DLAKF - Deutsche Lufthansa AG (DLAKF) Q3 2023 Earnings Call Transcript

2023-11-02 22:39:08 ET

Deutsche Lufthansa AG (DLAKF)

Q3 2023 Results Conference Call

November 02, 2023 05:00 AM ET

Company Participants

Dennis Weber - Investor Relations

Carsten Spohr - Chief Executive Officer

Remco Steenbergen - Chief Financial Officer

Conference Call Participants

Jaime Rowbotham - Deutsche Bank

James Hollins - BNB Paribas

Jarrod Castle - UBS

Muneeba Kayani - Bank of America

Stephen Furlong - Davy Research

Harry Gowers - JPMorgan

Sathish Sivakumar - Citi

Sandra Hadiza - HSBC

Neil Glynn - Air Control Tower

Conor Dwyer - Morgan Stanley

Johannes Braun - Stifel

Sumit Mehrotra - Societe

Andrew Lobbenberg - Barclays

Presentation

Dennis Weber

Thank you, and good morning, ladies and gentlemen, and welcome to the presentation of our Results for the Third Quarter of 2023.

With me on the call today are our CEO, Carsten Spohr; and our CFO, Remco Steenbergen. I'll present you our record results, discuss the strategic highlights and update you on our latest expectations for the rest of the year and beyond.

Afterwards, you will have the opportunity to ask your questions, as already mentioned, and similar to prior quarters, I would like to ask you to limit your questions to two so that everybody has a chance to participate in the Q&A session.

Thank you, and over to Carsten.

Carsten Spohr

Yes, Dennis, thank you, and also a warm welcome from my side, ladies and gentlemen. And it's obvious that after such a good quarter, Remco and I are pleased to give you an update on both our figures and the underlying strategy. But let's also be honest that before we turn to our nice numbers, I think it's valuable and just right to address the topic that I think has been on everybody's mind for some weeks, the war in the Middle East, and especially as an airline where our purpose is to connect people, cultures and economies, it's fair to see what happens in that kind of connection doesn't take place.

And we are shocked like everybody by the events in Israel and in Gaza, which were obviously triggered by this devastating act of terror -- and with our 15 special flights to Germany, Austria and Switzerland from Tel Aviv, we were at least able to make a small contribution to bring home about 2,000 citizens of our home countries. Nevertheless, our thoughts are with everyone who is affected, not just those 2,000, which we could bring back to safety. And I'm sure also like all of you, we hope for the timely end to this violence not just in the interest of our industry.

But obviously, let's return to the purpose of today's call, the second best quarter in our history, which we can present to you today after we already presented to you the best second quarter in our history last time. And this all despite a challenging geopolitical and macro network elements in our environment. Important for us as a group of airlines is at all our airlines consistently now achieved double-digit profit margins in the third quarter, and that for us is proof that our strategic direction as a group at leading airline group in Europe is successful and on track.

We, as a group, achieved an adjusted EBIT of €1.5 billion over the third quarter and only once that was the third quarter in 2017, we once had a higher operating result of more than 1.5%. But keep in mind, there was a very special economic environment in our home market because of the insolvency of Air Berlin. The group revenues totaled €10.3 billion this quarter, which ends up to be the highest revenue ever in the quarter and does reflect an 8% increase compared to the previous year. We welcomed 38 million guests on board in this quarter, which is a 14% increase from '22.

And while our yields increased 2% year-over-year, we're very proud that we were able to bring down our unit costs by about 1%. Our regularity improved back to 98% with another percentage point to go for our target. From an economic perspective, we can look back on the best summer in our history, showing that we have set the right strategic course in the past, and more than 10 years ago was when we decided to complement our leading market position in corporate travel by significantly strengthening our private travel business, thus positioning our airlines in all relevant customer segments and markets.

And without that, which includes the further enhancement of our route networks with significantly more private travel destinations or obviously, the successful realignment of Eurowings, which took us some years, but it's finally happened and the recent establishment and expansion of Discovery airlines with new destinations to popular markets around the world. I think it's fair to say that the group summer would not have been as successful as we are able to present it today. But obviously, strategy in aviation is nothing without the people behind it that I would like to thank the entire Lufthansa Group team for their relentless efforts. Despite the challenging environment, we were able to significantly improve our operational stability and quality compared to last summer.

However, this last summer, we did not always reach also this summer of '23. We did not always reach the level of quality and functionality we strive for. For various reasons, we are not yet able to live up to our own premium standard end to end. Some things, unfortunately, are outside of our own control. And in many areas, we are dependent on airports, on suppliers or other service providers. But it's also up to us to continuously improve. And we are working tirelessly on this with a clear goal of coming back to fulfilling our customers' expectations and of course, our own as well.

Our customers rightly expect the travel experience with us to be a premium experience from start to finish. And their desire to tap premium remains unbroken, and the demand in general, but especially for premium classes, continues to be high. Both private travelers continue to increasingly book first business class flights and also premium economy. Overall in this segment, we have not returned to the pre-COVID levels. But -- sorry, this when we have returned different than corporate travel, and this is driven both by total trips and visit to friends and relatives. And again, this summer season extends and extends. October was as strong as correct as a core summer months before.

And as usual, performance now in November and the first half of December will depend more heavily on business travel, which, as you know, is not yet recovering as quickly more strongly as private travel, which, to a certain degree, we all forecasted. Additional pressure comes from the challenging environment in the economic terms around us or, for example, the cost-cutting efforts of many of our corporate customers. On the domestic German routes, which by now only account for around 3% of our revenues, business travel is less than 50% in terms of passengers to precrisis levels, of course, looking better in terms of revenue due to higher yields; however, recovery has progressed significantly on the economically more important long-haul routes, especially the transatlantic.

In Asia, the recovery is still at the beginning. We forecast a further continued increase in demand for the rest of the year and beyond. In China and Japan, in particular, the recovery so far has largely been driven by travel within the region. Recently, we have also seen a significant revival though on core routes such as Tokyo, Shanghai, both inbound and outbound. Bookings for the Christmas season also make us extremely confident. Compared to the previous year, bookings for the fourth quarter are up by double-digit percentage.

We have already collected around 80% of bookings expected for the fourth quarter. And therefore, we are optimistic that we will be able to increase load factors and that yields will be roughly at the same high level as in the same quarter of the previous year. We are increasing demand continues to meet very limited supply. Our Global Industry Association, IATA predicts that industry-wide passenger numbers in '24 will be around 5% above precrisis levels on the transatlantic and around 10% in Europe. China and the rest of Asia will be lower. For the coming year, we are currently planning with a capacity of around 95% compared to 2019.

So demand will still be greater than our capacity in the coming year, enabling us to enforce good prices. At the same time, we are catching up with our competitors that are more affected by bottlenecks in the overall traffic system. For the foreseeable future, industry-wide bottlenecks, for example, when it comes to delivery of new aircraft production of seats and cabin interiors and the supply of spare parts will remain. And in addition, capacity problems at airports, ground handling providers and air traffic control and the effects of unplanned engine overhauls challenge the whole industry, making overcapacities very unlikely for the next years to come.

In many respects, we are better positioned than others to grow profitably in this environment. For '24, we expect the delivery of around 30 aircraft despite the ongoing difficulties. As a result, we will finally be able to offer our guests to promise product innovations and at the same time, further increase our efficiency and productivity. The Lufthansa Group benefits from direct access to the scarce and extremely in-demand MRO capacities a real competitive advantage in times like this.

Lufthansa will not only accelerate the required maintenance of the group's Pratt & Whitney engines, but also support the manufacturer and its global customers in bridging this bottleneck. In our own fleet, 146 engines are affected, and we currently expect that, on average, around 20 aircraft from the Airbus 320 family will have to remain on the ground daily in '24 due to the necessary maintenance work. This corresponds to less than 1/3 of the Lufthansa Group's Airbus 320 neo fleet, and it's less than 5% of our overall Airbus 320 fleet, which consists of more than 420 aircraft. It obviously helps that we decided to also use CFM LEAP engines on our 320 fleet and not put all eggs in one basket.

Thanks to the countermeasures we are currently working on, such as the extended use of existing 320 family aircraft, where these agreements and the procurement of additional spare engines, the additional maintenance effort will not impact our capacity outlook for '24 -- and especially in terms of labor shortages, I'm even more pleased that our attractiveness as an employer remains unbroken. This also shows in the yearly measured satisfaction index of our employees within the Lufthansa Group, where we have just over the last days, been reported record highs. And since the beginning of last year, we have additionally hired 22,000 employees and a further 1,200 new colleagues are joining every month.

By the end of '23, one in five people will be new to the Liveclear family showing that aviation continues to fascinate people. list destination defines our demands on our products and services. In summer of '24, we expect our long-awaited first long-haul aircraft with the new Allegris cabin onboard, where we'll be launching the new economy, the new premium economy and the new business class. Our guests onshore Holland medium-haul flights will also benefit from a more comfortable cabin in the future, larger luggage compartments, USB ports and holders for tablets and smartphones on every seat and more leg room, starting in the spring of 25, we will gradually equip the first 40 A320s that are already in use for our airlines with this new cabin.

For May 26, we plan to welcome our Lufthansa guests at the new Terminal 6 in New York, another example of improving customer-related qualities. The state-of-the-art terminal is the new home of our Lufthansa Group airlines flying to JFK. Part of it is a new launch, which will have an area of 3,000 square meters, more than twice as large as our current Lufthansa Group lounge in Terminal 1. And we are also making further progress in digital. Almost 0.5 million people use our apps every day. It's more people than we have on our planes every day. Every two weeks, new features are added to further simplify and improve not just the digital travel experience.

But at the same time, we take our responsibility for the environment seriously, relying on technology instead of idology. Modern aircraft are the most effective lever for more climate-friendly aviation. Each new model uses up to 30% less kerosene and correspondingly saves CO2. By 2030, our airlines will take delivery of more than 200 new fuel-efficient aircraft, the most extensive fleet modernization in our history. We also continue to optimize our existing fleet. 16 aircraft of our fleet are already equipped with AeroShark developed by Lufthansa Technik and BASF. Bionic film that optimizes the airflow and enabled significant fuel savings.

Currently, it already makes our aircraft 1% more efficient. Further developments could even save up to 3%. Technology as a silver bullet for climate protection also required is boosting of production of sustainable aviation fuels SAF. According to the EU, we should fill up with 2% staff by January 1, 25, 14 months from now. The average for all airlines worldwide currently is just 0.1%. For the Lufthansa Group already 0.2% of Klurzine we consume our bio-based sustainable fuels, twice of the industry. The proportion of fuels that are produced from green energy is currently zero because such fuels are simply not yet available in the market.

So it remains totally unclear our 20-fold increase when it comes to adding SAF. In our case, it's only tenfold increase shall be achieved within just 14 months. Let alone the carbon leakage effects as only the hubs in the EU are affected. On the other hand, wherever possible, we do contribute to greater climate protection in aviation. However, we lack concepts from fuel manufacturers to turn the blending quotas into reality. Demanding full commitment to more environmental protection from an industry like ours is the right thing to do. But to meet these demands conditions must be right and the level playing field must be maintained.

That's why we are working to advance the development of production processes and investing in SAP technologies of tomorrow. Just two weeks ago, we announced another collaboration together with the German aerospace center together with Airbus, Munich Airport and MTU are engines, we are researching the production of power to liquid aviation fuels. We are among many other things. For me, this is extremely high speed of change and innovation that makes our industry and our company so attractive.

At an unprecedented speed, we are driving forward our transformation from an aviation to a global airline group. We completed the sale of the remaining part of the LSE Group at the end of October just two days ago. We expect the sale of AirPlus so expect the sale of Air Plus, our payment specialist to be completed in the first half of next year. This allows us to concentrate even more on our core airline business. With our newly founded city airlines, we will increase our short-haul network and enable growth without any limitations in scope. By taking on feeding and feeding alongside Lucecity line, it will enable us to continue to grow profitably in our growing long-haul traffic from Frankfurt and Munich.

City Airlines will start operations in the summer of 24 and recruiting of operational staff will begin this month. The all in the ongoing consolidation process of our industry that is gaining momentum as we speak, we also want to play an active role. In this context, we are striving for, hopefully, timely approval from the EU commission regarding our investment into Ita Airways. With all transactions, our overarching goal is to strengthen our core business and to become even more international because in a global industry like aviation, we compete not only in our home markets, but internationally. Well, once again, I think it's fair to say we can look back on a very good quarter.

Our flights are well booked, and our attractiveness as an employer remains high. We invest significantly in better products and services for our guests, and we continually implement innovative measures to ensure a sustainable future. We are strengthening our core business and becoming more international, making us less dependent on our home markets and opening up attractive growth opportunities. Already today, we generate only 25% of our sales in Germany. In '24, it was still 37%, and this will continue to be reduced further. Lufthansa Technik continues to benefit from the industry high maintenance requirements. After the cargos market environment continues to normalize, but yields remain 39% above precrisis levels.

For the first time, all our airlines will end the year profitably. We have made good progress in terms of operational stability and reliability. This is a basis for meeting our quality standards in the future. When it comes to operational stability and quality, we are not yet where we want to be, but we are working on it every day. And even though the geopolitical environmental environment remains challenging, our booking outlook make us feel positive. For a good year, this was a good result this year and beyond. -- right now, thank you for your attention. Let me now hand over to Remco, who will explain the financial figures in more detail, and then we jointly look forward to answer your questions afterwards.

Thank you.

Remco Steenbergen

Thank you, Carsten, and welcome to everyone. Let me begin by providing an overview of our third quarter results, which exceeded the prior year level on all metrics. We achieved an operating profit of €1.5 billion, making it the second best third quarter result in the history of the Lufthansa Group. Net income amounted to €1.2 billion. Similar to earlier in the year, net profit growth was supported by lower financial expenses and effective tax management. Note that group revenues and adjusted EBIT no longer include the results from the LSG Group. The result of the catering business is reported as profit from discontinued operations right above net income.

Despite seasonal working capital outflows and significant investments in our future fleet am proud to report that our adjusted free cash flow was solidly positive amounting to €592 million. I will provide further details on the contributing factors later in my presentation. Our passenger airlines delivered a remarkable performance in the third quarter with an adjusted EBIT reaching €1.4 billion, nearly doubling compared to the previous year. This achievement can be attributed to the increased capacity we offered, the higher yields that we generated and the CASK reduction compared to the prior year quarter.

Consequently, the adjusted EBIT margin for the Passenger Airlines segment increased to 16%. In line with our forecast, yields were 25% higher than in 2019 and approximately 2% above the prior year's level. The strong yield environment continues to be driven by high premium demand, particularly from our leisure customers. Yields in our short-haul business saw a rise compared to the previous year, but the increase was even greater in the long-haul segment where yields surpassed 2019 levels by more than 30%. In addition to the future increase in yields, set factors remained above 86%.

Consequently, CASK in the third quarter amounted to $0.098, a 21% increase compared to 2019. I'm particularly pleased with our unit cost performance in this quarter, supported by better fixed cost leverage due to the increase in capacity and operational enhancements. Our unit cost performance improved in Q3 with a 0.9% reduction in costs compared to the previous year. On a year-to-date basis, CASK was 2.4% higher than the 2022 level. We expect a similar unit cost reduction as in the third quarter also in the fourth quarter, in line with our full year guidance of a low single percentage increase in CASK compared to the previous year.

Looking at the individual airline results, Swiss, Austrian and Brussels Airlines all achieved the best quarterly results in their history in the third quarter. The result of Lufthansa Airlines and Eurowings were only exceeded by the exceptional strong performance in the third quarter of 2017 following the sudden market amaze of Airberlin. Lufthansa Airlines continues to be impacted by the operational bottlenecks in the large German hubs, necessary investments in improvements of the products in our customer experience and the slow recovery of traffic to Asia.

Turning to our other segments. Our airfreight business around Lufthansa Cargo generated a breakeven result in a difficult market environment and a seasonal small quarter for air freight. While demand remained low also in the first quarter, we are confident that the market is currently bottoming out. Yields in our cargo business have stabilized at around 40% above the 2019 level and even increased again in the recent weeks, and we expect this to continue. Volumes are gradually ticking up as well, so we forecast tonnage to grow year-on-year in the fourth quarter. Lufthansa Cargo is expected to generate a solid profit in the mid-double-digit millions in the fourth quarter.

Based on this outlook for the last three months of the year, the business would achieve an adjusted EBIT margin of 8% in the full year of 2023, in our view, a respectable results in a difficult market environment. We're equally pleased with the performance of our MRO business, which generated the third quarter adjusted EBIT of €168 million. Lufthansa Technique is benefiting from innovated demand for maintenance services as airlines worldwide are expanding their capacities.

The delays in the delivery of new aircraft force many airlines to buy older aircraft for longer, MRO capacities and allowing Lufthansa technique to pass through higher cost to customers. The year-on-year profit decline in the third quarter was solely related to some one-off effects in the comparison base, primarily related to the significant appreciation of the U.S. dollar in the prior year. In the segment containing our other businesses, which include AirPlus, Lufthansa flight training and Lufthansa Systems as well as the cost of the group's overhead function, the operating results improved to a negative €65 million in the third quarter, mainly due to better performance at AirPlus.

Adjusted free cash flow in the first nine months of this year amounted to €1.7 billion. The operating cash flow of €4.3 billion was mainly driven by the strong operating results, good working capital management and an increase in customer prepayments. The business recovery at AirPlus resulted in an increase of receivables of around €345 million due to the steep increase in transactions, particularly at the beginning of the year. Net CapEx amounted to around €2.4 billion, mainly related to prepayments on aircraft orders and delivery of 16 aircraft in the first nine months. Our financial position continued to improve also in the third quarter.

The generation of free cash flow allowed us to repay maturing liabilities, primarily with cash. Nonetheless, available liquidity increased to €11.1 billion at the end of September. Net financial debt decreased to €5.4 billion, which is nearly €800 million lower than at the end of the prior year quarter and €1.5 billion below the year-end level of 2022. Additionally, our net pension liability decreased to €1.9 billion. In this context, we are making good progress in implementing some changes to the allocation of pension assets with the aim to align the interest rate sensitivity of plan assets more closely to the sensitivity of the liability side.

We expect this to significantly reduce the sensitivity of the pension deficit to changes in the interest rate environment. Around 2/3 of the intended changes have been implemented with the rest to follow in 2024. Our success in deleveraging means that the financial leverage has declined to 1.4% compared to 2.8 at the end of 2019 when we were rated investment grade by S&P and Moody's. From our point of view, it's therefore only logical that Fitch, we initiated coverage on Lufthansa Group yesterday rated is investment grade with the rating of BBB-.

Before discussing our financial outlook, let me update you on the recent increase in the oil and jet fuel prices. As a result, our fuel cost outlook for the full year of 2023 growth around €500 million higher than at the time of our last update in August. For the remaining months of 2023, we have hedged 86% of our crude oil exposure at a breakeven rate of around USD 90 per barrel. We've also hedged around half of our exposure to the jet crack at an average strike price of USD 25 per barrel, below the current spot price in U.S. dollars. Looking ahead to 2024, we have already hedged 74% of our planned fuel consumption with a combination of options on oil and jet fuel.

Considering both the hedged and unhedged portion of the fuel consumption, our mixed jet fuel rate for 2024 amounts to USD 951 per metric ton at current spot and forward prices. On this basis, we expect fuel unit cost to remain stable year-on-year in 2024. Despite the increase in fuel costs compared to just a few months ago, we confirm our full year profit outlook. We expect adjusted EBIT to reach at least €2.6 billion in 2023, implying a solidly positive result also in the fourth quarter, where we expect capacity to amount to 91% of the 2019 level. This would result in a full year capacity of around 85% in 2023.

We also expect a significant positive adjusted free cash flow, moving as close as possible to our target of a recurring free cash flow of €2 billion per year. In this context, we confirm our guidance for net CapEx of €2.5 billion to €3 billion for the full year of 2023. Higher gross investments will be partly offset by inflows from sale and leaseback transactions, which we expect to conclude in the fourth quarter. Let me also share our current thoughts on 2024 with you despite the fact that current bookings offer only limited visibility at this point in time, especially considering the volatile geopolitical and macroeconomic environment and that we are still in the midst of our budgeting for next year. Our goal is clear.

We aim at further improving operating profit and margin next year to achieve the midterm targets we set for 2024 in the early summer of '21. And adjusted EBIT margin of at least 8% and an adjusted ROCE of at least 10%. While , and I'm very happy about it, we will most likely generate a capital return of more than 10% already in 2023. We still have to close the gap to reach our margin target of 8% in 2024. Let me go through a few key assumptions to make this happen.

First and foremost, we do not anticipate any material deterioration in demand, coupled with ongoing supply constraints, which limits industry-wide growth and disciplined pricing across the industry, we do not expect any substantial deterioration in unit revenues going forward. As outlined by Carsten, we also trust and our ability to grow capacity by a low double-digit percentage rate to around 95% next year, considering our schedule of new aircraft deliveries, privileged access to MRO capacity and our success in recruiting. However, such growth will not be possible if the European aviation system stabilized further. To ensure that this is the case, we are in intense dialogues with our system partners, predominantly air traffic control and our part partners in Germany.

In parallel, we have kicked off a group-wide efficiency program with the aim to reduce the current around 10% productivity gap to precrisis levels as far as possible next year. The program will be based on terminal and external benchmarking with full responsibility and entrepreneurial freedom given to the individual business to ensure accountability and the flexibility to set priorities based on business-specific challenges. We expect better fixed cost leverage and increased efficiency to more than offset cost inflation so that unit costs will decline in 2024. I coupled with the benefits from profitable growth, ongoing positive momentum at Lufthansa Technik and the greater improvement in market trends in cargo, we look ahead to the next year with confidence. Thank you for your attention.

Carsten and I look forward to answering your questions now.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] One moment for the first question, please. And the first question comes from Jaime Rowbotham from Deutsche Bank.

Jaime Rowbotham

Two questions from me. The first, maybe for Remco is on the free cash flow. As you highlighted, another strong quarter, so you've done nearly €1.7 billion cumulatively on the Lufthansa definition in the first nine months. And I note the consensus for the full year is only around €1.8 billion. I'd have thought that even with some further seasonal working cap outflows, the scope for a fairly decent further deleveraging of the group in Q4, would that be fair, do you think? And then second, perhaps more for Carsten. Is just with regard to the approach that European Commission is taking on airline M&A. In particular, it feels like progress on the ECA situation is taking longer than you would like. Perhaps you could provide some updated thoughts on that.

Remco Steenbergen

Jamie, Remco here. Thank you for your question on the free cash flow. Yes, as I said also in the speech, and I have said during the last year, to be targeting to come close to €2 billion. This would mean that we try to get to €1.7 billion a little bit higher year-to-date for the full year. We have to keep in mind that in Q4, correct, we have the sale and leaseback transactions coming in, which bring our net CapEx a bit lower than the prior quarters. But of course, that sale and leaseback comes back in the net debt level, correct? So all in all, we expect the free cash flow to be a bit higher. But on net debt level to actually increase slightly to around €6 billion, and I'm talking about financial net debt. That's the current outlook, and I think it will be -- I will be very happy if we achieve that.

Carsten Spohr

Jamie, it's Carsten. As you know, when it comes to M&A and like ITA, we'd rather prefer to present the deal when it's done and not talk too much about it, but as you are probably also where we are in a very close and daily constructive dialogue with the European Commission to prepare the formal notification because this is how it's done that in this prenotification phase, you try to basically overcome potential resistance and questions and so on. And quality, I think and diligence in such a transaction, which is a lifelong relationship we are about to enter is more important than speed or haste.

You know our view, ITA is only, I think, number three in terms of market share in Italy or actually number four depending how you count it with the low-cost carriers being the top leading carriers, one local carrier alone has 40% market share in Italy, which is resulting in, I think, the highest price increases the European industry has seen anywhere in '23. So I think it's obvious that this transaction will increase competition in that important Italian market. And therefore, we are looking at this in a constructive way to eventually hand in the notification to then start to integrate ITA into our network and giving them the future they deserve.

Operator

And the next question comes from James Hollins from BNB Paribas.

James Hollins

In a show of great minds think alike are similar to James. Just on the ITA deal, I read this morning, we shouldn't always believe the media that the European Commission may be asking me to give up some flights at Frankfurt and Munich in order to get the deal done. I was on cost and if you would maybe use this platform as to discuss maybe where the red line would be on any potential remedies on actually doing that deal and whether that deal is you're 100% committed if the European Commission, which has it stated, is going to get a bit more active on effectively trying to block deals? That was one question. The second one, just on cash, maybe Remco guide on CapEx, gross and net or however you're thinking about CapEx for 2024 and those 30 deliveries and how you're seeing the mix of owned then lease.

Carsten Spohr

Yes, Carsten, I hope for your understanding that I won't speculate or comment on individual remedies. We'll report on those when we have approval of the transaction. But maybe let me add one thing for somebody who has been dealing with this now for more than 10 years. I think with the geopolitical situation, Europe more and more is turning its attention towards being globally competitive in other industries when it comes to energy, when it comes to defense, when it comes to monetary policy, I think Europe and the EU Commission have understood that we need to look after European interest on a global scale. And that's good news for our industry because to be globally competitive, the European airline groups, not just us, but also at least our two big competitors need to grow to stay on ice level with other global players. The three Americans are already number one, number two and number three in our industry. So I think what's currently happening around the world, resulting in a new way of the EU Commission looking into European competitiveness will also help to make that logical next step, which is an integration of ITA to Lufthansa, I think.

Remco Steenbergen

James, on the net CapEx for 2024, we expect about 30 deliveries of new planes next year. And in terms of the net CapEx to end up similar as this year. So also around €2.5 million to €3 billion of net CapEx and then also including sales and leaseback transactions in the range of €0.5 billion to €1 billion. That is where we currently stand. So very consistent, very similar to what we have this year.

Operator

And the next question comes from Tobias from [indiscernible].

Unidentified Analyst

Two for me as well please. Regarding your new city airlines, how different do you expect City airlines labor cost to be from the existing Lufthansa Airlines business? And that's material, what is driving the difference? I was also wondering if you received any response from the labor unions following the launch? And then secondly, regarding the corporate travel, can we say done recovering? We understand that cost is driver was substantially lower in summary 2023 than in 2019. Obviously, seasonality plays into that. But how are we looking into the rest of the year, perhaps you have already visibility on September and October? And what do you expect the recovery to be of the winter into Q1 2024?

Carsten Spohr

On City Airlines, maybe it's important to understand that for [indiscernible]. So the basic collective labor agreement on salaries will be a copy and paste from Lufthansa CityLine. So the main difference is that we don't have a scope clause, which will limit them to fly only aircraft below 95 seats, which unfortunately is what will be happening to CityLine as it currently operates. Therefore, we needed to move to make sure we have competitive feed into our long-range network in Frankfurt and Munich. The labor cost difference for CityLine or City Airlines whereas the mainline depending how you look at this, it's between 1 million to 2 million per 320 million per year. To give you an idea what the difference is in the balance stage. And overall, also maybe interesting for those of you who look at the German market, I understand from your name, you are probably German. City Airlines will have the second highest paying scheme for Gluster far track in Germany after the mainline, ahead of Eurowings and ahead of Discover and the Head of competitors.

The union talks have started when the German pilot union decided to have no scope clause added on in the last labor negotiation, which remember, I commented on last year -- last time, it's obviously has understood that this city airlines will be part of the solution. And it's part of our basically answer to compensate some of the cost increases, which are resulting from the last CLA agreement we have done for the mainline airline. So we look forward to constructive talks here because we said very early on, we don't want this airline, which carries the Lufthansa brand to be without in CLA. So if necessary, we start without a CLA, but we would prefer to finish agreements with the unions, not just pilots, also cabin, also the ground before we even operate next year.

Remco Steenbergen

Yes. On the question of the corporate travel, we ended Q3 with around 60% of 2019. And we have to keep in mind that the main reason why it's so low is to particularly the travel within Germany. So the domestic travel in Germany, which is not our most profitable part either. On the international side, the percentage is a bit higher. We expect that towards the winter to grow to 65% and towards next year or the end of next year, around 70%. This is just a logical consequence, correct, of the flying, particularly domestic and travel within Europe. On the other hand, corporate travel and particularly the pricing is very different. So if we would look from a pricing perspective, we're very happy of the development. We're also very happy of the leisure demand, which much, much exceeds the 2019 level. So overall, in line with our expectations.

Operator

And the next question comes from Jarrod Castle from UBS.

Jarrod Castle

Great. Just coming back to the disposal of the technic stake. I mean the wording is -- I don't know how to put it, but the wording is kind of like less clear. You kind of say the decision on the potential divestiture of the minority stake. You kind of say in the release, the review of the sale of minority stake is expected to be completed by the end of the year. I just wanted to get some color in terms of where negotiations are. And to be honest, if we might see by the end of the year, you're walking away from a disposal of the minority stake, if that's still an option? And then secondly, just coming back to the balance sheet, you've given very clear guidance again, so thanks for that. But how do you see the optimal capital structure kind of over the medium term? Obviously, you want to be investment grade, but where would the optimal capital structure be? And what would the plan be for any excess capital based on that?

Remco Steenbergen

First, on technique, nothing changed versus the beginning of the year, Q1, Q2 and where we currently stand. It's just also a bit our approach. We communicate on something like this when there is something to communicate -- we're still in the process. Of course, we have progressed quite a bit along the way. We target still a decision by year-end, which we have communicated also earlier in the year, and it's still unchanged at this point in time. And yes, I hope we can communicate soon. But again, as Carsten said, with M&A, quality goes over speed. That also goes for this transaction, and that remains on the top. But from the wording, please don't read anything different than we have communicated earlier in the year. With regards to the balance sheet, clearly, the leverage situation we're currently in is much better than 2019. Therefore, I'm very happy as well that Fitch put us on investment grade yesterday. I can't wait until also some of the other rating agencies have also made up their mind. I am quite impatient in this regard. The balance sheet is very strong. Over the coming years as well, we will continue to also do investments in our fleet, our cash flow target of around €2 billion will also remain in place. And with that, we will also strengthen our balance sheet. It also gives the opportunities to do M&A if that's needed without any weakening of our balance sheet with surplus cash, we can pay down our gross debt, and we have a very efficient capital structure with that in place.

Operator

And the next question comes from Muneeba Kayani from Bank of America.

Muneeba Kayani

I actually wanted to follow up firstly on the rationale for the technique sale. I know you've talked about it before, but your comments today on the MRO market in terms of like the demand debt and the constraints in the market. With all of that, why would you -- and the balance sheet where it is, why would you still be looking at a minority stake sale, if you could kind of revisit that? And then secondly, in terms of your guidance on EBIT margin for next year, how are you thinking about that across segments? Is it a similar over the 8% for all segments? If you could kind of just help us understand the moving parts there.

Remco Steenbergen

Thank you for the question on technique. The terms of the rationale has not changed also what we said in the beginning of the year. It's particularly from strategic reasons, and then we talk really about the mid to long term. Technik is a formidable company. And of course, with the current constraints on the short term, right, it is only strengthening. But on the longer term, we believe the Technik can play a much, much bigger role in -- not only in Europe, but probably also outside Europe and new segments to play in. And we are really looking for a partner who can help to give this significant boost on top of what we can bring only ourselves to the table. So a really big part of the whole underlying discussion is what the other party can bring on top of, we can do ourselves, but not for the coming two years, really when we're looking 5 to 10 years out. That's important that hasn't changed -- of course, going in instruction with the minority sale also governance is very important. The price which is paid for the initial and that all comes together. And then as we said before, we will make a decision at Fraport if it's all enough to move forward or not. I'm very positive.

I think it's a very big opportunity for Technik to take a next step for the years to come. On the EBIT margin, as Carsten said before, we expect all airlines to be positive this year, and we also expect all airlines to further improve next year. We also expect Technik to further improve next year. We said for cargo as well, that there's a bottoming out in Q3. And also for cargo, we expect with that an improvement next year or at least to stay in amount in a similar place as we're ending this year. So all in all, position, we are happy about, but we should not forget we live in a very volatile environment currently, geopolitically, macroeconomically, supply chain situations, airport situations. We do everything we can when overcome, but also certain parts which are not under control. But we have, at this point in time, we're looking forward to go after the 8%.

Operator

And the next question comes from Stephen Furlong.

Stephen Furlong

Congratulations on the excellent results, by the way. Hopefully, the market starts giving you credit for the execution. So two questions when I say that. Just go back to the 8% next year or at least 8%. I am assuming you're kind of generic assumption on unit revenue for the passenger business is somewhere kind of stable or stabilization from the increases we have over the last couple of years. And assuming your assumption is, obviously, it's very volatile geopolitically, but the supply constraints in the market helped that. Just might just talk about that. And obviously, it's uncertain -- and then maybe just talk about what the balance sheet where it is and investment right now from Fitch, presumably, dividends are now on the horizon again as we look into the next couple of years.

Carsten Spohr

Steven it's Carsten, No, I think your question is a good summary of how we look into the next year, much to add for me. There's existing supply chain constraints, which I think referred to every quarterly. Look at atreticontrol in the Northeast U.S., look at pilots in the U.S., look at aircraft around the world. Now add to that the Pratt & Whitney issue. I understand 1/3, I think, of the fleet will be on the ground. For Lufthansthere will be 20 aircraft alone. While we can compensate that, I'm sure some competitors cannot. And long term also, there will be an impact on this beyond 24. So again, I think your question kind of summarized our view into '24.

Remco Steenbergen

Remco here. Let me add to this, right to fully concur as well. I think we also should keep in mind that for the coming years, correct from an and that's for industry-wide, correct? And probably also for other industries the case. While perhaps the macroeconomic inflation is coming slightly down, sustainability costs coming into the system will still drive cost up for everyone. So also for unit costs to remain flat also for the coming years to increase is needed for this whole industry to remain profitable. Of course, we will look carefully at our CASK. That as we target for next year, a slight decrease in CASK. And if you consider that as well over the five years after 2019, correct? Then we will be still around 12% to 13% higher costs, which were this year while flying on a much lower ASK level, correct? And the CASK increase you could see is only already covered by inflation.

So I think we do a very good job in there. And that's why also considering flying at 88% this quarter, we have such a good result. Who could everything like that, that on these ASK levels, we can make such a profit level. So we have done something clearly right on the cost side. With that, we have always said that we will put forward to the Supervisory Board and approval for a dividend distribution in case our results will come in line with expectation that looks like that. So that we will put forward for approval in the beginning of next year. Our dividend policy has been between 20% and 40% of recurring net income. We haven't looked at what would be the right level, but this is where we currently stand.

Operator

And the next question comes from Harry Gowers from JPMorgan.

Harry Gowers

Three questions, if I can. First one, just going back on the ex-fuel unit cost, obviously, a pretty good performance in Q3. Remco, think you mentioned it just now in terms of your thinking on ex fuel cast for 2024. But what quantum could you see the unit cost coming down by? Are we looking at low single-digit percentage year-on-year? And then secondly, if I could here to ask or look ahead this far, but could you give any commentary on how pricing or demand is looking on bookings so far in January or Q1 2024?

Remco Steenbergen

Harry, first of all, on the CASK, Indeed, we are looking for a low single-digit decrease in CASK in '24. You have to see that also in the context of growing the ASK with 12% and inflation in the mid-single digit. And then particularly the discussions because we're currently in the middle of our budget discussions is really the efficiency and the efficiency we want really to strike the right balance on making sure the system is reliable, we can improve our punctuality, particularly in Germany for our customers, while at the same time, driving efficiency. And of course, as you understand that it's a careful balance. We need to work, and we're moving through that. And that will be, of course, very much dependent on the discussion we have with our partners, correct at the airports, air traffic control improvements, et cetera. What we see in pricing and demand towards next year, it's relatively low, yet at 20%. So it's a bit too early. But what we currently see is still a flattish yield performance. The bookings are in line with our expectations also in line with the growth when we compare it to earlier levels. So in all in that sense, all the scientists we see them now are still good.

Operator

And the next question comes from Sathish Sivakumar from Citi.

Sathish Babu

I got two questions. So firstly, on the corporate traffic. You mentioned that InterContinental is around 62%. Given that we are seeing North America traffic has probably come back to 2019 levels, what are you seeing in terms of corporate traffic out of North America and then the recovery into next year, is it mainly a function of ramp-up in capacity out of Asia, i.e., China? And then the second one is just more on the booking curve. How does the booking curve award the onset of say uncertainty around mid-last -- and how does that actually compare with the, say, last year when the Ukraine conflict started?

Carsten Spohr

Yes. Satish, the corporate travel on the North Atlantic is definitely on the brighter side of the corporate travel development. We're actually seeing close to 70% already in terms of tax passengers. And that's not only higher than average. But if you add to that the yield increases, you get quite close to what we have seen before. If you look at our latest network extensions to America, we go into Raleigh, Durham, we go into Minnesota, that's not necessarily close to the beaches. So you see that even our network development reflects that strength of corporate travel on the North Atlantic. Sorry, the second question was on your booking curve, how that compared to last year?

Sathish Babu

So since the conflict and Middle East uncertainty, have you seen impact on the booking curve? And obviously, last year, when Ukraine conflict happened, what we have seen is the booking curve was softened for two to three weeks before we started to pick up again. So I'm just trying to see how those things are evolving this year.

Remco Steenbergen

Of course, when the Middle East crisis broke out, we saw in the days following, we saw a little bit of a dip in the meanwhile, this has recovered a bit. but we see travel correct to other destinations, holiday destinations and beach destinations increasing more, and it's perhaps a little bit less than the Middle East. We also have to keep in mind that around the Middle East is a relatively small part of the overall portfolio. But overall, we are not where it is. In terms of the booking, the booking curve, that is the same, as I said before, the booking curves we currently see is in line with also in prior years. It's still small for Q1, but it's in line with what we have always have.

Operator

And the next question comes from Sandra Hadiza from HSBC.

Sandra Hadiza

Two questions, please. First, you see United capacities over the Atlantic are strongly above 2019 levels versus your capacity still below 2019 level. So do you see potential to close capacity gap to United over the next one, two years? And since capacity trends at United has been stronger than at Lufthansa for three years now, that has cash rebalancing implications between you and United in 2024? And second, at Frankfurt Airport, the airlines currently operating from Terminal 2 will move to Terminal 3 over the next years. So what are your plans with respect to terminal space in Frankfurt and do you see potential to improve customer satisfaction levels by expanding into Terminal 2 or by your partners moving to Terminal 2.

Carsten Spohr

Yes it's Carsten, on the Transatlantic, as you rightly point out, United was leading the way this summer and also last summer. This will turn around next summer. United announced that they won't grow on the transatlantic in '24. We will see significant growth on the transatlantic in '24. So we'll basically close the gap, which was always the idea that we -- as a joint venture partner, look at the joint market position and market development, and that's what you see happening also after this pandemic. And the formula we have between United and us without going into detail, is a formula that goes through the cycle. So you don't look at this every quarter every year. So you can count on having that balancing effect also being reflected in the way we leave this commercially. Thankful airport, yes, you're rightly mentioning that T3 will be the home of our competitors. T2 will be opened up for renovation, which will then also allow us to have the renovation done in T1. So the clear answer to your question is, yes, this will bring improvement to customer satisfaction after the move of things. And somebody has its microphone on. I think we have some backward noise from some office.

Operator

So the next question comes from the line of Neil Glynn from Air Control Tower.

Neil Glynn

If I could also ask two questions, please. The first one on the efficiency program that you've mentioned this morning in the context of the inflationary pressure. Could you give us a feel for how much of that is already in train today versus how much is still to get started? And if relevant, any thoughts on the lead time between decisions and ultimate execution on those efficiency initiatives? And then the second question, joining the Chorus on M&A. Obviously, there's been some questions on ITA.But shifting focus to TAP, I appreciate that may be distance, but it might be five months between now and your next group conference call like this. So I wanted to just understand your thinking in an unprecedented scenario where you might actually have two acquisitions on the go at one time. How do you think about governance challenges risk to your own business? Of actually taking on those two simultaneously should that come to pass.

Remco Steenbergen

Yes. Thank you, Neil. First, on the question on the efficiency. The efficiency is not something which is a start or stop or start to stop. Also this year, of course, we look in the efficiency improvement, some airlines are a little bit further than others, depending as well on how stable the airport and the system is for '24, particularly what is going already starting up is for the main airline very important to further increase that also to see in the relationship of new airplanes coming in, people need to be trained and particularly bringing the punctuality up. So this is not something about start or stop in many places, things have already started. Some started on a smaller scale and will be ramped up. Some will be also done later in '24 and only coming in effect in '25 because 24 is not yet ready on this. And this is a careful discussion, which currently happened during the budget process, which is also then an agreement which we have to do with the airports. And that will still be continuing over the coming months and the course of next year. It's very important we do the right thing of the customers first, and we put the efficiency on top of many uncertainties there, but we will do our mix here.

Carsten Spohr

Yes, Neil, on TAP, as you know, it's too early to comment that the process hasn't even started. And as all of the major European players, Lufthansa has expressed an interest to look into this due to its interesting traffic flows between especially Brazil and Southern Europe. So I don't see that timing overlap. But maybe a more general answer to your question, if you look at the Lufthansa organization over the last years, it has evolved into a so-called matrix where we have been able to plug in and play with other airlines beyond the five hubs we already operate and the 13 airlines in total we operate. So I don't look at that with that much, let's say, nervousness as probably would have five years ago because we have come a long way in optimizing our org structure to play that business model via five hubs, and we can also play it over 6 or August 7, if we have the opportunity to do that.

Operator

And the next question comes from the line of Conor Dwyer from Morgan Stanley.

Conor Dwyer

Two from me, please, as well. So the first one is back to corporate travel. So at your FY '22 results, you give a graph that implied corporate volumes will be recovering to above 80% in 2024. I think that was important to some extent, at least for the EBIT margin target into next year. But I think now you're expecting it to be in the 70s range. I'm just wondering how that doesn't impact your margin target at all. Is that just because it's lagging the less profitable short haul? Or are you now more confident in leisure's ability to float that gap? Because I think your overall cost expectations into next year are roughly similar to what they were back then. And the second question is you've seen some recent concerns highlighted in other industries about the German consumer, which really doesn't seem to be consistent with what you guys are seeing. I'm just wondering what's the disconnect here?

Carsten Spohr

Yes, on the corporate travel, as always, you have to look at revenue and number of passengers, right? So we obviously have higher yields on corporate than before. And indeed, we do have higher yields on corporate than on premium leisure, but the gap between corporate yields and premium leisure yields has come down. So these were all effects. Of course, we didn't have in mind when we announced the midterm targets or Remco did that many years ago. I remember when we do that Remco 2020? Yes, so quite some time ago. So there have been changes. Of course, there have been new changes, not just on yields, but also on costs, think about inflation, but to answer your detailed question.

On the German consumer, I think it's worth to say that we are down to 3% of our revenue on German domestic, which is the most lagging behind, I think, traffic flow in all of Europe due to the high cost of German airports and infrastructure in general. And we are now down to less than 25% of revenue from Germany for the whole group. And it was just a few years ago, we were above the 37, I think, two years ago. So we are less and less depending on the German consumer, but there's also a shift of consumer priorities around the world, including the German consumer. So while he or she spends less on other topics he or she loves to fly Lufthansa Group Airlines and spends more on us in average. Great decision of the German consumer.

Operator

And the next question comes from Johannes Braun from Stifel.

Johannes Stife

First one is for Carsten. I guess, you mentioned it again today, those supply bottlenecks in the industry restricting the capacity growth, and therefore, obviously, supporting the yields. But I think we have heard some voices from the U.S. recently that there's too much capacity coming through for next year. Just curious to hear from you whether there is any reason why Europe would be different here. And I think you also mentioned that Lufthansa was affected by those constraints compared to your peers, which obviously enables you to grow 10% next year. Can you just repeat why do you think this is the case? Why are you better late than the overall industry growth capacity? And then secondly, the impact of the GTF engine issue on MRO. Just any updated thoughts on to what extent MRO will benefit from the increased maintenance work due to the TDF overall.

Carsten Spohr

When it comes to the bottlenecks, I think if I read the U.S. news right, they complained about too much capacity on the domestic U.S. market, including yield problems. And by the way, I think, in a way, they have huge cost problems, of course, due to the recent labor agreements. But I didn't hear any comments of too much capacity on intercontinental routes. As a matter of fact, look at Asia Pacific, they're just now ramping up the China traffic two days ago being announced. So I think we're not that different from the U.S. view on long-range Intercontinental.

On the geared turbofan, it is true that technique will help in two ways. They will help our airlines by being able to accelerate the fix of the engines by putting them into our own shops, and they will help the bottom line of the Lufthansa Group by pulling in business from other airlines around the world due to our partnership with Pratt & Whitney and MTU, we are licensed to do that work on MTU -- sorry, on Pratt & Whitney engines. So there's one operational effect, getting the engines back into the air faster. There's a financial effect of potential extra profits through doing work for other airlines around the world.

Operator

And the next question comes from Sumit Mehrotra from Societe.

Sumit Mehrotra

So I just want to know for next year, what trends you see for your working capital development, what support free cash flow we should see from there. It's a loaded question given what's your expectations about the booking levels and the prices at which they come in? Secondly, of fuel with the same unit cost that you're projecting and the capacity increases mathematically an $800 million increase that we should expect for next year?

Carsten Spohr

Sumit, good morning, Remco here. Let me split the working capital in two elements. First, the prepayments. With further growth, we, of course, expect prepayments to further grow, and that's a positive working capital impact. The rest of the working capital of receivables, payable and inventory. As we've said, before as well. We expect with the growth, no negative impact of the rest of the working capital. That's what we're targeting for. So we have the benefit of the prepayment and for the rest to stay roughly flat. With regards to the fuel cost, indeed, if the unit fuel cost, as we see it now, right, because it's a volatile world. But as we see it now, the unit costs are flat. Indeed, the increase next year will be purely volume related, with a little bit of benefit of the new planes. Of course, we use less fuel.

Operator

And the next question comes from Andrew Lobbenberg from Barclays.

Andrew Lobbenberg

Can I ask back on the GTF. You speak of the opportunity for Lufthansa Technik. But to what extent will pushing your machines through your lines? Will that cap off your ability to take external revenue because you don't have a endless supply of engineers. And on the GTF also, how is Swiss doing? Because it has the A220s that are misbehaving as well as powered neos? - second question would come back to your productivity push. I think you speak of a 10% productivity gap relative to 2019. How quickly do you realistically expect to close that? I don't suppose you're going to do it next year? How long do you think it will take to close that?

Carsten Spohr

Andrew, on the GTF example on Lufthansa Technik, we use them in a similar way when those things happen. We always look at the overall group bottom line of the decision between taking external work in Lufthansa Technik. So in the end, it's Remco's cashbox, which defines if Lufthansa takes an external contract or rather uses the capacity for an internal work, which then, of course, needs to result in a higher bottom line effect. So for example, we asked Technik to use resources to help us to bring the 380 back in due time. That was a much better multiple than using the same mechanics to do some external work for a customer.

So we'll do the same on the Pratt & Whitney topics. It's always basically the group optimum first, how we use that asset booking, which by the way is one of the big discussion points we have with potential investors for minority shares. Swiss, as you know, the 220 engine also has issues. We currently have three 220s on the ground, but it doesn't have the same issues as we see on the 320 Pratt engine and we'll need to look into that if that situation changes. We do believe with the announced time of shop visit days from Pratt that Lufthansa Tani can do about 100 days faster this necessarily fixed than what Pratt & Whitney has been announced as the average time for a wing-to-wing fix.

The productivity gap, well, as Remco said, we have announced two big programs for next year an efficiency program and the service excellence program. And I think in both programs, we want to close the gap by the end of '24, which will depend on many, many things, aircraft deliveries, accessibilities of slots and so on. So I look at both, and I promise you that or can it be in '25? I think it could well happen. But the way we target things is that '24 must be the year, the last year of transformation, let me put it that way, from the COVID restrictions we have enjoyed to the first full swing here of 25%. You see that in capacity, 100%. And hopefully, also within '25, we come back to the same service level and the same efficiency level with '24 still being used as a transformation.

Operator

In the interest of time, we have to stop the Q&A session, and I hand back to Dennis Weber.

Dennis Weber

Thank you very much for your great interest out there. I'm aware that we have not been able to answer all questions. Apologies for that, but we've got another call coming up, we'll make sure to get back to you. If there are any other questions open, as usual, don't hesitate to contact us at Investor Relations directly. We look forward to meeting and speaking with you over the next few weeks and months.

Thank you.

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Deutsche Lufthansa AG (DLAKF) Q3 2023 Earnings Call Transcript