Traffic Revenue

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

𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

= 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 (𝑅𝑆𝐾)

× 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 (𝑅𝑅𝑆𝐾) Where

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 = 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑒𝑎𝑡 𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 × 𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝐿𝑜𝑎𝑑 𝐹𝑎𝑐𝑡𝑜𝑟 𝐶𝑎𝑟𝑔𝑜 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

= 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑎𝑟𝑔𝑜 𝑇𝑜𝑛𝑛𝑒𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 (𝑅𝐶𝑇𝐾)

× 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑎𝑟𝑔𝑜 𝑇𝑜𝑛𝑛𝑒𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 (𝑅𝑅𝐶𝑇𝐾) Where

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐶𝑎𝑟𝑔𝑜 𝑇𝑜𝑛𝑛𝑒𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟

= 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝐶𝑎𝑟𝑔𝑜 𝑇𝑜𝑛𝑛𝑒𝐾𝑖𝑙𝑜𝑚𝑒𝑡𝑒𝑟 × 𝐶𝑎𝑟𝑔𝑜 𝐿𝑜𝑎𝑑 𝐹𝑎𝑐𝑡𝑜𝑟 Table 33 gives an overview of the development of those numbers in the past five years:

in EUR million 2013A 2014A 2015A 2016A 2017A

Available Seat Kilometers 262,682 268,105 273,993 286,555 322,821 Passenger Load Factor (%) 79.80% 80.10% 80.40% 79.10% 80.90%

Revenue Seat Kilometers 209,652 214,643 220,400 226,639 261,156 Revenue per Revenue Seat

Kilometer (in EUR) 0.1037 0.1005 0.1034 0.0982 0.0975 Passenger Revenue 21,743 21,566 22,611 22,256 25,467 Available Cargo

Tonne-Kilometers 14,893 14,659 14,971 15,117 15,619

Cargo Load Factor (%) 69.10% 69.90% 66.30% 66.60% 69.30%

Revenue Cargo

Tonne-Kilometers 10,285 10,249 9,930 10,071 10,819

Revenue per Revenue Cargo

Tonne-Kilometer (in EUR) 0.2747 0.2753 0.2730 0.2388 0.2710

Cargo Revenue 2,825 2,822 2,711 2,405 2,932

Traffic Revenue 24,568 24,388 25,506 24,661 28,399

Table 33 - Split and Development of Lufthansa's Traffic Revenue, Own Calculations Based on Annual Reports

8.1.1.1 Passenger Revenue

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

8.1.1.1.1 Available Seat Kilometer

“An available seat-kilometer (ASK) denotes one seat offered flown for one kilometer”

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

In % 2018E 2019E 2020E 2021E 2022E

Growth Rate Market (Europe) - 6.46% 7.51% 8.50% 5.55%

Growth Rate Market

(Germany) - 4.79% 5.80% 6.73% 4.21%

Inflation Rate - 2.00% 2.00% 2.00% 2.00%

Growth rate ASK 9.50% 3.62% 4.65% 5.61% 2.88%

Table 34 – Forecast of Growth Rates of Lufthansa's Available Seat Kilometers

8.1.1.1.2 Passenger Load Factor and Revenue Seat Kilometers

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

2018E 2019E 2020E 2021E 2022E Available Seat Kilometers (in

million) 353,489 366,303 383,349 404,870 416,524 Passenger Load Factor (%) 80.06% 80.06% 80.06% 80.06% 80.06%

Revenue Seat Kilometers (in

million) 283,003 293,262 306,909 324,139 333,469

Table 35 - Forecast of Lufthansa's Revenue Seat Kilometers (in million)

8.1.1.1.3 Revenue per Revenue Seat Kilometer

Lastly, the Revenue per Revenue Seat Kilometer (RRSK) has to be estimated. It can be seen in Table 36 that RRSK has been on a decreasing trend for the past five years. This seems reasonable, as the share of Low Cost Carriers worldwide is increasing (see Section 3.2), which sets ticket prices under pressure. As this trend is expected to continue in the (near) future, we

estimate a RRSK growth rate of -1.00% in 2018, similar to Lufthansa’s own estimate, and -1.48% in the following years, which is equal to the past five years average RRSK growth rate.

An overview of historical and future growth rates as well as absolute RRSK is given in Tables 36 and 37:

2013A 2014A 2015A 2016A 2017A Average RRSK (in EUR) 0.1037 0.1005 0.1034 0.0982 0.0975

Growth Rates

RRSK (%) -3.12% 2.94% -5.05% -0.70% -1.48%

Table 36 - Historical Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK), Based on Annual Reports

2018E 2019E 2020E 2021E 2022E Growth Rates RRSK (%) -1.00% -1.48% -1.48% -1.48% -1.48%

RRSK (in EUR) 0.0965 0.0951 0.0937 0.0923 0.0909

Table 37 - Forecasted Growth Rates of Lufthansa's Revenue per Revenue Seat Kilometer (RRSK)

Based on these estimates of Revenue Seat Kilometers and Revenue per Revenue Seat Kilometer, the development of Passenger Revenue is forecasted as seen in Table 38:

2018E 2019E 2020E 2021E 2022E Revenue Seat Kilometers (in

million) 283,003 293,262 306,909 324,139 333,469 RRSK (in EUR) 0.0965 0.0951 0.0937 0.0923 0.0909 Passenger Revenue (in EUR

million) 27,321 27,892 28,757 29,921 30,326

Table 38 - Forecast of Lufthansa's Passenger Revenue

8.1.1.2 Cargo Revenue

After the estimation of Passenger Revenue, we will continue with forecasting Lufthansa’s Cargo Revenue for the next five years. Cargo Revenue includes all revenues from freight and mail and is calculated according to the same logic as Passenger Revenue. Therefore, Available

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

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

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

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

2018E 2019E 2020E 2021E 2022E Available Cargo

Tonne-Kilometer (in million) 15,809 16,000 16,194 16,391 16,590 Cargo Load Factor (%) 68.24% 68.24% 68.24% 68.24% 68.24%

Revenue Cargo

Tonne-Kilometers (in million) 10,788 10,919 11,051 11,185 11,321

Table 39 - Forecast of Lufthansa's Revenue Cargo-Tonne Kilometers (in million)

8.1.1.2.2 Revenue per Revenue Cargo Tonne-Kilometer, Cargo Revenue, and Traffic Revenue

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

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

2018E 2019E 2020E 2021E 2022E Passenger Revenue (in EUR

million) 27,321 27,892 28,757 29,921 30,326

Revenue Cargo

Tonne-Kilometers (in million) 10,788 10,919 11,051 11,185 11,321 RRCTK (in EUR) 0.2710 0.2710 0.2710 0.2710 0.2710 Cargo Revenue (in EUR

million) 2,924 2,959 2,995 3,031 3,068

Traffic Revenue (in EUR

million) 30,245 30,851 31,752 32,953 33,394

Table 40 - Forecast of Lufthansa's Traffic Revenue

8.1.2 Other Revenue, Changes in Inventories, Other Operating Income, and Total Revenue

In document Valuation of (Sider 81-85)