Remedial Programme For Pll Lot

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  • 1. Remedial programme for PLL LOT Warsaw, 20 August 2008
  • 2. Table of contents
    • 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 2008 1997 0 50 100 150 200 250 300 350 400 Crude oil price Amsterdam spot (US c/gal l on) 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 o n t h e market
    • Fuel prices doubled over the last 12 months, which makes large airlines reduce their offer and smaller ones go bankrupt
    1978 2008 1998 1988 3 4 2 1 3 4 2 1 3 4 2 1 1 2 Cycle I Cycle II Cycle III -4 -3 -2 -1 0 1 2 3 4 5 6 7
  • 4. Current situation of Company - reasons
    • Advantage not take n of increase in transport and traffic at Polish regional airport s
    • 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
    Strategy Market Costs Management
    • Beginning of economic slack on the market
    • Rocketing fuel prices
    • Increase in other operational costs
    Market Difficult external situation Difficult internal situation – LOT unable to compete on open market
  • 5. Current situation of the Company - PLL LOT 6-month performance 6 and 2008 forecast * Forecast by LOT Controlling Source: LOT Controlling 1.436 1.326 YTD revenue 6M 07 -130 2.752 2.983 2.866 Revenue (12 -month forecast ) -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 -61
  • 6. 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
    -2 Source: Team analysis
  • 7. Table of contents
    • LOT situation
    • LOT ambitions
    • Remedial programme
    • Financial plans and objectives
  • 8. 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 l ong h aul 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
    IPO -2 Marketization of PLL LOT Achieving profitability in 2010 Strategic Financial Customers
  • 9. 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 2009
    • and 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
    81
  • 10. Table of contents
    • LOT situation
    • LOT ambitions
    • Remedial programme
    • Financial plans and objectives
  • 11. Strategy – six leverages of the remedial programme -2 Remedial programme leverages Optimising network and fleet Cost efficiency/CAPEX Stimulating revenues Cooperation strategy within alliance Source: team analysis Customer Reforming the capital group
  • 12. Leverage 1 - customer -2
    • 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
    • N etwork – new destinations replacing unprofitable ones
    • P romotions – 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
  • 13. Leverage 2 - network -2
    • Optimising network profitability
    • Adjusting network to realistic demand forecasts
    • Flexible network (changing on monthly or weekly seasonal basis)
    • More efficient fleet allocation
    • Revising plan s of developing the current fleet and adjusting it to market situation
    • Developing strategy for code share
    Source: team analysis Optimising network and fleet
  • 14. Leverage 3 - revenues -2 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
  • 15. Leverage 4 - costs -2 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
  • 16. Leverage 5 – the group -2 Source: team analysis
    • Changing the administration model in the group, more efficient administration
    • New action model in Centralwings
    • and EuroLOT
    • Reforming technology, LGS, LOT Catering
    Reforming the capital group
  • 17. Leverage 6 - alliance -2 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
  • 18. 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
  • 19. 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
  • 20. Table of contents
    • LOT situation
    • LOT ambitions
    • Remedial programme
    • Financial plans and objectives
  • 21. 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 - 60 335 -440 Base 2009 scenario 130 Network optimisation 100 150 Cost reduction -120 EBIT after remedial actions Total 560* 160 150 250 in PLN million Reform costs -70 50 * Excluding one-time reform costs
  • 22. 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 fleet 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 Reform costs -70 5 * Excluding one-time reform costs
    • Major risks:
      • Developing long haul connections
      • Developing the situation on the German market (including cooperation with Lufthansa)
      • Possible implementation of full remedy potential
  • 23. 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 activation Source: team analysis 4.200 08 4.400 4.270 2007 4.100 09 2010 455 3.900 08 4.030 4.270 2007 4.100 09 2010 3.990 08 * 4.200 4.270 2007 4.100 09 2010 Base scenario Scenario after network optimisation Scenario after all initiatives
  • 24. Thank you for your attention