Course of business and economic position

The Passenger Transportation segment, consisting of Lufthansa Passenger Airlines, Germanwings, SWISS (until 30 June at equity) and from April 2007 SunExpress (at equity) can look back on an particulary successful first half-year. Traffic, revenue and result increased significantly.

As part of the summer flight timetable in effect from 25 March Lufthansa Passenger Airlines have expanded their global network to 192 destinations (previous year: 188) in 78 countries (previous year: 77). The timetable includes six new destinations, amongst them Pusan (South Korea) and Tirana (Albania). In Europe mainly direct connections were extended, from Düsseldorf, Stuttgart and Hamburg. With the start of the summer flight schedule Lufthansa also began cooperation with Turkish Airlines. Beside a code share agreements for flights between Germany and Turkey, it was also accorded that Turkish Airlines will join Star Alliance.

In May Lufthansa and its Star Alliance partners celebrated the tenth anniversary of the world’s largest airline network. Over this time the alliance has grown from originally 5 to 17 airlines today. This year also two new members, Air China and Shanghai Airlines, are joining from China, the fastest growing aviation market in the world.

Lufthansa has consistently extended its premium range, e.g. by developing the Lufthansa Private Jet product (including limousine service) and commencing modernisation work on the Senator and Business Lounges.

Our initiatives in the premium sector are well received by customers. For example the readers of the business travel magazine "Business Traveller Deutschland" awarded Lufthansa top marks for service, security and website, and voted the airline into first place for 2006 in five different categories. The travel magazine "Clever Reisen" also awarded Lufthansa first place in a product comparison between twelve scheduled airlines. The categories tested included departure airports in Germany and network, fares, legroom, age of fleet and alliance membership. Lufthansa’s Miles & More programme also got good marks: at the Freddie Awards, the Oscars for frequent flyer programmes, where it won the categories "Best Affinity Credit Card", "Program of the Year", "Best Bonus Promotion" and "Best Award" and received several awards.

The success of the Passenger Transportation segment is also visible in further improvements in traffic figures. Lufthansa Passenger Airlines (Lufthansa and its regional partners) transported some 27 million passengers between January and June 2007 (+5.9 per cent year on year) – a record in the company’s history. The passenger load factor rose by 2.1 percentage points to 76.1 per cent at significantly higher capacity. All traffic areas contributed to this result with high growth rates.

Of particular note is the positive development in the largest traffic region, Europe. The expansion of the flight network paid off, as did the successful marketing of the "betterFly" rates. Despite strong competition in Europe the additional capacity, especially towards Eastern Europe, was fully sold in the market. The Americas traffic region also recorded very good growth rates. Additional capacity was fully sold and the load factor went up even further. Lufthansa was also successful in the traffic region Asia/Pacific. Passenger numbers and sales grew strongly and increased the load factor. Despite reduced capacity the traffic region Middle East/Africa increased sales and thereby improved the passenger load factor considerably.

With some 327,000 flights worldwide Lufthansa Passenger Airlines achieved an increase of 3.9 per cent in the first half-year.

Growth in the no-frills sector flattened slightly. In this environment Germanwings could perform well. 3.7 million passengers were carried from January to June 2007 (+9.8 per cent), whilst the passenger load factor remained high at 81.0 per cent (previous year: 81.6 per cent).

With this positive development of the airlines the traffic revenue in the segment also rose by 6.0 per cent to EUR 6.5bn. EUR 268m thereof (previous year: EUR 243m) were due to Germanwings. Lufthansa Passenger Airlines have pursued their market-oriented capacity and yield management. Despite signifi cantly higher capacity and a negative currency impact average yields for Lufthansa and its regional partners remained almost stable at –1.7 per cent (adjusted for exchange rates, +1.1 per cent). The share of premium passengers and their yield remained on a high level.

Other operating income amounted to EUR 386m (previous year: EUR 318m) and total operating income rose by 7.3 per cent to EUR 7.3bn.

In contrast to the operating income the operating expenses only went up by 5.4 per cent, to EUR 7.1bn.

Cost of materials and services totalled EUR 4.1bn (+4.8 per cent), of which EUR 1.4bn (+2.6 per cent) was for fuel. The weaker US Dollar restrained the increase in fuel costs, despite the additional capacity. Fees and charges of EUR 1.3bn were paid, 4.0 per cent more than last year. They include flight security fees of EUR 347m (+10.9 per cent), caused by expanded capacity and fee increases.

Expenses for handling and landing fees were reduced, however, despite the considerable rise in capacity. Other purchased services amounted to EUR 1.3bn (+7.1 per cent). Herein the MRO expenses climbed by 11.4 per cent to EUR 665m, mainly due to completion of the business class refitting.

Staff costs rose by 8.1 per cent to EUR 1.3bn. This is affected by new recruitment, the increase in basic salary from 1 May 2007 agreed in the wage settlement and a one-off payment for the months January to April. Additions to provisions for retirement benefit obligations declined, however, to EUR 113m (–4.2 per cent) due to the increase in market interest rates at the end of 2006. The number of employees went up by 1,602 at the end of June to 39,499 or 4.2 per cent more than a year ago. The operating units in particular employ more staff in line with the increased capacity.

Fleet expansion caused depreciation to go up by 3.9 per cent to EUR 375m.

The operating result almost doubled, going up by EUR 138m to EUR 278m (previous year: EUR 140m).

Other segment income fell by 36.0 per cent to EUR 32m, largely due to lower reversals of provisions. Other segment expenses remained roughly unchanged at EUR 2m. SWISS, BMI and from the second quarter SunExpress, are incorporated in the result of investments accounted for using the equity method. For the most part SWISS had a significant contribution (EUR 180m) to the increase of 270.2 per cent to EUR 174m. The segment result doubled to EUR 482m.

Segment capital expenditure – above all for new aircraft (three Airbus A340-600) and predelivering payments on aircraft – rose by EUR 289m to EUR 564m.

In the coming months Lufthansa will continue to invest further in products and quality to expand the offer for business travellers. The lounges in up to 25 locations worldwide are to be modernised and extended over the next two years for some EUR 100m. In addition to the extension of lounge capacities at the hubs in Frankfurt and Munich, other key airports such as Dusseldorf and New York are also undergoing modernisation. Other projects in Los Angeles, Shanghai, London and Paris are being planned as well. The economy class will also be upgraded: from the start of the winter flight schedule the seats will be equipped with individual monitors.

Lufthansa’s flight network is to be extended with the help of cooperation agreements. From the start of the winter timetable 2007/2008 Lufthansa and Egypt Air will offer all flights between Germany and Egypt with common flight numbers. Other code share connections, particularly to tourist destinations in North Africa, are also planned. In addition Lufthansa is planning to extend its access to Russian and South American markets through such partnerships.

Germanwings will also extend its network, particularly to Eastern Europe, from the winter schedule 2007/2008.

Outlook

The actual operating development and the stable booking situation allows the Passenger Transportation segment to raise its profit forecast for the full financial year 2007. If the development of the global economy is not disrupted by further oil price increases, geopolitical risks or pandemics, then the segment anticipates a significantly higher operating result for 2007 than last year. The full consolidation of SWISS from 1 July will lead to a further improvement in results.

Course of business and economic position

The upturn in global economy and positive economic developments in Germany have had an invigorating effect on the cargo business. Nevertheless, over-capacities and the pressure of competition are still weighing on average yields.

In this environment Lufthansa Cargo has achieved better traffic figures and also set the course for profitable growth. Lufthansa Cargo intends to develop its market position and quality leadership significantly in the sectors of animal transport, valuable cargo, airmail and temperature sensitive goods. To this end the relevant skill sets were bundled together in individualised units from the beginning of the year. At the same time the optimisation programme "Excellence + Growth" is to be continued and supplemented by a range of activities on the sales and cost side to secure the result for 2007.

In terms of flight safety standards Lufthansa Cargo has assumed a leading role and is the first freight airline worldwide to be IOSA certified (IATA Operational Safety Audit). Customers also recognise the efforts the business segment has made. In the reporting period Lufthansa Cargo received two awards. The specialised logistics magazine "Cargo News Asia" conferred the title of "Best Air Cargo Carrier Europe" and the trade magazine "Air Cargo Week" gave Lufthansa Cargo the "Best Airline Customer Care" award for the best global customer service.

Lufthansa Cargo is growing. With the switch to the summer schedule the frequency of flights to Dallas, São Paulo and Shanghai was increased. New in the schedule are Lahore (Pakistan) and Wilmington (USA). Expanding the network of Lufthansa Passenger Airlines also generates additional cargo business. For the summer schedule Lufthansa Cargo is also deploying three chartered long-haul planes and two short-haul aircraft in addition to its own 19 aircraft.

The expanded capacity is also reflected in the traffic figures. In the reporting period some 877,000 tonnes of freight and mail were transported, 2.8 per cent more than last year. Capacity was extended by 1.9 per cent and sales were up by 3.9 per cent, leading to an increase in the cargo load factor of 1.3 percentage points to 68.5 per cent. The number of flights went down by 14.8 per cent due to lower charter activity.

In the Europe traffic region capacity and freight volumes both increased as a result of higher capacities at the Passenger Airlines. Sales also went up, leading to an improvement in the cargo load factor. Growth in the Americas region business was above-average, as freight capacities were deliberately switched from Asia to America. This meant that capacity declined in the traffic region Asia/Pacific. Transport volumes rose in both regions, as did the load factor.

Traffic revenue was not able to keep up with this positive development in traffic. It fell by 5.1 per cent to EUR 1.2bn. The main reason lies in a further deterioration of 13.1 per cent in average yields in the traffic region Asia/Pacific. Overall average yields dropped by 8.5 per cent (of which 4.1 per cent were due to exchange rates). Other operating income declined by 34.7 per cent to EUR 32m, principally as a result of lower foreign currency gains. Total operating income decreased by 6.8 per cent to EUR 1.3bn.

Operating expenses also declined by 5.7 per cent to EUR 1.3bn. EUR 896m (–5.8 per cent) was spent on materials and services; fuel expenses dropped to EUR 218m (–9.2 per cent). More favourable prices and exchange rates as well as lower purchase volumes all played a part. As code share services with partner airlines were reduced, charter expenses declined by 7.0 per cent to EUR 423m. MRO expenses rose by 14.8 per cent to EUR 70m. This is due to a change in the billing method for engine overhauls.

Staff costs dropped by 2.4 per cent to EUR 164m. The number of employees also went down by 2.4 per cent to 4,565.

The operating result amounted to EUR 29m and is therefore EUR 18m below last year’s level.

The result of investments accounted for using the equity method is EUR 5m (previous year: EUR 9m). This includes the investment in the newly established Jade Cargo International Company Ltd. in Shenzhen, China.

The segment result totalled EUR 40m (–35.5 per cent).

Segment capital expenditure doubled to EUR 6m, above all for the purchase of air cargo containers.

With the DHL Express European hub opened in Leipzig and the beginning of the winter schedule, Lufthansa Cargo will move its freighters from Cologne to Leipzig. Cologne will remain a Lufthansa Cargo location, but will only be served by Lufthansa passenger planes and trucks.

Once the necessary air traffic rights are obtained, flights from Shenzhen to Europe, North America and within Asia will be available from this summer in cooperation with Jade Cargo International.

Outlook

The intense competition in the logistics market is expected to persist in the months ahead, putting further pressure on average yields. Lufthansa Cargo has taken specific steps to reduce costs, however, in order to safeguard planned results. For the full financial year 2007 the forecast of a higher operating result than last year remains unchanged. 

Course of business and economic position

In the first half-year Lufthansa Technik increased revenue and results significantly and made good use of the ongoing upswing in global demand for aircraft maintenance, repair and overhaul (MRO) services.

The customer base was strengthened and expanded. A ten-year contract worth over USD 250m for the "full service" package Total Material Operations and for aircraft maintenance was signed with Virgin America, a start-up airline in the United States. Lufthansa Technik AERO Alzey was also successful in America and closed a ten-year contract with Lynx Aviation, a subsidiary of Frontier Airlines, for the maintenance of its PW150 engines. Kingfisher Airlines, India’s fastest growing airline, and Lufthansa Technik agreed on a supplement to their contract for exclusive technical support for the complete A320 fleet. In total Lufthansa Technik concluded 267 additional contracts with external customers in 2007, with expected revenue of EUR 316m, and gained 23 new customers. This means that Lufthansa Technik now services 20 per cent more aircraft than in the same period in 2006.

This growth is also reflected in revenue, which went up by 6.9 percent compared with the same period in the previous year to EUR 1.8bn.

External revenue increased by 6.2 per cent to EUR 1.1bn. Its share of total revenue remained at the same level as last year at around 60 per cent. Revenue from other Group companies rose by 8.0 per cent to EUR 716m. The main drivers for this positive development are the extended programme of winter rest periods, in which the final refit of the Lufthansa Business Class was completed, and the larger fleet. Other operating income went up by EUR 11m to EUR 69m, primarily due to foreign currency gains, meaning that the segment MRO can report total operating income of EUR 1.9bn (+7.3 per cent).

Operating expenses rose in line with revenue by 7.0 per cent to EUR 1.7bn. Material and services accounted for the largest increase, going up by 6.4 per cent to EUR 928m as a result of higher volumes. Staff costs rose by 5.4 per cent to EUR 504m due to higher staff numbers and increased provisions for partial retirement agreements. At the end of June Lufthansa Technik Group had 18,537 employees. This represents a rise of 3.7 per cent, largely accounted for by Lufthansa Technik AG and Lufthansa Technik Philippines Inc. Depreciation and amortisation went up in line with capital expenditure by 8.1 per cent to EUR 40m. Other operating expenses climbed by 11.8 per cent to EUR 276m as a result of greater deployment of external staff and follow-up costs for finished goods.

The operating result at the end of June was EUR 124m, 11.7 per cent above the previous year, due to a strong second quarter.

Other segment income dropped by EUR 2m to EUR 3m. Other segment expenses were at the same level as in the previous year. The result of investments accounted for using the equity method (including HEICO Aerospace, AMECO and others) was EUR 7m (previous year: EUR 8m). The segment result was EUR 134m, 8.1 per cent above last year.

Segment capital expenditure more than doubled to EUR 96m, above all for the purchase of additional reserve engines, new aircraft and technical equipment as well as the construction of the A380 maintenance hangar in Frankfurt.

In March 2007 N3 Engine Overhaul Service, a joint venture between Lufthansa Technik and Rolls-Royce, commenced its engine overhaul operations in Arnstadt. In the future some 200 aero engines for the Airbus models A330, A340 and A380 will be overhauled there annually.

In July Lufthansa Technik laid the cornerstone for an overhaul hangar for Airbus long-haul aircraft in Malta. As part of its EUR 55m commitment Lufthansa Technik will increase its stake in the company to 90 per cent.

Airfoil Services Sdn. Bhd. in Malaysia, a joint holding of Lufthansa Technik and MTU with 350 employees at present, moved into new production premises in Kota Damansara near Kuala Lumpur. In the course of the planned expansion the product portfolio will be broadened and 250 new jobs created.

Outlook

Although competition remains intense, Lufthansa Technik is optimistic about the future and expects to increase the operating result for the full financial year 2007 above the level of the previous year.

Course of business and economic position

Lufthansa Systems was able to improve revenue in the first halfyear. The focus of its sales activities is on outsourcing projects and platform solutions. The necessary preproduction costs continue to depress results, however.

Over the mid- to long-term the IT Services business segment intends to build its product portfolio into a flexible IT platform for airlines. Having gradually modernised various system elements over recent years for this purpose, Lufthansa Systems is now going to implement the core elements, Booking, Inventory and Check-in on a new platform. In order to remain competitive, services are increasingly being produced in countries with favourable pay structures.

New projects have not yet impacted revenue development, however. External revenue therefore remained stable compared with last year at EUR 136m. Internal revenue rose by 7.3 per cent to EUR 190m in contrast, especially as a result of taking on responsibility for and optimising the IT infrastructure of the LSG Sky Chefs companies in Europe and the USA. Total revenue went up by 4.2 per cent to EUR 326m. Other operating income improved by EUR 3m to EUR 15m. Total operating income increased by 4.9 per cent to EUR 341m.

Operating expenses amounted to EUR 327m (+7.2 per cent). The modernisation of the system environment led to higher costs of materials and services (+11.8 per cent to EUR 19m). Staff costs climbed by 2.5 per cent to EUR 123m, above all on account of restructuring expenses. The number of employees sank by 2.5 per cent to 3,225. Depreciation and amortisation rose by 12.5 per cent to EUR 18m due to higher capital expenditure for the infrastructure project at the LSG Sky Chefs companies. Other operating expenses totalled EUR 167m (+9.9 per cent). These include the costs of outsourcing development work for the passenger platform FACE (Future Airline Core Environment).

High preproduction costs for developing new technologies and outsourcing projects as well as increased price pressure and restructuring expenses caused the operating result to sink by EUR 6m to EUR 14m.

Other segment income and expenses are practically unchanged. The segment result is therefore also EUR 14m.

Segment capital expenditure went up by 27.3 per cent to EUR 28m, particularly for developing the FACE platform.

Outlook

The considerable need for modernisation work on IT systems, which is intended to bring cost and efficiency gains, will continue to stimulate demand and generate revenue. Lufthansa Systems is therefore also anticipating increased volumes. However, preproduction costs for IT platforms and IT outsourcing projects as well as restructuring measures and persistent price pressure will continue to weigh on results in the current year. A positive operating result is anticipated, but which is not expected to reach the last year's level.

Course of business and economic position

The segment Catering continues to make good progress. Revenue and operating result both improved considerably in the first half-year. Higher traffic, many new contracts and the consistent implementation of cost reduction programmes are responsible.

New wins and the extension of existing key customer contracts contributed to revenue growth. At the Dallas hub in Texas, the catering contract with American Airlines was extended to 2012. Important contracts with Northwest, Delta, United Airlines and Air New Zealand were all extended. US Airways prolonged or expanded the catering contract with twelve major European LSG Sky Chefs locations. The contract with First Choice Airways in Great Britain was recovered.

On the cost side the cost reduction programmes "Triangle" and "Lean Total Direct Cost" and the outsourcing of the IT infrastructure all resulted in further savings and thereby had a positive effect on earnings.

In the first half-year revenue increased by 3.7 per cent to EUR 1.1bn. External revenue went up by 5.7 per cent to EUR 897m, whilst internal revenue dropped by 2.8 per cent to EUR 246m. Changes in the group of consolidated companies had a positive impact of EUR 1m, but currency effects negatively affected revenue by EUR 27m.

All regions contributed to this encouraging progress. The highest growth rates in Europe were achieved in Italy, Scandinavia and the UK. New orders and higher volumes were responsible. This more than made up for the deconsolidation of the LSG subsidiary in France. In the United States of America sales volumes were improved by new acquisitions and a return to higher service levels. Nevertheless, the weakness of the dollar caused revenue to fall on a euro basis. In Latin America LSG Sky Chefs raised revenue considerably, particularly thanks to the recently consolidated subsidiary in Mexico and gains in market share in Brazil and Venezuela. Higher traffic also had a positive effect in the Asia/Pacific region, where the subsidiaries in Korea, Thailand and New Zealand especially registered significant improvements. Other operating income declined by EUR 29m to EUR 25m, largely due to realised foreign currency gains in the previous year. Total operating income went up by 1.0 per cent to EUR 1.2bn.

Operating expenses sank despite revenue growth and amounted to EUR 1.1bn (–1.2 per cent). The cost of materials and services climbed by 5.1 per cent to EUR 493m as a result of higher business volumes and increased outsourcing. This shift in the cost structure reflects the Company’s objective of increasing its flexibility. Staff costs were brought down by 9.1 per cent to EUR 438m, principally because the one-off payment for the new US wage settlement no longer applies, the LSG subsidiary in France was deconsolidated and the dollar is trading weaker. The consolidation and deconsolidation of companies meant that the number of employees rose overall by 6.6 per cent to 29,950. Adjusted for these changes in consolidation the number of employees sank by 0.7 per cent. Depreciation and amortisation remained nearly unchanged compared with last year. Other operating expenses increased by 3.9 per cent to EUR 177m.

The operating result made a substantial leap from EUR 5m last year to EUR 31m. The successful completion of restructuring activities and higher demand both contributed to this improvement.

Other segment income remained unchanged at EUR 1m, whilst other segment expenses dropped from EUR 20m to EUR 1m. The segment result improved in consequence by EUR 45m to EUR 36m (previous year: EUR –9m).

Segment capital expenditure doubled to EUR 50m – especially for the construction of a new LSG site as part of the airport extension in Frankfurt.

In order to respond to ever growing demand in the Asia/Pacific region, LSG Sky Chefs has set up a production facility for frozen meals in Qingdao in cooperation with China National Aviation Group Ltd. It will have an initial capacity of 35,000 meals a day. An additional frozen food facility will be set up until the end of 2007 in the existing kitchens in Pittsburgh (Pennsylvania). This project allows LSG Sky Chefs to service the growing demand for frozen meals in the North American catering market.

Outlook

As a result of higher traffic, continued implementation of cost reduction programmes and successful customer acquisition, LSG Sky Chefs continous to anticipate an operating result for the year 2007 well ahead of last year’s. Further growth is being sought from improved customer relations and continual optimisation of cost structures. The growing demand for total solutions for cabin management offers additional opportunities. LSG Sky Chefs is therefore aiming for above average growth in its Inflight Solutions sector.

Course of business and economic position

The segment Service and Financial Companies principally consists of the AirPlus Group, Lufthansa Flight Training (LFT) and Lufthansa Commercial Holding, in which WAM Acquisition S.A. and other Lufthansa investments are held. The first half-year was a great success for the service and financial companies, especially due to extraordinary income.

AirPlus pursued its internationalisation; the company account is accepted by a large number of airlines, the AirPlus CorporateCards benefit from the global VISA and MasterCard networks. Cooperation agreements with airlines and banks were also expanded in the first half-year. In the UK AirPlus won the Business Travel Award 2007 as the best provider of payment solutions for business travel management.

The planned share buy-back of 47.4 per cent by WAM Acquisition S.A. will generate a positive cash flow of about EUR 100m in the third quarter. The resulting income from disposal of non-current assets of EUR 71m has already been recognised as of 30 June, in accordance with IFRS. The shareholders’ relative holdings are not affected by the transaction.

Total operating income rose by 23.1 per cent to EUR 192m. Operating expenses also went up by 23.1 per cent to EUR 165m. The operating result of Service and Financial Companies climbed by 22.7 per cent to EUR 27m, of which AirPlus accounted for EUR 7m (–12.9 per cent). The decline is due to investments in international markets and preproduction costs for new products. The operating result of the LFT Group increased to EUR 15m (previous year: EUR 10m).

Other segment income rose by EUR 59m to EUR 160m, for which the income from disposal of the WAM Acquisition S.A. stake is largely responsible. Other segment expenses sank by 43.5 per cent to EUR 26m. The segment result more than doubled to EUR 161m (previous year: EUR 77m).

Segment capital expenditure was down by 36.5 per cent to EUR 33m.