Financial Strategy -

Lufthansa
 FINANCIAL STRATEGY IS A
Evaluation of METRIC SYSTEM OF TOOLS FOR
MEASURING BUSINESS GOALS.

financial MAPS FINANCIAL REQUIREMENTS

strategy TO STEPPINGSTONES OF A
BUSINESS.
 Financial strategy…

The major points of financial strategy for a business is as follows:

1. Net cash available: This indicates level of efficiency the business entity operates to generate
ore cash for further growth.

2. Revenue growth: The calculation = (Last period's revenue - Current period's revenues) /
Total last period's revenues.
Note - Revenues from a single client should not exceed 10 percent of your total revenues.
 Financial strategy formulas…

3. Profitability ratios: It is the metric to evaluate ability of company to generate profit during a
specific period of time. Profitability ratios are categorized in to 2 sections,

i. Margin ratios: Gross profit, EBITDA, Operating profit, Net profit, Cash flow
 Gross profit= (Revenue - Cost of Goods sold)/Revenue

 EBITDA = EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and
Amortization.
It is a metric used to evaluate the business entity's operating performance.

 EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

 Operating profit margin = Operating income/Revenue

 Net profit = Net profit/Revenue

 Financial strategy formulas…

ii. Return ratios: Return on assets, return on invested capital, return on equity

• Return On Assets, ROA = Net Income / End of Period Assets

• Return On invested Capital, ROIC = EBIT x (1 – tax rate) / (value of debt + value of +
equity)

• Return On Equity, ROE = Net income/Equity

• Adjusted Return On Capital Employed (ROCE) = (Adjusted EBIT + Interest on liquidity

– 25% taxes)/Average capital employed.
Lufthansa's
financial
strategy for
2020
 Lufthansa's financial strategy for
2020…

 Overcoming crisis with necessary actions and contributions from all stakeholders.

 95% capacity reduction

 Reduction of all costs and investments

 Suspension of dividend for 2019

 Suspension of flight operations

 Lufthansa's financial strategy for
2020…

 Executive board and management's salary cut

 Deferral of taxes and government fees

 Suspension of slot rule

 Short-time efficient work

 No Compensation for corona related flight cancellations

Lufthansa's
Product-sales-
results
 Lufthansa's Product-sales-results…

 Eurowings: Improvement at Eurowings offset by higher fuel costs and decline in Logistics.
Adjusted EBIT 2019: 2.026

 Eurowings turnaround shows first signs of success.

 Eurowings: Financial turnaround progresses as planned is -4.0%

 Network Airlines: Unit cost reductions partly compensate for top line pressure. Adjusted
EBIT 2019: 1.805 which is 7.8 % as compared to FY2018
 Lufthansa Cargo: 0.0% -9.9 pts compared to FY2018

 Lufthansa Technik: 7.1% -0.2 pts compared to FY2018

 LSD Group: 3.8% +0.2 pts compared to FY2018

 Others: -9% drop

 Lufthansa's Product-sales-results…

 In 2019,the Lufthansa Group had an Adjusted ROCE after tax of 6.6%. This was 4.0
percentage points down on the previous year and higher than the WACC, which was just
4.2% and unchanged from the previous year. The Company therefore added value again in
2019. If Adjusted ROCE exceeds the weighted average cost of capital (WACC), the Company
is creating value.
Market
Segmentation
 Market Segmentation…

 Network Airlines: The Network Airlines segment comprises Lufthansa German Airlines, SWISS
and Austrian Airlines

 Eurowings: The Eurowings segment comprises the airlines Eurowings, Germanwings and
Eurowings Europe.

 Eurowings is the low-cost airline of the Lufthansa Group and thus part of the world's largest
aviation group.

 Aviation Services:
a. Logistics: Lufthansa Cargo is one of leading provider of international scheduled
airfreight services.
b. Maintenance Repair Overhaul (MRO) services is provided by Lufthansa.
c. Catering: The LSG group is the leading provider of a complete Portfolio of in-flight
products and services and has a worldwide network of 201 catering facilities in 50 countries.
Financial
Analysis
 Financial Analysis…

Profitability:
 Net profit for the year 2019 is 595 million euros compared to 339 million euros in 2018

 Key profitability and value creation figures are as follows,

a. Adjusted EBITDA margin 13.0 % which is –1.1 pts than 2018
b. Adjusted EBIT margin % 5.6% –2.4 pts than 2018
c. EBIT margin 5.1% –3.3 pts than 2018
d. ROCE 6.1% –5.0 pts than 2018
e. Adjusted ROCE 6.6% –4.0 pts than 2018

 Sustainable value generation in the Company: Adjusted EBIT came to EUR 2,026m in 2019
and was thus 29% below the previous year.

 Continuous cost management contributes to structural increase in profitability.

 Current assets rose year-on-year by 6% to EUR 11,285m (previous year: EUR 10,654m)
 Financial Analysis…

Liquidity:
 Adjusted ROCE in % 6.6 10.6 –4.0 pts.

 Strong to solid liquidity position.

 Diverse forms of funding ensure liquidity.

 Liquidity increased by 7% to EUR 3,385m (previous year: EUR 3,169m).

 Liquidity risk has risen due to the fall in bookings and flight cancellations.

 Liquidity in year 2019 was 3,385 versus 3,169 million euros in 2018.

 Liquidity will be further strengthened by new financings. Unused credit lines 800 million
euros.
Risks
 Risks…
Quantative risks:

 Fuel price movements

 Earnings risks

 Cyber- and IT risks

 Breaches of compliance requirements

 Exchange rate losses on pension fund investments

 Non-achievement of the continuous improvement assumption substantial

 Exchange rate movements substantial

 Crises, wars, political unrest or natural disasters substantial

 Loss of the investment grade rating

 Risks…

Qualitative risks:

 Pandemic diseases.

 Flight operations risks.

 Human resources substantial.

 Increased noise legislation substantial.

 Regulatory risks resulting from climate change substantial.

 Digital transformation – market entry of new competitors.

 Contaminated foods
Risks…
Risks…
Conclusion and
Problems
Lufthansa might
face
 Conclusion…

Conclusion:
• Market position as a leading European (home market) airline group to be strengthened by means of
profitable growth.

• Core business to be strengthened.

• Focus is on developing premium positioning, cost reductions and profitability increases.

• Consolidation, flexibility and digitalization offer great opportunities.

• Network Airlines focus on quality strategy and improve cost-efficiency.

• Digitalization to be driven forward.

• Eurowings to focus on the turnaround by 2021.

• Lufthansa aims to cut down CO2 emission as a part of Corporate Social Responsibility (CSR).
 Problems Lufthansa might face …

• Suspension of dividend payment in light of Corona crisis.

• Spread of Corona virus makes precise financial outlook impossible.

Thank you!

Raj Bharath Adamaram