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Fleet Strategy Investor Day 2007 Frankfurt, January 25th, 2007 Nico Buchholz SVP Corporate Fleet Deutsche Lufthansa AG 1 Overview Strategy Evaluation Implementation Conclusion 2 Lufthansa Corporate Fleet Is responsible for Fleet Strategy, Development of Aircraft together with the Manufacturer, as well as Aircraft Purchases and Sales within the Lufthansa Group. This includes § passenger aircraft from 30 seats to 500 seats § cargo aircraft This includes the same activities for the engine market. Additionally the Aircraft Asset Management is also performed along with Aircraft Leasing Activities. 3 Each market needs a different approach market driven requirement possible aircraft types A380 B747-8 83 550 Seater 400 Seater Longhaul 30 53 200-300 Seater A350/B787 2006 2010 298 73 150-250 Seater 80-150 Seater A320Fam/B737Fam A320Fam/B737Fam CRJ/C-Series/EMB/Sukhoi CRJ/EMB/Sukhoi Shorthaul 119 106 50-70 Seater 2006 2010 4 Life Cycle: The Airline perspective (> 30 years) Aircraft Asset Management = Corporate fleet Plan Buy Fly Sell Phase-out & remarketing Strategy/ Operational Rough Early Final Detailed Longterm Planning specification negotiation specification negotiation planning Aircraft evaluation and manufacturer discussions Aircraft evaluation and manufacturer discussions Contract Controlling Finance Tax Balance Sheet Financing Source: Corporate Fleet 5 Life Cycle: The Manufacturer Perspective Action here has the most leverage on costs later on, here, in the business envelope of LH. Concept Development Program Definition Detailed Design Test & Evaluation Production Ops & Support Disposal 80% of costs committed, <15% incurred 1. Engage the LC before acquisition / operations 20% of costs committed, >75% incurred Enhance Shareholder value 2. Acquisition process 5. Disposal process The majority of leverage into LH s business case appears to be here. This means being proactive as an Airline, early in the LC. Source: Corporate Fleet Strategy and Aircraft Evaluation 4. Feedback loop to transmit & secure targets set 3. LH b.c during acquisition process Ops process 6 The STRATEGY of today: focused on delivering the best value proposition for LH and linked to the output of the overall strategy process Market driven corporate strategy Maximize shareholder value (network, KSF s (fleet), restrictions (risk + finance) Max. Value = Fleet Strategy Fleet Strategy Opportunity, Risk, Scale, Buildup Situation audit Gap analysis level of fit (fleet) Potential scenarios fleet development Benchmark Quantitative Evaluation of scenarios Qualitative Source: Corporate Fleet Strategy and Aircraft Evaluation 7 Evaluation of Life Cycle Benefit Delivery Date nts Ca sh Op Technology era t Price ing Co st De ice r eP par S vel e opm LH Strategy ------- Aircraft Choice 8 Definitions as used Aircraft related MTOW: max permissible weight of the aircraft at the start of the takeoff roll MEW: weight of the structure, power plant, furnishings, systems and other equipment that are considered an integral part of the aircraft MZFW: maximum weight permitted before usable fuel is loaded into the airplane OEW: manufacturer's empty weight plus the operator's items COC: all cost to operate an aircraft (fuel, crew, maintenance, landing and air traffic control fees, except capital cost and insurance) Range: range in still air, in nautical miles SFC: Specific Fuel Consumption = the fuel efficiency of an engine design. It measures the fuel needed to provide a given thrust over a certain period of operation (in kg fuel per lbs thrust) Other expressions Evaluation of an Aircraft: considers technological impacts and COC over the operational life span is not related to price at the initial phase is not linked to strategy at the initial phase Lufthansa life cycle: From Entry Into Service (EIS) at LH until and including divestment from LH Original Equipment Manufacturer (OEM) life cycle = From conception of programme, through production phase, until fleet size has declined to a minimum operational fleet 9 ba u ck p Passenger Airline: Where we are, how we got there 1970 ------ >> And where to go 2006 >2014 A380 B747-8 16F/128C Intercont 115 Seats 200 300 seats wide body Cont 94 Seats 100 250 seats short haul 70 Seats Regional Aircraft Source: Corporate Fleet Strategy and Aircraft Evaluation 10 The last long-haul aircraft rollover can be measured. It proved our assessment. A340-300 TECHNOLOGY DC-10 1989 Example: A340 vs. DC-10 2-Man vs. 3-Man Cockpit - 8% Fuel-Consumption-Reduction - 25% Maintenance - 9% Extended Range (A340 vs. DC-10) Commonality to A320-Fleet Less Noise More Comfort (unit cost reduction) . Source: Corporate Fleet Strategy and Aircraft Evaluation 11 Overview Strategy Evaluation Implementation Conclusion 12 The target OEW Range = 13 To manage cost is to understand the levers that impact each cost element 100% Cost elements have to be measured for their competitive sustainability Fuel Total Maintenance Cost Landing Fees Handling Fees Navigation Fees Cockpit Crews Cabin Crews 14 typical cash operating cost (COC) of long haul aircraft Source: Corporate Fleet Strategy and Aircraft Evaluation Technology assessment leads to cash operating cost sensitivities over our lifecycle Progress is expected to focus on detail improvements of aerodynamics, engines, production and systems Structural/Material Carbon fibre; Composites New alloys; Glare Laser beam welding Maintenance cost Aerodynamic/Flightmechanics Larger laminar area Adaptive wing Riblets Optimized stability Reduction of noise Cabin design Lower deck seating New Entertainment systems New Catering Systemes Engines Pic-Source: NASA Fuel burn reduction Slow rotating fan New compressor-/turbine profiles New alloys Variable pitch fan Low emission combustor / double stage burner Noise reduction Source: Corporate Fleet Strategy and Aircraft Evaluation Systems / ATC New Cockpit-Architecture Fly by light Integrated networks & ground data exchange/link More electric / less hydraulic New APU technology / fuel cell Free flight concept 15 Impact of Fuel price Source: TECSON Source: TECSON Source: TECSON Source: TECSON 16 Current programs show a significant improvement in specific fuel consumption (sfc) 1980s 1990s 2000 >2007 Datum => Delta sfc (%) ~ 15 % improvement Source: Corporate Fleet Strategy and Aircraft Evaluation 17 Aircraft Maintenance Engine: i.e. materials, repair procedures, design of engines, less parts reduce cost i.e. landing gear and brakes, new materials, multiple source and the braking procedures reduce cost self diagnostic maintenance and optimised design reduce cost (i.e. simplified flap system, electrically instead of hydraulically activated) Components: Airframe: *) slices not corresponding to absolut levels Source: Corporate Fleet 18 Dealing with the manufacturers multiple supplier strategy for key elements AIRBUS GE PW RR Bombardier 19 Embraer Sukhoi Fees for Navigation Landing Handling Input MTOW MTOW Payload + Space As payload is the only driver yielding revenues, thus weights are critical in any evaluation. 20 The operating cost chart enables us to easily position comparable aircraft 15% 10% relative unit cost per seat Type X shortened Decrease aircraft size unattractive area 5% 0% -5% -10% -10% Type X New Technology -5% 0% Increase aircraft size Type X stretched 5% 10% 15% 20% relative cost per trip Source: Corporate Fleet Strategy and Aircraft Evaluation 21 Overview Strategy Evaluation Implementation Conclusion 22 Putting strategy and evaluation into practice Decisions on fleet go beyond economics 23 The B747-8 will be helping to optimize the capacity staggering of the Lufthansa long-range fleet, while also offering an attractive cost position Long haul 550 A380-800 549 450 + 34% approx. 410 B747-8 B747-400 344 350 + 34% 306 250 221 A340-300 A340-600 + 38% Source: Corporate Fleet Strategy and Aircraft Evaluation 24 Quiet for Communities Frankfurt/Main Airport, Germany RWY 25R 85 dBA NADP 1 (ICAO-A) Takeoff noise contours 6000nmi Mission Hattersheim Kelsterbach 747-8 B747-8 Raunheim 747-400 B747-400 Walldorf and reducing emissions Source: Boeing FRA-11152006001 COPYRIGHT © 2006 THE BOEING COMPANY 25 Competitive Positioning § Own assets § § § no cash out for leases and no worry on redelivery cost flexible dispositon and planning for replacement, growth and reduction well balanced mix between depreciated and new assets advantage over i.e. 767 fleets by using the A330 747-8 entry into service in 2010 offers a position close to the larger aircraft first on 747-8 unique fast delivery slot management within the September 2006 order: A320s end of 2007, A330s early 2008 § Modern fuel efficient fleet to hedge against fuel price fluctuations § § § Early delivery dates § § § Capacity management harmonized through central unit allows less expenditure for requirements across the group Lufthansa, Germanwings, Swiss, use the same aircraft pool Aircraft sizes suited to allow operations on frequency driven routes and size driven routes § 26 To close: the constant challenge Planning of invest and capacities requires a long term fleet strategy and a broad horizon. Fleet decisions on types have to satisfy multiple criteria such as taking into account Homogeneous fleet Economies of Scale Fleet commonality Innovative aircraft conflicting interests versus Operational flexibility versus Product differentiation versus Risk mitigation/-spread versus Low capital expenditure The target of Fleet Development: Determine a low complexity fleet, market driven multiple aircraft sizes offering high flexibility in operation and performance while being state of the (technical) art and sustainable highly economical. 27 Q&A Nico Buchholz SVP Corporate Fleet Deutsche Lufthansa AG 28 Disclaimer This presentation is for informational purposes only, contains preliminary financial and other information about Lufthansa and is subject to updating, revision, amendment and completion. This presentation does not and is not intended to constitute or contain any offer of securities for sale or a solicitation of an offer to purchase any securities of Deutsche Lufthansa AG or any other company and neither this presentation nor anything contained herein shall form the basis of any contract or commitment. Certain statements contained in this presentation may be statements of future expectations and other forward-looking statements or trend information that are based on management's current views and assumptions and involve known and unknown risks and uncertainties. In addition to statements which are forwardlooking by reason of context, including without limitation, statements referring to risk limitations, operational profitability, financial strength, performance targets, profitable growth opportunities, and risk adequate pricing, as well as the words "may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, or continue", "potential, future, or further", and similar expressions identify forwardlooking statements. Actual results, performance or events may differ materially from those in such statements. Lufthansa assumes no obligation to update any such statements or any other information contained herein. 29