Trend and Common-Size Analysis of Income statement

𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝐴𝑆𝐾 × 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝐴𝑆𝐾

𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝐴𝑆𝐾 × 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝑅𝑆𝐾 × 𝑃𝑎𝑠𝑠𝑒𝑛𝑔𝑒𝑟 𝐿𝑜𝑎𝑑 𝐹𝑎𝑐𝑡𝑜𝑟 ASK (Available Seat Kilometer) denotes one seat offered and flown for one kilometer, while RSK (Revenue Seat-Kilometer) denotes a paying passenger flown one kilometer. Furthermore, Passenger Load Factor measures the percentage of capacity utilization. Passenger Revenue is driven by one or more of the three previous mentioned factors.

Lufthansa ASK, RASK, RRPK and

Load factor 2013 2014 2015 2016 2017

ASK (million) 262,682 268,105 273,973 286,555 322,821 Revenue per ASK (RASK) (EUR cents) 8.3 8 8.3 8.6 8.7 Revenue per RSK (RRSK) (EUR cents) 10.4 10 10.3 9.8 9.7 Load Factor (Percentage) 79.80% 80.10% 80.40% 79.10% 80.90%

Table 4 - ASK, RASK, RRPK, and Load Factor for Lufthansa, Own Calculations Based on Annual Reports

Table 5 gives an overview of the development of these factors and indicates large growth in available seat kilometer, particularly from the year 2016 to 2017. This is due to the use of larger aircrafts, consolidation of Brussels airlines, and deployment of aircrafts as part of a wet-lease contract with airberlin Group (Lufthansa Annual Report, 2017). The load factor, on the other hand, has remained around the same level of approximately 80%, which is also close to the industry’s average rate of 81.2% in 2017 (Statista, n.d.). A slight increase in revenue per ASK can be seen between 2014 – 2017, while a slight decrease is found in revenue per RSK during the same period, indicating declining ticket prices. Although declining ticket prices are usually negative for an airline’s business, it may be a natural tendency given the growth and competition in the industry as well as Lufthansa’s wet lease contracts and consolidations of low cost airlines. Analyzing these factors in relation to Lufthansa’s peers will provide an insight in the industries tendencies as well as indicate Lufthansa’s competitive advantages.

Trend Analysis ASK, RASK,

RRPK and Load Factor 2013 2014 2015 2016 2017

ASK 100.00 102.06 104.30 109.09 122.89

Revenue per ASK (RASK) 100.00 96.39 100.00 103.61 104.82 Revenue per RSK (RRSK) 100.00 96.15 99.04 94.23 93.27 Load Factor 100.00 100.38 100.75 99.12 101.38

Table 5 - Trend Analysis of Lufthansa's ASK, RASK, RRPK, and Load Factor, Own Calculations Based on Annual Reports

Table 6 compares trends in passenger numbers between Lufthansa and its peers. 2013 is used as reference year for this and all following trend analyses.

Trend Analysis Passenger

Numbers 2013 2014 2015 2016 2017

Lufthansa 100.00 101.33 102.95 104.85 124.33

Air France-KLM 100.00 100.16 102.18 103.67 108.56

easyJet 100.00 106.58 112.83 120.23 131.91

IAG 100.00 115.04 131.40 149.76 155.94

Ryanair 100.00 103.04 114.26 134.29 151.38

SAS 100.00 96.62 94.90 96.76 98.78

Table 6 - Trend Analysis in Passenger Numbers for Lufthansa and its Peers, Own Calculations Based on Annual Reports

It is clear that the airline industry is facing growing demand, which lead to growth of most airlines. Large increases in passenger numbers of Ryanair, easyJet may be linked to an expanding demand for low cost airlines, while increases in IAG’s passenger numbers can be traced back to several acquisitions, including Air Lingus in 2015, as well as the expansion of their fleet. Lufthansa, however, had only slight increases in passenger numbers between 2013 – 2016, while the significant rise by almost 20% from 2016 to 2017 can be explained by previously mentioned consolidation with Brussel airlines and deployment of aircrafts in airberlin Group wet-lease contract.

6.1.3.2 Other Revenue

The trend analysis of Lufthansa’s income statement showed a more than 30% increase in Other Revenue between 2013 - 2017. The item covers MRO (Maintenance Repair and Overhaul Services), Catering Services, Travel Services, IT Services, Ground Services and Other Services.

Other Services include recognized revenue from work in progress related to service contracts and long term production (Lufthansa Annual Report, 2017), lounge operations and transport/warehouse logistics. It has had the largest increase in those years, while MRO Services and Catering Services still account for the largest part in terms of total number.

Increases in MRO Services can be explained by new customers and contracts for maintenance services (Lufthansa Annual Report, 2017), by Lufthansa Technik which is a leading independent provider of MRO services for civilian commercial aircrafts (Lufthansa Annual Report, 2017). Catering Services revenue solely originates in the catering segment and was mostly driven by new and extended contracts in 2015. Travel Services is the only account which showed a decrease from 2013 to 2017, however, the impact on overall revenue is small, as the absolute numbers are relatively low.

Trend Analysis Other Revenue 2013 2014 2015 2016 2017 MRO Services 100.00 102.93 126.52 133.17 135.01 Catering Services 100.00 105.90 124.30 130.84 128.10 Travel Services (Commissions) 100.00 90.67 127.46 31.09 33.16 IT Services 100.00 103.14 100.00 103.48 103.83 Ground Services 100.00 99.03 119.42 117.48 130.10 Other Services 100.00 100.39 119.66 141.91 163.39 Total Other Revenue 100.00 103.00 123.36 128.21 131.53

Table 7 - Trend Analysis of Lufthansa’s Other Revenue, Own Calculations Based on Annual Reports

6.1.3.3 Cost Breakdown 6.1.3.3.1 Staff Costs

As seen before, Staff Costs were large relative to revenue. Lufthansa’s staff costs overall increased more than 10% from 2013 to 2017, however, fluctuated each year as depicted in Figure 20. The decline in 2016 is mainly due to adjustments in the accounting numbers made to the cabin crew’s retirement and transitional benefits at Lufthansa Passenger Airlines (Lufthansa Annual Report, 2016).

Figure 20 - Lufthansa's Staff Cost, Based on Annual Reports

Even though an increase in Staff Costs can be explained by higher passenger numbers, efficiency is becoming more important for Lufthansa in order to achieve a high profit margin and to remain competitive. Staff Costs are affected by different factors, primarily changes in employee numbers and increases in Salaries and Related Costs, which include pension and other benefits. Consequently, it is relevant to examine both factors.

Table 8 provides a trend analysis of key measures related to Lufthansa’s Staff Costs. It is evident that the number of employees has increased by 10% from year 2013 to 2017. Similarly,

7.200 7.300 7.400 7.500 7.600 7.700 7.800 7.900 8.000 8.100 8.200 8.300

2013 2014 2015 2016 2017

Staff Costs (in EUR million)

Salaries and Related Costs increased overall, however, fluctuated together with total amount of Staff Costs as previously mentioned. It is noteworthy that salaries have decreased relative to revenue, indicating that revenue growth was higher than the increases in wages and salaries over the same time period. Furthermore, productivity measured in ASK per employee has shown a great acceleration from year 2016 to 2017.

Trend Analysis Staff Costs 2013 2014 2015 2016 2017 Number of Employees 100.00 100.74 101.83 105.87 110.23 Salaries and Related Costs 100.00 101.25 110.62 100.74 111.95 Salaries Relative to Revenue 100.00 101.41 101.59 95.66 95.04 ASK per Employee

(Productivity) 100.00 101.31 102.43 103.04 111.49

Table 8 - Trend Analysis of Lufthansa's Staff Costs, Own Calculations Based on Annual Reports

In the following tables, Lufthansa’s salaries relative to revenue and ASK per employee are measured and compared to its peers.

Salaries Relative to Revenue 2013 2014 2015 2016 2017

Lufthansa 22.82% 22.80% 23.01% 21.67% 21.53%

Air France-KLM 28.66% 30.63% 30.13% 30.08% 29.57%

easyJet 12.14% 12.50% 12.42% 12.94% 14.21%

IAG 22.73% 22.73% 21.46% 21.38% 21.71%

Ryanair 8.92% 9.20% 8.89% 8.96% 9.52%

SAS 25.16% 23.07% 23.01% 21.87% 20.25%

Table 9 - Salaries Relative to Revenue for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Salaries and Related Costs at Lufthansa accounted for 22.82% of Total Revenue in 2013 and declined to 21.53% in 2017. This indicates that wages and staff costs do not necessarily follow Lufthansa’s growth in revenue. Similar trends are seen for Lufthansa’s peers of which SAS has the largest decline from 25.16% in 2013 to 20.25% in 2017. Table 10 shows that Lufthansa’s employee productivity, measured by ASK per employee, has increased from 2.24 million in 2013 to 2.49 million in 2017. Similar trends appear for Lufthansa’s competitors. Only easyJet has a declining productivity. However, Lufthansa’s productivity per employee is lower than the one of all other peers. This can be attributed to the fact that Lufthansa, as a premium brand, offers higher customer service levels than its peers, making it the only 5 star airline in Europe (Skytrax, 2017), which results in a higher need of employees.

ASK per Employee

(in million) 2013 2014 2015 2016 2017 Average

Lufthansa 2.24 2.27 2.29 2.31 2.49 2.32

Air France-KLM 2.83 0.22 0.23 3.30 3.43 3.04

easyJet 8.90 8.85 8.55 8.54 8.22 8.61

IAG 3.84 4.24 4.48 4.69 4.78 4.41

Ryanair 12.94 13.20 13.65 12.28 12.10 12.83

SAS 3.16 3.66 3.92 4.54 5.06 3.92

Average 5.65 5.83 5.96 5.89 5.95 5.86

Table 10 - ASK per Employee for Lufthansa and its Peers, Own Calculations Based on Annual Reports

6.1.3.3.2 Fuel Costs

From Lufthansa’s common-size analysis and trend analysis of Lufthansa’s income statement, it was also evident that fuel expenses, even though still accounting for a large part of total cost, declined in the period from 2013 to 2017. This decline in expenses is relevant to analyze as it increases Lufthansa’s profit margin significantly. Several factors can be linked to fuel costs.

Mainly, fuel expenses are highly sensitive to the price of oil. In Figure 21, showing Lufthansa’s fuel expenses, a great decline can be seen from 2014 to 2016, followed by a slight increase in 2017. The same figure also gives the average crude oil price during this period (Statista.com, 2018). A similar decline is evident between 2014 to 2016, with an increase in 2017. This indicates that Lufthansa’s fuel expenses closely follow the average crude oil price in the world and the company’s profit margin therefore is heavily dependent on a low oil price.

Figure 21 - Lufthansa's Fuel Expenses versus Average Crude Oil Price, Based on Annual Reports and Statista.com (2018)

Fluctuation in oil price impacts all airlines, making them subject to identical conditions. Cost control in this account is driven by internal characteristics such as hedging decisions or fuel

0 20 40 60 80 100 120

0 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000

2013 2014 2015 2016 2017

Fuel Expenses (EUR million) and Average Crude Oil Price (USD/t)

Fuel Expenses

Average Crude Oil Price

consumption, which may depend on the fleet and fleet efficiency. High fuel efficiency can be linked to newer aircrafts or specific types of aircrafts. On all flights in general, fuel is consumed regardless of revenue and load factors. Consequently, it is relevant to measure fuel expenses in relation to capacity in terms of ASK. Table 12 shows this measure for Lufthansa and its peers.

Fuel expenses of easyJet and SAS have been translated to EUR million using the following FX rates from xe.com:

FX Rates 2013 2014 2015 2016 2017

EUR/GBP (December) 1.19818 1.28769 1.3554 1.17489 1.12553 SEK/EUR (October) 8.78065 9.25537 9.36082 9.91655 9.72937

Table 11 - FX Rates, Based on xe.com

The industry-wide decrease in Fuel Expense per ASK for all airlines can be explained the previously seen drop in oil prices, together with higher fuel efficiencies for all fleets due to newer airplanes (Cooper, et al., 2018).

Fuel Expense per

ASK (in EUR cents) 2013 2014 2015 2016 2017 Average

Lufthansa 2.71 2.52 2.11 1.70 1.62 2.13

Air France-KLM 2.53 2.45 2.23 1.65 1.57 2.09

easyJet 1.91 2.03 1.94 1.49 1.25 1.72

IAG 2.58 2.38 2.21 1.62 1.51 2.06

Ryanair 1.61 1.61 1.55 1.47 1.21 1.49

SAS 2.31 2.11 2.03 1.45 1.45 1.87

Average 2.27 2.18 2.01 1.56 1.44 1.89

Table 12 - Fuel Expenses per ASK for Lufthansa and its Peers, Own Calculations Based on Annual Reports

In document Valuation of (Sider 51-57)