remedial programme for pll lot
DESCRIPTION
courtesy of PPL LOTTRANSCRIPT
1
Warsaw, 20 August 2008
Remedial programme for PLL LOT
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Table of contents
1. LOT situation
2. LOT ambitions
3. Remedial programme
4. Financial plans and objectives
3
Market situation deepens the crisis of LOT
Source:International Air Transport Association
Cycles in aviation sector Operating margin, 1978-2008 (%)
Increasing fuel prices*
1986 200819970
50
100
150
200
250
300
350
400Crude oil price Amsterdam spot(USc/gallon)
Change since early 2007+107%
Compared to minimum price
+1089%
• Economic trend in the entire branch is downward
• Forecast adjustment for this year published in June 2008 by IATA showed break on the market
• Fuel prices doubled over the last 12 months, which makes large airlines reduce their offer and smaller ones go bankrupt
1978 200819981988
3 421 3 421 3 421 1 2
Cycle I Cycle II Cycle III
-4-3-2-101234567
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Difficult external situation
Current situation of Company - reasons
• Advantage not taken of increase in transport and traffic at Polish regional airports
• Development directions inadequate to market reality (e.g. in Asia)
• No strong and efficient commercial and sales function
• Increase in permanent costs (10% over 2 years) and no control of costs after completion of historic cost reduction programmes
• Unprofitable network of connections
• Low labour efficiency and overemployment
• Unstable situation as regards the fleet
• Failed attempts to create a strong regional hub in Warsaw
• Neglected relations with Star Alliance partners
• Lack of managerial continuity (5 different presidents over 5 years)
• Unspecified responsibilities and settlement rules
Difficult internal
situation –
LOT unable to compete on open market Strategy
Market
Costs
Management
•Beginning of economic slack on the market
•Rocketing fuel prices
•Increase in other operational costs
Market
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Current situation of the Company - PLL LOT 6-month performance 6 and 2008 forecast
* Forecast by LOT ControllingSource: LOT Controlling
1.436 1.326
YTD revenue
6M 07
-130
2.752
2.983 2.866
Revenue (12-month forecast)
-216
73
-216
-275
Performance in the first 6 months Annual performance
-1
6M 08A
6M 07 6M 08A
2007 2008 P*
EBIT YTD EBIT (12-month forecast)
2007 2008 P*
In PLN million
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LOT must implement a remedial programme at once
External challenges Internal challenges
• Surging fuel prices force the aviation industry to limit their offer and significantly revise their growth plans: many connections are becoming unprofitable
• The aviation industry is going into economic recession, which translates into lower prices and fewer passengers for most airlines
• Competitors are becoming increasingly active
• LOT’s current operating results are negative and likely to get even worse
• A vast majority of LOT connections are unprofitable – planned expansion was not adjusted to market needs and connections profitability economics
• Additional negative factors – resulting from unprofitable previous actions and outdated structure
Remedial programme
• Quick actions towards marketization of the Company– adjusting to the competitive market
• List of actions for revenues and costs to significantly increase profitability in 2009; suppressing the downward trend
Source: Team analysis
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Table of contents
1. LOT situation
2. LOT ambitions
3. Remedial programme
4. Financial plans and objectives
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LOT ambitions
• LOT as preferable partner in a large alliance
• Closer cooperation with PPL in order to increase the role of the port in Warsaw
• Profitable business model for long haul connections
• Regaining control over Polish market through stronger commercial mergers
• Short-term – profitability by 2010
• Mid-term – improved financial performance to have ROIC over WACC (by 2013)
• LOT as first-choice carrier for customers flying to/from Poland
• Optimisation of product towards customer needs and profitability
• Visibly strengthening position in the business sector at each contact point
• Visible improvement of customer service
• Entering the stock market with improved financial performance
Mark
eti
zati
on
of
PLL L
OT
Ach
ievin
g p
rofi
tab
ilit
y in
2010
Strategic
IPO
Financial
Customers
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Financial objectives for Subsidiary Companies
* except Petrolot and Casinos Poland** compared to the 2008 budget*** net financial result based on the 2009 budgets
Source: team analysis
• Centrawings
• LGS
• EuroLOT
• LOT Catering
CEES
• GTL LOT
• LOT Auto Services
WRO LOT
COMPANY* OBJECTIVE
• Profitability by 2009
• Additional PLN 20 million in operating result** in 2009and additional improvement of operating result** by 10 million PLN in 2010
• Reducing administrative costs by PLN 3 million (e.g. through centralizing administrative functions)
Financial result ensuring return of LOT capital employed exceeding cost of capital
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Table of contents
1. LOT situation
2. LOT ambitions
3. Remedial programme
4. Financial plans and objectives
11
Strategy – six leverages of the remedial programme
Remedial programme leverages
Optimising network and fleet
Cost efficiency/CAPEX
Stimulating revenues
Cooperation strategy within alliance
Source:team analysis
Customer
Reforming the capital group
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Leverage 1 - customer
• Segmentation of customers and identifying customer needs
• Improved quality of services
• Better service availability, efficient channels
• New products, promotions
• Better ground personnel
Customer
• Shorter check-in• Improved customer service• Shorter waiting time after
landing
• Improving punctuality• Reducing the number of
cancelled flights• High quality of on-board
staff
Cooperation with PPL,Changes in LGS
Company economises,customer profits!
Through:
• Better functioning www, focusing on internet channel
• Services available on mobile phones
Loyalty of key customers, new customers; new,
convenient access channels
• Network – new destinations replacing unprofitable ones
• Promotions – weekend offers, regular events
Flights more profitable,destinations reflecting
customer needs,developing relations with
customers
• Improved service availability for individual customers
• Focus on business customers and direct cooperation with corporate customers
Personalised product for key customers
Better control over ground customer service; better
quality in areas most influencing customer
satisfaction
Objective:LOT as first-choice carrier for Polish
customers
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Leverage 2 - network
• Optimising network profitability• Adjusting network to realistic demand forecasts• Flexible network (changing on monthly or weekly
seasonal basis)
• More efficient fleet allocation • Revising plans of developing the current fleet and
adjusting it to market situation
• Developing strategy for code share
Source:team analysis
Optimising network and fleet
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Leverage 3 - revenues
Source:team analysis
Stimulating revenues
• Activating sales• Comprehensive application of electronic distribution and
service channels• Mobile access to services (mobile phones)
• Improved revenue management
• Sales stimulating programmes• Dedicated programmes for German and transatlantic
markets
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Leverage 4 - costs
Source:team analysis
• Freezing recruitment and salaries, negotiations with trade unions• Reducing costs and employment in administration
• Implementing lean principles in organisation (e.g. technology, handling, customer service)
• Higher productivity of flying and onboard personnel• Optimising fuel costs• Reviewing and optimising main investments
Cost efficiency/CAPEX
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Leverage 5 – the group
Source:team analysis
• Changing the administration model in the group, more efficient administration
• New action model in Centralwingsand EuroLOT
• Reforming technology, LGS, LOT Catering
Reforming the capital group
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Leverage 6 - alliance
Source:team analysis
• Developing LOT strategy of cooperation with Lufthansa/ Austrian Airlines/Swiss with view to maximum profitability
• Preparing and holding negotiations in August/September
• Improving cooperation with PPL, especially at the Warsaw airport
Cooperation strategy for alliance
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Actions – how do we work
• Detailed schedule• Gradual implementation of tasks until 2010• Implementation of first programme elements in III and IV quarter
of 2008
• Determining top-down objectives• Working teams dedicated for specific tasks• Up-to-date reporting• Revision of progress• Project management office• Gradual implementation of respective elements of the programme• Modifying plans according to feedback information• Up-to-date reporting to RN and MS• Separate team to work on improving the results of CLW, LGS, LOT Catering
• Bottom-up initiatives prepared by responsible representatives of respective teams – cascade programme for getting staff involved in shift work
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Actions already taken
Optimising the network
• Improving the internet channel – promotion www.lot.pl• Weekend promotions available at www.lot.pl
effect: rise in online sales by 10%• More functional website• Since September: regular promotions only at www.lot.pl• Since September: mobile services – mobile-lot.com
• Giving up unprofitable connections• New destinations• Reducing the frequency of selected connections
Negotiations within alliance • Launch of negotiations – President of PLL LOT visits Lufthansa
Sales,New access channels
By the end of 2008 we expect to reduce loss in all areas of our activity by PLN 20 million
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Table of contents
1. LOT situation
2. LOT ambitions
3. Remedial programme
4. Financial plans and objectives
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The remedial programme to reduce loss generated in 2009
Network optimisation
Revenue maximisation
Cost reduction
Overall potential of remedial actions
EBIT in 2009 before the cost of financial leasing of fleet
Revenue maximisation
Reform costs
- 60335
-440
Base 2009 scenario
130
Network optimisation
100150
Cost reduction
-120
EBIT after remedial actions
Total
560*160 150 250
in PLN million
Reform costs
-70
* Excluding one-time reform costs
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Achieving full effects of the programme necessary for LOT to become profitable by 2010
Network optimisation
Revenue maximisation
Cost reduction
Overall potential of remedial actions
EBIT in 2009 before the cost of financial leasing of fleet5
435
-545
Base 2010 scenario
160
Network optimisation
150
Revenue maximisation
250
Cost reduction Reform costs EBIT after remedial actions
- 10
Total
560*160 150 250
In PLN million
Major risks:– Developing long haul connections– Developing the situation on the German market (including cooperation
with Lufthansa)– Possible implementation of full remedy potential
Reform costs
-70
* Excluding one-time reform costs
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To achieve the 2010 goal it is necessary to implement the objectives of network optimisation and improved efficiency
No. of passengers (million)
* Additional effect expected in 4th quarter of 2008 in connection with network optimisation and sales activationSource: team analysis
Base scenario
Scenario after network optimisation
Scenario after all initiatives
4.200
08
4.4004.270
2007
4.100
09 2010
3.900
08
4.0304.270
2007
4.100
09 2010
3.990
08*
4.2004.270
2007
4.100
09 2010
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Thank you for your attention