Lufthansa Cost Savings

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Cost savings through operational excellence in theenvironment of volatile fuel prices

Singapore, March 05th 2009


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Singapore - JET FUEL Asia Summit 2009 - 2 -- 2 -

Contents

1. Introduction

2. Oil Price Development

3. General and Airline Specific Impacts of the ETS

4. Reduction of Fuel Burn in Flight Operations

4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown

6. Lufthansa Consulting


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


1


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Singapore - JET FUEL Asia Summit 2009 - 4 -

Introduction 1


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


2


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Several micro- and macroeconomic factors drive the fuel price development,but the related risks and uncertainties make fuel prices quite unpredictable

World jet fuel demand

Jet fuel supply situation

OPEC policy

Supply from non OPEC countries

Political situation

External factors, e.g. weather, strike, etc.

2

The main influencing factors

The main influencing factorsThe main influencing factors

Source: Lufthansa

US - $


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2

Development of crude oil lt. sweet pit2008

Hedging was the way out for large network airlines until the fuelprices eroded and also put these airlines at peril

When crude oil prices

soared last summer,

airlines around the

world entered into

hedge agreements

aimed at insulating

them from even higher

jet fuel cots.

SIA's third-quarter profit falls 43% on hedges

Fuel hedge adjustments and merger costs trigger massive quarterly losses for Delta Fuel hedging crimps Southwests profits

Southwest may pledge up to 20 737s as hedge collateral

Huge fuel hedge loss, falling demand to hurt Cathay

SIA's third-quarter profit falls 43% on hedges

Fuel hedge adjustments and merger costs trigger massive quarterly losses for Delta

Fuel hedging crimps Southwests profits

Southwest may pledge up to 20 737s as hedge collateral

Huge fuel hedge loss, falling demand to hurt Cathay

Recent Aviation & Airline headlines*

Source: ATW , RATI

US - $

Average price caps of hedged fuel


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Efficient cost control remains number one priority in operationalairline management the target is to control fuel cost

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007 2008F

[ % ]

$0,0

$20,0

$40,0

$60,0

$80,0

$100,0

$120,0

% of operating costs Average price per barrel of crude

Source: IATA, Platts, ATA, Lufthansa Consulting Analysis

2

Fuel Impact

Operating Costs

The percentage of cost for jet fuel (portion of DOC) has increased by 22 %

since 2002, forcing carriers to cut down on operating expenses

and to focus on operational efficiency. The aim for sustainability can only be met

by adequate measures to cut the operational cost base.

Fuel impact on operating costFuel impact on operating costFuel impact on operating cost


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Profitability can be a matter of one extra seat sold with the volatilityof jet fuel prices the profitability is at jeopardy for all airlines

100 %

50%

75%

25%

10%

100 %100 %Procurement

Marketing

Admin

Pax Handling Charges

Landing, Enroute

Ground Handling

Catering Crews

Depreciation

Maintenance

FUEL

Airline Operating Expenses (2008)Airline Operating Expenses (2008)Airline Operating Expenses (2008)

33 %

2

Source: Selected annual reports, Lufthansa Consulting analysis


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


3


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The European Emission Trading Scheme will implicate additionalchallenges for the airlines

EU parliament has decided to include airline activities in the scheme for greenhouse gas

emission allowance trading within the community starting from 2012

Applicable for all flights to or from EU airports

Goal shall be the reduction of CO2 emissions by 20% in 2020 in comparison to 1990

European Emission Trading Scheme (ETS) will have major financial impacts on the

aviation industry

Airlines are obliged to take action according to the EU commission guidelines

(Directive 2008/101/EG)

High time pressure since the first deadline is in June 2009

3

European Emission Trading Scheme (ETS)European Emission Trading Scheme (ETS)European Emission Trading Scheme (ETS)


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Only airlines which are able to manage and predict fuel consumptionand the correlated CO2 production will lead the industry

Per consumed tone of fuel 3,15 tones

of CO2 are emitted

EUR/tone of fuel (as of Jan 2009) =

370 EUR

EUR/Certificate (as of Jan 2009)

= 12 EUR

EUR/tone of CO2 = 12 x 3,15

= 37,8 EUR

CO2 costs/fuel costs(%) = 37,8/370

= 10%

Example calculation Conclusion

At a certificate price of 12 EUR and a

fuel price of 370 EUR per tone the

costs for CO2 emissions equal 10% of

the fuel costs

It is assumed that a big network

carrier is facing additional emission

costs in three-digit Mio. EUR amountin 2012

If airlines do not have the necessary

amount of certificates the penalty fee

of 100 EUR per tones CO2 will apply

Emission factor 3,15 tones of CO2 per tone of fuel burned

Assumption: 100% of CO2 emissions have to be paid for

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By managing fuel consumption data, airlines can manage theemission cost scenarios and make a major cost block predictable

Emission cost scenarios

Today's price is 12 EUR, but pricesof 30-50 EUR could be realistic infuture

Prices will rise due to higherdemand for emission rights and the

inclusion of other industries

Expansion since 2004-2006 has tobe bought as well as growth from2012

At a certificate price of 12 EUR withan auction rate of 15% the costs foremission certificates already sumup to 140 Mio. EUR p.a.

EU goal: Auction rate of 100%

Note 1: Auction rate is the percentage of emission certificates which have to be bought by the airlines

Best case 2012 2013 2014

Allocation rate 97% 95% 95%

Auction rate1 15% 15% 15%

Certificate price 12 12 20

Costs 120 Mio. 128 Mio. 222 Mio.

Worst case 2012 2013 2014

Allocation rate 97% 95% 60%

Auction rate 15% 30% 40%

Certificate price 30 40 50

Costs 291 Mio. 517 Mio. 940 Mio.

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However airlines need to push for a global approach, because isolatedEU measures might cause a distortion of competition and detours

NYC-FRA-MUM: 336 tones of CO2(emission certificates needed)

NYC-DXB-MUM: 460 tones of CO2(no emission certificates needed)

FRA-HKG: 251 tones of CO2(emission certificates needed)

FRA-DXB-HKG: 296 tones of CO2(emission certificates only needed

for section)

Increase of CO2 due to detours

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Impact on climate

Example 1:

Example 2:Impact on climate


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The implementation of ETS will have a major financial impact, onlythe airlines who will prepare will stay ahead

Conclusion

With the implementation of EU ETS all airlines with EU traffic will face additional emission

costs, the total cost is not exactly assessable today

Data monitoring, reporting and verification will cause additional administration costs

Demand will be affected negatively

Growth of the airline and aviation sector will be more difficult

Distortion of competition

Financial means spent for certificates are not available for investments in modern and

efficient technologies

Insecure application of emission funds - emission revenues should inure to the

environmental benefit and the reduction of emissions in the aviation industry

International ETS agreement as a global solution is necessary

3


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


4


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A reduction of CO2 and fuel cost can be achieved in FlightOperations on a daily basis

Includes all fuel saving

measures in terms of

planning and preparation

for the in-flight phase.

Usually this area involves

Ground Handling,

Operational Control

functions and

administrative bodies.

The In Flight phase has the

major fuel savings potential. The

flight crews are actively

implementing the prepared

measures from the Pre Flight

phase and are executing in flight

fuel saving procedures.

During this stage data from

the In Flight phase are

collected, consolidated and

validated to realize

strategies and measures

for further fuel saving

activities.

4

Pre - FlightPrePre -- FlightFlight In - FlightInIn -- FlightFlight Post - FlightPostPost -- FlightFlight


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CO2 reductions and cost savings go hand in hand withOperational Excellence

Flight Planning &Preparation

Advanced IT tools forroute calculations

Route selection

(time vs. cost vs. fuel) Extra fuel calculations

Establishment of a corporate

Fuel Management

Ground Handling procedures

Usage of APU vs. GPU

Turn-around processes

Cost Index

Weight Reduction

Paperless cockpit

Flight procedures

Idle power descends

Reduced take-off thrust

Flap setting

Tankering / fuel uplift

Taxi procedures

Briefing & communication

Flight level selection

Fuel PerformanceMonitoring

Maintenance Actions

Engine wash

Cost monitoring

Fuel database

Planning & budgeting

Controlling

Fuel supply management

Purchasing & contracting

Interface communication

4

Pre - FlightPrePre -- FlightFlight In - FlightInIn -- FlightFlight Post - FlightPostPost -- FlightFlight


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


4


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Flight Planning Provision of realistic parameters to reducefuel costs and CO2 emissions 4

Ideal flight pathsIdeal flight paths

Realistic flight pathsRealistic flight paths

A B

Vertical profile

A B

Vertical profile

Optimum Altitude

Optimum Altitude

Horizontal profile

BA

Horizontal profile

BA

Restricted Airspaces


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The challenge of flight planning is to determine the exact fuelconsumption but SAFETY remains first priority 4

BA

SafetySafety Profitability Punctuality

Route & Altitude structure

Weather phenomena

Schedule constraints

Operational constraints

Aircraft performance Company specific procedures

RequiredFuel Amount

RequiredRequired

Fuel AmountFuel Amount

Basic ObjectivesBasic ObjectivesBasic Objectives

Influencing FactorsInfluencing FactorsInfluencing Factors


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CO2 and fuel cost efficient flight planning needs state of

the art training and high sophisticated tools

Flight PlanningIT Tool

Flight PlanningIT Tool

ActualWeather Data

NavigationData, e.g.NOTAMs

ActualWeather Data

OperationalData

IndividualAircraft Data

FinancialData

Companyrelated

requirements

Individual & OptimizedOperational Flight Plans

Individual & OptimizedOperational Flight Plans

4


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State of the art flight planning takes into account real timewind conditions and estimates the saving potential

Assumption:

Aircraft Type: ATR 72

Cruise Procedure: Long Range Speed

Routing: SIN CGK

GC distance: 474 NM

Headwind at FL18: 20 kts

Headwind at FL230: 50 kts

Source: ATR Manual

According to the books and without

considering weather conditions the

recommendation for the Operational Flight

Plan would be:

Cruising Level FL230

Standard calculation

Optimized calculation

If the Operational Flight Plan is calculated by

considering actual weather/wind effects as well

as aircraft performance data the result &

recommendation will be different:

Specific range:

FL180 0.39 NM/kgFL230 0.37 NM/kg

Under this conditions flying at lower altitudes

leads to a higher specific range resulting in lessfuel burn.Fuel savings on this routing:

5 %

Under this conditions flying at lower altitudesleads to a higher specific range resulting in less

fuel burn.Fuel savings on this routing:

5 %

4


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Extra Fuel needs to be addressed with the cockpit, becausetomorrows cockpits manage emissions and fuel cost

Legal minimum

requirements

Legal minimum

requirements

TripFuel

Contingency

Fuel

AlternateFuel

Final ReserveFuel

+

+

+

+

Extra FuelExtra Fuel

Fuel for the flight from A to B incl.climbing phase and descent phase

Fuel for unforeseen flight incidents

Fuel for flight to the alternateaerodrome

Fuel amount to fly holding patternsat the alternate aerodrome

Fuel that is carried at the discretion of the commanderFuel that is carried at the discretion of the commander

Planned

Take-Off Fuel

Planned

Take-Off Fuel

=

4

Because of the best guess principle the question for the pilot is every

time the same:What is the right amount of extra fuel to carryWhat is the right amount of extra fuel to carry ..


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With the help of the Analyzed Extra Fuel the fuel consumption dueto the carriage of too much additional fuel can be reduced

Fuel that is carried at the discretion of the commander

The Flight Crew decides about the amount of Extra Fuel carried.

This decision is based on estimations, experience, safety and comfort.

The challenge is to find the balance between safety and economic efficiency.

The Flight Crew decides about the amount of Extra Fuel carried.

This decision is based on estimations, experience, safety and comfort.

The challenge is to find the balance between safety and economic efficiency.

On an average B747 routing 25 30 % of the Extra Fuel uplift will beburned just to carry it !On particularly stretched long haul flights this additional

consumption may even increase to 60 %.An example:If on a flight from FRA to EZE the amount of Extra Fuel is 5.000 kg,3 tons of fuel will be burned just due to the higher weight of theaircraft !!!

On an average B747 routing 25 30 % of the Extra Fuel uplift will beburned just to carry it !On particularly stretched long haul flights this additionalconsumption may even increase to 60 %.

An example:If on a flight from FRA to EZE the amount of Extra Fuel is 5.000 kg,3 tons of fuel will be burned just due to the higher weight of theaircraft !!!

4

Extra FuelExtra FuelExtra Fuel


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Relation between Extra Fuel ordered and the amount of ExtraFuel actually needed before introducing AEF

-2000

-1000

0

1000

2000

3000

4000

5000

6000ExtraFuel ordered

ExtraFuel needed

4

01.01.03 30.09.04

kg

Example: Extra Fuel for FRA-HAM with A300-600


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Statistical information on the Operational Flight Plan help the Flight Crew

to make a reasonable decision about the desired amount of Extra Fuel

TaxiFuel

TripFuel

ContingencyFuel

AlternateFuel

Final ReserveFuel

+

+

+

+

+

Extra Fuel

TaxiFuel

TripFuel

ContingencyFuel

AlternateFuel

Final ReserveFuel

+

+

+

+

+

Extra Fuel

PlannedTake-Off Fuel

MEAN VALUE MS 2000: Describes the averagely consumed additional (plus - PS) or less (minus -

MS) fuel amount in relation to the Planned Take-Off Fuel.

EF90 MS 860: On 936 considered legs 90% of all flights on this city pair reached their

destination with a fuel consumption less than 860 kg of the Trip +

Contingency Fuel.

EF99 PS 1774: 99 % of all considered flight reached their destination without using Alternate

and Final Reserve Fuel and had to use a maximum Extra Fuel amount of

1774 kg.

-----------------------------------------------------------------------------------------------------------------

ANALYZED EXTRA FUEL SUMMARY

MEAN VALUE MS 2000 EF90 MS 860 EF99 PS 1774

CONSIDERED FLIGHTS 936

-----------------------------------------------------------------------------------------------------------------

4


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Potential savings due to minimized carriage of Extra Fuel 4

Fuel savings in kg of Airbus A340 (route length 3000 NM):

1000 kg:

500 kg:

Weightreduction

180 kg

88 kg

936 flights

of the flights

Flights not requiringExtra Fuel

936 flights

of the flights

Flights not requiringExtra Fuel

Example:LHR JFK

Yearly fuel savings forone flight a day:

65.700 kg

Example:LHR JFK

Yearly fuel savings forone flight a day:

65.700 kg


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Contents

1. Introduction




4.1 Pre - Flight

4.2 In - Flight

4.3 Post Flight

5. Touchdown


4


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The most innovative project certainly is the introduction ofthe cost index concept in flight operations 4

CI optimization of planned speeds will y i e l d s a v i n g s f r o m 2 t o 3 %a n d i n s o m e c a s e s as m u c h a s 1 0 % when a flight is restricted

to a low altitude or in unusually strong winds

(IATA Fuel Action Plan Guidance material and best practices for fuel and environmental management)

CI = CTime

CFuelCI =CTimeCFuel

The cost index is defined as the ratio of incremental time dependant costs and the costs of fuel.An optimum flight speed can be calculated, using the time costs like an additional fuel flow. This

enables the operator to achieve a trade-off between incremental fuel burn and operating costs per

time unit.

The cost index concept requires a comprehensive evaluation of all airline specific direct operating

costs to identify those of relevance for the cost index. It is very important to know, that not all time

dependant costs are also cost index relevant.


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Many airlines have sophisticated planning tools, however fuelsavings during flight or flight tactics are still in its infancy 4

Tactical PlanningStrategic Planning

Provision of CI performance

data for climb, cruise and

descent for improved OFPs

Support of tactical economic

decisions on board following

OFP deviations of any kind


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4

0,50 0,54 0,58 0,62 0,66 0,70 0,74 0,78 0,82

250

260

270

280

290

300

310

320

330

340

350

360

370

380

390

400

410

Mach

Fligh

tLevel

Min. Cost CRJ 100/200

0,0%-0,2% 0,2%-0,4% 0,4%-0,6% 0,6%-0,8% 0,8%-1,0%

1,0%-1,2% 1,2%-1,4% 1,4%-1,6% 1,6%-1,8% 1,8%-2,0%2,0%-2,2% 2,2%-2,4% 2,4%-2,6% 2,6%-2,8% 2,8%-3,0%

3,0%-3,2% 3,2%-3,4% 3,4%-3,6% 3,6%-3,8% 3,8%-4,0%4,0%-4,2% 4,2%-4,4% 4,4%-4,6% 4,6%-4,8% 4,8%-5,0%

Wind Component

250

260

270

280

290

300

310

320330

340

350

360

370

380

390

400

410

-150 -100 -50 +0 +50 +100 + 150

WC [kt]

FlightLevel

Instead of having fixed cruising speeds a variable speedadjustment in-flight would save up to 3% of fuel for this flight

Lufthansa Cost Savings

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