS IBZ ALC CAG FAO Brindisi BJV Rhodos Antalya RHO AYT Gran Canaria Italy Greece Turkey Spain LPA
14 Expert Session Eurowings I 10.06.2016 Long-haul network serves leisure and selected city destinations Continuously growing long-haul network
new new Miami Boston United States United States Bangkok Thailand
BOS Phuket Thailand MIA HAV
VRA Punta Cana CUN POP PUJ DXB Dominican BKK new Republic Havanna HKT Cuba
new Port Louis Full charter destinations: Puerto Plata Mauritius Dominican Montego Bay, La Romana, Republic MRU Bridgetown, Salalah
15 Expert Session Eurowings I 10.06.2016 Eurowings serves price as well as value oriented customers Appealing to business and leisure passenger
Eurowings customer segments
Price-sensitive leisure travelers Value-conscious business travelers seeking lowest fares possible and corporate customers
Upmarket leisure travelers, LH Groups most loyal customers willing to trade up for comfort traveling on non-hub routes
Reason for ~75% Leisure/private ~25% Business travelling
Clusters within 12% 28% 43% 12% 5% B2C segment Minimalistic One-time Recurring Long-term Frequent [Customer
share] • Trip duration • Trip duration • Ø bookings per • Trip duration • Ø bookings per < 10 days < 7 days year > 2 >10 days year >10 • No frills / • Ancillaries during • Additional • Booking early in • Additional ancillaries flight booking ancillary services advance ancillary services
16 Expert Session Eurowings I 10.06.2016 ‘A la carte’ product caters individual customer preferences Three pre-packaged products complemented by ancillary options
Customer 55% 40% 5% share*
*average in Q1 2016; incl. travel agencies
17 Expert Session Eurowings I 10.06.2016 Product follows customer demand: up to 32’’ seat pitch on short-haul Biggest section of more legroom seats among competitors
BEST seats (free middle seat)
32‘‘ More legroom [81cm] (rows 1-12)
Ancillary Revenue per pax: ~11 EUR
Standard 29‘‘ Economy [74cm]
Max ∑ 180 seats Max ∑ 150 seats
18 Expert Session Eurowings I 10.06.2016 Eurowings offers a state-of-the-art value product on long-haul High density configuration for competitive low-cost operation
30‘‘ [76 cm] 34‘‘ [86 cm] 45 ‘‘ [114 cm]
111 seats 104 seats 46 seats 28 seats 21 seats ∑ 310 seats
SLF >90% Ancillary Revenue per pax: ~19 EUR
• 3 class high density configuration for competitive low-cost operations with leisure customer focus
• State-of-the-art cabin interior with wireless internet connectivity and HD Entertainment on every seat
19 Expert Session Eurowings I 10.06.2016 Comprehensive, cost efficient distribution remains key success factor Sales channel mix
Direct Sales Indirect Sales ticketless Ticketed
Call Airport Corporate Direct Tour GDS EW.com Mobile Groups GDS Center Sales portal Connect Operator light
Sales channel
Revenue 39% 38%** 23% share*
Channel 20 EUR / 20 EUR / 7.5 EUR / 15 EUR / ------fee booking booking segment segment
Volume 81% low cost distribution 19%
• Variety of sales channels cover the needs of all customers
• Customer pays additional transaction costs
* Actual Fare+ Fees, w/o VAT , ** incl. Miscellaneous
20 Expert Session Eurowings I 10.06.2016 New ancillary services to be offered in the course of the year Developing new revenue streams
Protect your price: Eurowings Holidays: Check your preferred flight with family & Online integration of packaged holidays friends before booking – the prize is safe! with tour operator Tropo
New Smart bundle differentiation: Private seat: Re-allocated & optimized bundle products Need some private space? Book a free differentiated between markets seat next to you
Bid for BEST: Best price guarantee on Submit a bid for an upgrade from SMART eurowings.com: to the premium BEST fare Strengthening of direct sales
21 Expert Session Eurowings I 10.06.2016 Internet connectivity on board of the entire Eurowings fleet Continuous product improvements
Inflight entertainment on your own smartphone, tablet or laptop via WiFi on board of the entire short-haul fleet
Selection of movies, music and games for all travelers
On board internet connectivity (starting winter 2016/17)
22 Expert Session Eurowings I 10.06.2016 Eurowings is successfully building a modern, innovative brand Quality image and a leading presence in social media
#1 LCC on Facebook in Germany
100k 9.1k visits 7.5 mio. 450k people people Most reached reached committed fans1 1.6k 141k people reached Most interactive airline2
Eurowings clear #1 in Facebook likes compared to competitors.3
1 In terms of engagement rate ((Likes + comments + shares) / total Likes) 2 Shortest response time among German competitors (AB, X3, DE) 3 Local Likes in Germany among LCC competitors (EW, FR, AB & EZY)
23 Expert Session Eurowings I 10.06.2016 Brand recognition increased significantly supported by TV-spots Market research about brand recognition in Germany and Austria
Brand recognition1 & willingness to book2 Advertisement recognition1
Feb-15 Feb-16
Brand recognition Willingness to book Advertisement recognition 87% 31% FR: 85% 82% 81% 74% 68% 72% 26% 64%
44%
6% 2%
Germany Austria Germany Austria Germany Austria
• Brand recognition of Eurowings brand has • Advertisement recognition boosted degree of increased significantly in Germany and Austria brand awareness
• Effect on willingness to book a flight • TV advertisement plays most important role in line with brand perception (GER: 66%; AUT: 56%) • ‚Tom Selleck‘ and ‚cheap prices‘ mentioned most • Conversion rate increased (7% 13%) frequently
Source: Online survey via INNOFACT 1supported recognition 2 booking of a short-haul flight
24 Expert Session Eurowings I 10.06.2016 Eurowings stands for quality and value for money Eurowings brand values
CLEVER Surprising Charmingly humorous Inspiring Intelligent CARING CASUAL Friendly Open Interested Uncomplicated Concerned Approachable Warm-hearted Cool CONFIDENT Professional Attractive Charismatic Relevant
25 Expert Session Eurowings I 10.06.2016 1 Market environment and positioning of Eurowings
2 Commercial strategy
3 Organizational setup and financials
4 Growth opportunities through innovative Eurowings cooperation model
5 Summary and next steps
26 Expert Session Eurowings I 10.06.2016 Lean organisational set-up provides for efficient overhead structure Bundling of commercial and administrative functions for multiple AOCs
Eurowings Aviation GmbH
Administration & commercial departments . Bundled management structures . Coordination of Eurowings Group AOCs . Headquarters in Cologne
1 2 3 4 … AOC 1 AOC 2 AOC 3 AOC 4 AOC … Eurowings Eurowings Sun Express Germanwings tbd. Germany Europe Germany
. EW branding . EW branding . 4U branding . EW branding . tbd. . EW flight no. . EW flight no. . 4U flight no. . EW flight no. . tbd. . CR9 / A320 fleet . A320 fleet . A319/320 fleet . A330-200 fleet
Short-haul Short-haul Short-haul Long-haul TBD
AOC: Air Operator Certificate
27 Expert Session Eurowings I 10.06.2016 Current results are still burdened but positive underlying performance Adj. EBIT Q1 2016 and trading assumptions 2016
Adj. EBIT development Q1 16 Trading assumptions FY 16
in m EUR Q1 2016 KPI FY16 assumptions Explanation
Revenue 377 No. of Flights Short-haul growth of c. 4% and c. +5% (Landings) new long-haul operations Adj. EBIT -86
Capacity Short-haul growth of c. 8% and thereof one-off costs +25-30% (ASK) new long-haul operations (project and irregularity c. 20 costs on long-haul) Load Factor Measures to reduce seasonality; slight increase (SLF) successful long-haul operations
Structural decline from increased • First quarter was burdened by Pricing clearly negative long-haul operations; increasing project costs and (Yield ex currency) competition in home markets irregularities on long-haul operations Unit Revenue clearly negative (RASK ex currency) • Positive contribution of long- haul operations excl. irregs Unit Costs already in first quarter Refleeting CR9 to A320; (CASK ex fuel c. -10% long-haul growth; platform-shift ex currency)
28 Expert Session Eurowings I 10.06.2016 Eurowings with clear path to lower unit costs Main drivers are up-gauging, crew costs and long-haul capacity increase
CASK development*
CASK* in eurocents / ASK Competitive cost base, 8.0 in particular on shorter Overhead -28% average sector length & Misc. 0.6 7.2 0.6 Product Change 5.8 2015 vs. 2020 -40% ACMI 2.8 -25%
-30%
Fees & Charges 4.0 -25%
2015 Plan 2016 Plan 2020
* According to current planning; CASK excl. fuel/ETS, currency and project costs; ACMI = Aircraft, Crew, Maintenance and Insurance
29 Expert Session Eurowings I 10.06.2016 Action on manageable cost items to strengthen competitiveness Cost optimization focus and main levers
New organizational set-up Fleet streamlining
• Bundling of planning and • Upgauging of CR9 to administrative functions and Airbus A320 fleet realization of scale effects by offering these services to • Cost efficient operation of several operating platforms homogeneous A320 family fleet • Focused standardization of all business processes
Competitive tariff structures Provider Management
Cockpit costs per block hour -20% • Agreement on new -23% catering contract • Negotiation with airports and handling provider to further reduce costs
LH 4U EW
30 Expert Session Eurowings I 10.06.2016 Fleet growth and transfer of assets to most competitive platforms Development of fleet allocation until 2020*
Eurowings long-haul
Eurowings A320fam
Eurowings CR900
Germanwings A320fam
2015 Plan 2016 Plan 2020
* According to current planning
31 Expert Session Eurowings I 10.06.2016 More potential for profit improvement identified Cyclical business and productivity level offer opportunities for improvement
Revenue and Adj. EBIT 2015 Seat load factor
in m EUR Seat load factor in % 90 Revenue Adjusted EBIT 1,909 85
80 75
70 65 2013 2014 2015 2016
Margin -16% 6% 14% -5% 2% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
599 516 Average daily block hours 456 338 82 Average block hours / aircraft / day Levers for further improvement 31 38 9.5 8.3 • Network and flight plan 7.2 optimization
-22 • Finalization of pilot training -53 • Competitive labour agreements Q1 Q2 Q3 Q4 FY • Start-up Eurowings Europe 4U EW DE EW EU A320 A320 A320 Challenge of seasonality and productivity to Positive EBIT performance in 2015, be tackled with different levers, e.g. changes however still burdened by seasonality in network and labour agreements
32 Expert Session Eurowings I 10.06.2016 EBIT improvement driven by CASK reduction and lower project costs Project costs and EBIT development
Development of Adj. EBIT and project cost*
in m EUR Project Costs
Adj. EBIT
39 Further reduction of 23 project costs in following years
2015 2016 2017
CASK reduction and lower project cost will lead to structural earnings improvement
* According to current planning
33 Expert Session Eurowings I 10.06.2016 1 Market environment and positioning of Eurowings
2 Commercial strategy
3 Organizational setup and financials
4 Growth opportunities through innovative Eurowings cooperation model
5 Summary and next steps
34 Expert Session Eurowings I 10.06.2016 Consolidation in Europe will happen Eurowings well prepared to actively benefit from consolidation
USA Europe
Market Share (ASK) Top European LCCs primarily focusing Others on organic growth AS UA WN
CO 22% Government shareholders 8% US 18% only gradually selling shares 12% Others AA/US 17% NW AA 11% DL 24% 20% Bilateral traffic rights (outside EU) at risk >120 Airlines DL in case of cross national M&A in Europe 21% 24% USA 20 years ago WN UA Insolvency law makes M&A less attractive ~50 Airlines than in the US (Chapter 11)
• 20 years ago more than 120 airlines operated • Eurowings cooperation model enhances ability to in the US actively shape European consolidation • Today around 50 airlines operate in the US • WingsConnect enables alignment and cost • Four major airlines control the market efficiency without requiring majority shareholding
35 Expert Session Eurowings I 10.06.2016 Various options for external growth A broad set of growth options are being pursued
Growth options Partnership criteria
1 Growth from within Cost efficiency/ LCC DNA . CASK Lufthansa Group . Labour productivity Top point- . Consolidation within . Aircraft utilization LH Group to-point Market positioning . Focus on . Attractive catchments (size and spend) airline point-to-point . Market leader in relevant segment . Pan-European footprint
Customers Partnerships and in 2 . Yield and ancillary revenue potential # 1 M&A . Value/ quality LCC product . Accretive demand, different customer segments home . Leading, cost- markets* efficient point-to- Reliability point airlines in . Operational stability
Europe . Safety . Quality as bedrock . Small to medium Feasibility size airlines in . Availability (legal, organizational) competitive market . Investment/ price environments . Ease of implementation . Cultural fit (e.g. brand, growth ambition)
* Home markets = Germany, Austria, Switzerland, Belgium
36 Expert Session Eurowings I 10.06.2016 The Eurowings cooperation model Attractive partnering options are offered at different levels of integration
Wet lease and WingsConnect partnerships
Airline Management Company (AMC) WingsConnect 3 (Eurowings Aviation) 3 „Eurowings Shareholder“ Steering and . Equity involvement services in AMC . Shapes industry . P&L based on service fee revenue . Execution of growth ambitions . Strategic goals . Operations and . Brand & product quality business
Wet lease 1 . Local air traffic flow Cash model rights 2 WingsConnect “Subcontractor” . Bundling of „AOC Partner“ . Fixed ACMI(O) resources rate per flight . Centralization of Flight ops & hour services in AMC
Standards local services . Quick ramp-up . Incentivized to drive cost efficiency . Test phase & intro into 1 Eurowings airline partners 2 . AOC keeps revenue model minus fees to AMC
37 Expert Session Eurowings I 10.06.2016 Eurowings offers a consistent customer experience Eurowings provides a one-shop travel offer
Plan & book Day of travel… On board…
One website One service experience One product . Marketing . Check-In & bag check . In-flight product . Communication . Information . Seat & services . Website eurwoings.com . Services . Crew: Eurowings uniform and . Booking process . Flight status training standards . … . … . …
One consistent customer experience
38 Expert Session Eurowings I 10.06.2016 A triple win for customers, airline partners and Eurowings itself Overview of benefits
Eurowings Partner – Airline Customer . Strengthening of .EurowingsEnhanced, pan- brand European network . Extension of commercial. Consistent know -service how and product . Eurowings brand . Standardization of product concept . IT standardization . Provider of admin services . Securing market shares . Utilization of LH group scale against competition . Networkeffects expansion . Network profitability . Synergies via scale . Pan-European brand . Efficiency gains . Synergy effects . Increasing return on capital . Return on investment . Impact on market adjustments . Ensuring future sustainability Airline partner
39 Expert Session Eurowings I 10.06.2016 1 Market environment and positioning of Eurowings
2 Commercial strategy
3 Organizational setup and financials
4 Growth opportunities through innovative Eurowings cooperation model
5 Summary and next steps
40 Expert Session Eurowings I 10.06.2016 Eurowings is on track to become a top European point-to-point airline Overview of major milestones
New Eurowings Growth 1 Germanwings 2 Group 3 opportunities
Align Point-to-Point Set-up of lean Pursue organic growth network and transfer non- organization with and Lufthansa Group hub traffic from Lufthansa bundled management internal consolidation Ensure homogenous Offer a product that short- and long-haul fleet Use external consolidation meets individual opportunities with customer preferences on Strengthen Eurowings innovative cooperation price and comfort quality LCC brand and model customer relationship Turn heavily loss making Continuous control cost Build one of the non hub traffic into a Launch new product top Point-to-Point profitable business unit choices and tap into new airlines in Europe revenue streams
41 Expert Session Eurowings I 10.06.2016 Lufthansa Investor Relations Contact
Deutsche Lufthansa AG Investor Relations / FRA IR Lufthansa Aviation Center Airportring D-60546 Frankfurt
Andreas Hagenbring, Head of IR Phone: +49 (0) 69 696 28000 Fax: +49 (0) 69 696 90990 E-mail: [email protected]
Visit our webpage: lufthansa-group.com/investor-relations