MTU Aero Engines Holding AG together with its consolidated group of companies (designated below as “MTU”, “the group”, “the enterprise” or “the company”) is Germany’s leading engine manufacturer and one of the world’s largest. The support it provides for commercial and military aircraft engines covers their entire lifecycle: MTU develops, manufactures and markets engines and maintains them.

The company is a technological leader in low-pressure turbines, high-pressure compressors, repair techniques and manufacturing processes. MTU is a decisive partner in all important technology programs, both national and international, and cooperates with the top names in the industry – General Electric, Pratt & Whitney and Rolls-Royce.

MTU is the world’s largest independent provider of MRO services for commercial aero engines, measured in terms of revenue. In the military sector, it has been the leading company in the national market and lead industrial partner to the German armed forces for several decades.

MTU operates in two principal segments: the OEM business (Original Equipment Manufacturing) and the MRO business (Maintenance, Repair and Overhaul).

The OEM business covers those parts of the company’s activities relating to the design and manufacture of new engines and spare parts for commercial aircraft, plus the whole of the company’s military business (new engines, spare parts and maintenance).

MTU is a risk- and revenue-sharing partner in the major commercial engine programs. This means that the company carries the full responsibility for the components and modules it designs and manufactures – and also the financial risk. MTU receives a percentage of the revenues in proportion to its stake in the respective program.

MTU’s products for the commercial aero engine market cover all thrust and power categories and the most important components and subsystems. The company designs and manufactures modules and components and carries out final assembly work on complete engines. The focus of MTU’s work on engine modules lies on low-pressure turbines and high-pressure compressors.MTU also develops and manufactures industrial gas turbines (IGTs). The commercial aero engine programs currently of greatest importance, alongside the long-running CF-6 and PW2000, are the GP7000 for the Airbus A380, the V2500 engine that powers the Airbus A320 family, and the business jet engines PW300 and PW500. A recent addition is the company’s stake in the GEnx program for the Boeing 787 and 747-8.

In the military domain of the OEM business, MTU supplies basic technologies, develops and manufactures engine modules and components, manufactures spare parts, is responsible for engine final assembly, and carries out maintenance work. Other services include providing technical and logistical support for MTU products and training military and civilian personnel of the armed-forces. The air forces of many different nations number among the company’s military customers. As lead industrial partner to the German armed forces, MTU provides service support for virtually every type of aero engine in service with the Bundeswehr. It is also the German partner in all major military engine programs at European level. Examples include the EJ200 Eurofighter engine, the TP400-D6 for the A400M military transporter, and the MTR390 engine, as well as the more powerful MTR390 Enhanced Version that powers the Tiger combat helicopter. In the U.S. military market, the largest in the world, MTU is a risk- and revenue-sharing partner in America’s F414 and F404 aircraft engine and GE38 helicopter engine programs.

The MRO business covers all MTU’s commercial maintenance activities; these are organized under the umbrella of MTU Maintenance. The MTU Maintenance companies operate facilities in all the major markets and are collectively the world’s largest independent provider of commercial maintenance services. MTU Maintenance offers an extensive range of services and one-stop solutions, including the repair and overhaul of aircraft engines and industrial gas turbines. The main programs are the V2500 for the Airbus A320 family, the CF6 deployed in widebody jets such as the A330 and the Boeing 747, the CF34 business and regional jet engine, and the LM series of gas turbines. Customers include airlines and stationary gas turbine operators all over the world.

MTU Aero Engines Holding AG is the parent company of the MTU group; its functions are largely those of a holding company. MTU Aero Engines Holding AG owns a 100 % interest in MTU Aero Engines GmbH. MTU Aero Engines GmbH in turn holds interests in German and international affiliates. The percentage shareholdings are indicated in the chart below, which shows the structure of the group.

The operating activities of the MTU group are concentrated in MTU Aero Engines GmbH and the affiliated companies in which it holds a direct or indirect interest.

MTU Aero Engines Holding AG and its affiliates have a worldwide presence in all the most important markets and regions.

The global network of affiliates and associated companies, the maintenance business and the research and development activities are all controlled from the company’s central offices in Munich, which is also the location of its main manufacturing site. This facility also develops, manufactures, assembles, tests and markets commercial and military engine components and modules, develops new manufacturing processes and repair techniques, and assembles and repairs military engines.

MTU Maintenance Hannover, based in Langenhagen, is the largest plant in the MTU Maintenance network. It supports mid-sized and large commercial engines and provides services such as customer training and a 24-hour service.

Small engines and industrial gas turbines are supported by MTU Maintenance Berlin-Brandenburg. At its Ludwigsfelde site near Berlin, the company also assembles and tests the TP400-D6 production engines for the A400M military transporter.

In the fast-growing Asian market, MTU has teamed up with joint venture partners in two different countries to improve the market position: MTU Maintenance Zhuhai is a joint venture with China Southern Airlines, the country’s largest airline. The 50 % interest in the jointly controlled entity is proportionately consolidated in the group financial statements. The company specializes in the maintenance of V2500 and CFM56 engines. Airfoil Services Sdn. Bhd. (ASSB) in Malaysia is a 50:50 joint venture with Lufthansa Technik. It repairs low-pressure turbine blades and high-pressure compressor blades.

MTU has three affiliates in North America, the world’s biggest engine market. MTU Aero Engines North America (AENA), based in Newington near East Hartford, Connecticut, develops and manufactures components for aircraft engines and industrial gas turbines. MTU Maintenance Canada, based in Richmond near Vancouver, specializes primarily in the maintenance of auxiliary units and of CF6-50 and CFM56 engines. The third American MTU affiliate, Vericor Power Systems, markets, distributes and supports aero-derivative gas turbines for marine and industrial applications from its base in Atlanta, Georgia.

MTU Aero Engines Polska was founded in May 2007. The new company will develop, manufacture and repair engine parts at the new MTU location in Rzeszów, southeastern Poland, from mid-2009 onward.

MTU Aero Engines Finance B.V. is the financing entity within the MTU group. It was through the intermediary of MTU Aero Engines Finance B.V. that MTU Aero Engines Holding AG transacted its € 180.0 million convertible bond issue in January 2007.

MTU is a member of several management consortia for engine programs. These are, in the commercial sector, the International Aero Engines AG (IAE) consortium for the V2500, and in the military sector, Turbo Union Ltd. for the Tornado’s RB199 engine, Eurojet Turbo GmbH for the Eurofighter’s EJ200 engine, MTU Turbomeca Rolls-Royce GmbH for the MTR390 and MTU Turbomeca Rolls-Royce ITP GmbH for the MTR390 Enhanced, and finally Europrop International GmbH (EPI) for the A400M military transporter‘s TP400-D6 engine.

MTU has drawn up a written code of conduct that clearly defines, among other things, the basic principles to be applied when dealing with customers, suppliers, and colleagues. More information on the non-financial performance indicators employed by MTU can be found in the company’s human resources report.

MTU’s aims are unswervingly geared towards strengthening the company’s strategic position and continuing to expand its lead through targeted, profitable growth. MTU is one of the world’s leading engine manufacturers and the largest independent provider of commercial MRO services. Its key objective is to improve competitiveness and systematically work towards the company’s projected growth targets.

MTU pursues a long-term growth strategy in every line of business. In order to meet its set revenue and earnings targets, in both the OEM and the MRO sectors, the company systematically orients its activities towards the engine programs that offer the best opportunities for future business success.

All MTU business segments are primed for market growth – the prospects of which are by no means diminished, even though it may take longer to arrive in view of the current global economic crisis. The company already holds a large share of the service and MRO markets, and has paved the way to further sustainable growth with its forward-looking program portfolio, well-established and durable customer relationships, motivated workforce, and global structures to reinforce its position in the major growth markets.

In the light of progressive global warming and spiraling kerosene prices, the development of future generations of engines focuses more than ever before on environmental compatibility and cost-efficiency. MTU is closely cooperating with partners from research and industry to develop and implement innovative, environment-friendly propulsion systems; examples include the geared turbofan and the Claire engine concept. In the engine maintenance sector, too, MTU plans to extend its technological leadership by developing innovative, cost-effective repair techniques.

Investment in large-scale programs with a high growth potential is a key factor in securing the company’s profitability and competitive strength over the long term. The long lifecycles typical of the aero engine business make it essential to gain early entry to the most promising aircraft and engine programs.

The top priority for MTU’s commercial engine business is to obtain a stake in the new engine programs for the successor aircraft to the A320 and B737 families and for planned long-haul airliners. Gaining entry into the GEnx program is one example. MTU is already well positioned in the market for large business and regional jets with the MRJ, and at the lower-capacity end of the market for short- and medium-haul aircraft, for instance with the Bombardier CSeries. The company has made the appropriate overtures to the OEMs in question and made budgetary arrangements for the necessary funding.

In the military sector, as well as generating further export business for existing programs, MTU aims to make further investments in U.S. American programs. The breakthrough into the U.S. military market was achieved when MTU was awarded a share in the GE38 engine for the next generation of heavy-lift helicopters. The company’s strategy for the military business is to compete successfully for a share in the few existing modern programs and to augment its share of the stagnating military market by offering new, innovative products.

MTU’s commercial maintenance activities are concentrated on increasing the company’s market share of existing, successful programs such as the V2500, PW2000, CF6, and CF34, and acquiring stakes in additional widebody airliner programs with attractive growth prospects. In the industrial gas turbine (IGT) market, the company has developed new service concepts that are meanwhile ready for market.

The measures initiated by MTU in 2006 to optimize its economic competitiveness resulted in significant cost savings in 2008. Through its recently introduced Challenge 2010 program, MTU aims to generate additional annual cost savings of € 50 million from 2011 its Challenge 2010 program onward. The company is pressing ahead with the development of its new facilities in Poland and the introduction of local centers of competence for engine repairs. Moreover, further steps to boost productivity and optimize manufacturing processes are being taken in all sections of the company.

MTU intends to study the options of expanding into lines of business close to its present core activities, with a view to achieving its objectives and further improving its competitive strength. As soon as profitable, expanding markets have been identified, MTU will make the necessary investments to offer corresponding products and services.

MTU regularly investigates the potential of attractive acquisition opportunities that promise to contribute towards its growth targets. Additions to the group’s portfolio serve to strengthen its engine development and manufacturing activities, secure access to the requisite technologies and maintain competitiveness. A further objective is to gain entry into specific markets that will enable MTU to establish its own presence in the growth areas of the future. Through cooperation with airlines, the company also assures itself of additional avenues to profitable growth in the maintenance sector.

Three value-driven performance indicators – return on investment, free cash flow, and revenues/EBITDA – delimit the range within which MTU operates in terms of growth, profitability and liquidity. The main instruments employed to ensure compliance with this integrated control system are:

• Regular Board of Management meetings held at two-weekly intervals
• Liquidity development
• Monthly reports by the business segments
• Central committees dealing with investments, acquisitions and human resources, and group-wide committees on quality issues, health and safety, and environmental protection
• Risk and opportunity management

To increase revenues is the starting point of almost any company’s performance ambitions, with the aim of achieving substantial growth.

Operating profit or EBITDA (adjusted) is the second most important performance indicator. Any increase in EBITDA is a measure of the enterprise’s short-term business performance and reflects the results of the individual business segments. Another indicator monitored by the company is the EBITDA margin, which expresses the relationship between EBITDA and total revenues. This ratio makes it possible to compare the profitability of differently sized operating units.

MTU’s aim is to outperform the return on investment expected by shareholders on the basis of general capital-market trends (shareholder return). The expected return is measured as a function of the cost of capital, averaged to account for both debt capital and equity capital, i.e. the weighted average cost of capital (WACC). The cost of equity capital is calculated using the capital asset pricing model (CAPM), in which a risk premium to cover market risk and a beta factor derived from a peer-group analysis are added to the risk-free return. The cost of debt capital is determined on the basis of the weighted cost of borrowing, which takes into account the deductibility of the capital costs. Every investment is required to generate a return (interest) at least equivalent to the WACC. The business portfolio is optimized by concentrating on those investments that can be expected to produce the highest return in the medium term.

The group uses the expected return in two ways: Firstly as a central value-oriented performance indicator representing an absolute measure of the added value contributed by the operating segments and the individual engine programs, and secondly as a key target to ensure that all operating activities will contribute towards increasing the value of the company. Since the aim is to generate added value, this means that the group must always earn interest at least equivalent to the cost of capital.

MTU uses two indicators to monitor its performance with respect to this target: Return on capital employed (ROCE) and earnings before interest and tax (EBIT adjusted). The use of ROCE and the relative value contribution – the difference between ROCE and cost of capital – to track this target is based on the underlying assumption that the value of the company will increase as long as a sustainably positive value contribution is being achieved. ROCE represents the global return on investment before tax. It is a relative measure of how efficiently the group is employing its capital resources to generate revenues, obtained by comparing the average EBIT (adjusted) with the average value of its operating assets, adjusted to eliminate the effect of purchase price allocation (PPA).

ROCE in 2008, at 37.6 %, was lower than in the previous year (38.9 %). This is attributable to the improvement in EBIT (adjusted) to € 18.4 million combined with an increase in fixed assets (an element of capital employed) due to the company’s share of the development costs for the GE38 helicopter engine and the purchase of a stake in the GEnx engine program amounting to a total of € 174.1 million (2007: € 0.0 million). The generated ROCE consequently exceeded the weighted average cost of capital (WACC) of 13.5 % (2007: 13.8 %) by 24.1 percentage points.

The resulting contribution to the value of MTU amounts to € 212.1 million (2007: € 201.5 million), or 24.1% (2007: 25.1 %) when expressed as a percentage. The calculation of the cost of capital is described in Note 40. to the consolidated financial statements.

By optimizing its free cash flow, the company ensures that it will be able to maintain its financial assets into the future. Free cash flow comprises elements relating to operating activities (operating profit, changes in current working capital, and capital expenditure) and unrelated elements (financing expense, share of profit/loss of joint ventures, and taxes).

The enterprise strives to optimize free cash flow by increasing group revenues and operating profit. Additionally, a firm hand is applied in the management of the current working capital (WoC), given that MTU’s business activities require high capital expenditure on plant and inventories. Working capital is hence a crucial indicator for the group: It is the balance that remains after trade payables and prepayments have been deducted from the value of inventories, trade receivables and contract production receivables. By observing changes in this indicator, it is possible to track the way in which working capital varies as a function of business cycles. In order to ensure that these principles are firmly embodied in the group’s organizational structure, senior management has delegated the immediate responsibility for operating profit, working capital optimization and capital expenditure to the managers of the business segments.

As an incentive to business segment managers to focus their full attention on achieving sustainable improvements in the results of operating activities, senior management has decided that the performance-related portion of managers’ pay shall be linked to the development of operating profit and free cash flow.

In addition to its financial objectives, certain non-financial factors also play an important role in MTU’s success:

• Customer satisfaction
• Quality
• A motivated, highly trained workforce
• Operative performance
• Trust and confidence
• Flight safety
• Occupational health and safety, and environmental protection

The steadily growing mobility demands of billions of people, limited raw materials and the intensifying environmental problems call for innovative solutions. MTU’s established technological leadership in its core competencies of low-pressure turbines, high-pressure compressors, engine control and monitoring units and high-tech manufacturing processes and repair techniques forms the basis for further development of existing engine concepts and for new engine concepts like the geared turbofan.

MTU’s long-term goals with respect to the development of new engines for commercial air transport are in accordance with the European aviation industry’s voluntary commitment to the ACARE 2020 targets (Advisory Council for Aeronautical Research in Europe). These targets envisage a 50 % reduction in noise, 80 % reduction in NOX, along with a 50 % reduction in CO2 emissions for the aviation sector, with engines intended to provide a substantial contribution towards these cuts. MTU has launched its Claire (Clean Air Engine) technology program, a three-stage program designed, amongst other aims, to reduce CO2 emissions by up to 30 % by 2035 (see section Environmental report).

The requirements applicable to future engines for military applications are determined substantially by the specific features of propulsion systems for unmanned aerial vehicles (UAVs). Long range coupled with high thrust and low fuel consumption while operating close to the ground all call for innovative solutions.

Consequently, MTU has been playing a significant role in national and European studies, including the European Technology Acquisition Programme (ETAP). The focus of other ongoing work lies on reducing the cost of ownership and improving agility, for example through thrust-vector control.

The aim of development activities is to further enhance the added value of products and services for the customer. MTU’s standard is to offer competitively priced leading technological products and to clearly differentiate itself from competition. By continuous research and development, MTU has once more increased the efficiency and quality of its products in the year under review.

At € 181.6 million, MTU’s total expenditure on research and development in 2008 was above the previous year’s level (2007: € 176.4 million). R&D as a percentage of revenues, at 6.7 %, remained close to the previous year’s level. The following table shows research and development expenditure prior to the capitalization of development costs, together with the change in R&D as a percentage of revenues.

A distinction is made between company-funded and externally funded R&D expenditure. Company-funded expenditure originates from the group’s own resources. Such expenditure is examined to determine whether it meets the criteria for capitalization as a self-created intangible asset. In addition to meeting the general requirements for recognition and initial measurement as an intangible asset, the asset’s technical and commercial feasibility must be established and it must be possible to reliably measure the attributable costs. It must be probable that future economic benefits will flow from the intangible asset, that it is identifiable, and that it can be assigned to a specific engine program or product. Development expenditure that meets the criteria for capitalization is amortized over the expected production output expressed as a number of units. If it is not possible to reliably estimate the number of units to be produced, the capitalized development costs are amortized over the expected useful life of the self-created intangible asset. The amortization expense is included in the cost of sales. Company-funded expenditure is disclosed under ‘Research and development expenses’ in the consolidated income statement and in Note 8. to the consolidated financial statements. All costs attributable to the research phase of an engine project are expensed.

In 2008, company-funded R&D expenditure amounted to € 101.1 million and externally funded R&D expenditure to € 80.5 million. The increase in company-funded research and development expenditure relates predominantly to the OEM business and is attributable to the higher investment in new engine programs for the GE38, PW810, PW1217G and PW1524G. A total of € 6.2 million (6.1 % of company-funded R&D expenditure) was recognized as capitalized development costs.

Externally funded development expenditure relates to the military engine business and is accounted for as construction contracts in accordance with IAS 11 and disclosed under “Contract production receivables” due to the fact that the work is conducted under contract to national and international consortia on a customer-specific basis.

The following table shows company-funded R&D expenditure and the deductions made for capitalized development costs for the group as a whole and by business segment, together with the percentage of research and development costs recognized as expense and as intangible assets respectively.

The R&D expenditure meeting recognition criteria for intangible assets in the OEM business amounting to € 2.8 million (2007: € 0.0 million) relates to company-funded development costs for the GE38 engine program incurred after the acquisition of a stake in this engine program (see additional comments under “Capitalized development costs” below). The commercial MRO business has developed special repair techniques for more cost-efficient engine maintenance, for which a total of € 3.4 million (2007: € 4.3 million) was recognized as capitalized development costs.

In addition to the expenditure of € 6.2 million on company-funded R&D recognized as capitalized development costs, the following development assets were acquired in exchange for payment and capitalized in connection with the share of development costs resulting from MTU’s investment in the GEnx (General Electric next generation) engine program:

MTU acquired a 6.65 % stake in the strategically important future-oriented GEnx engine program through a cooperation agreement dated December 19, 2008 between the General Electric Company and MTU Aero Engines GmbH. This engine will power the Boeing 787 Dreamliner, the Boeing 747-8 intercontinental airliner and the Boeing 747-8 freighter version. MTU is to manufacture and assume design responsibility for the engine‘s turbine center frame. The company expects to deliver the first engine components towards the end of 2009. The investment in this new engine program amounting to € 126.1 million has been recognized under program assets.

MTU’s 18% stake in General Electric’s GE38 helicopter engine program represents the first time that the company has been awarded full development responsibility for a module of a U.S. military engine program. The engine’s first application will be in the Sikorsky CH-53K heavy-lift helicopter. MTU is supplying the power turbines and is also responsible for the maintenance, final assembly and testing of the GE38 models for the future European Heavy Transport Helicopter (HTH). The first ground trials of this 5.595 kW engine are planned for mid 2009. Development costs for this program amounting to € 45.2 million were capitalized for the first time in 2008 in respect of the military engine business. In addition to the development assets acquired in return for payment, company-funded R&D expenditure amounting to € 2.8 million (2007: € 0.0) was recognized as capitalized development costs in connection with the GE38 engine program. Consequently, a total amount of € 48.0 million (2007: € 0.0 million) was recognized as capitalized development costs in respect of MTU’s share in the GE38 helicopter engine in the financial year 2008.

MTU is focusing on the development of an engine family that encompasses the geared turbofan and the PW810 program. The distinctive feature of this family is that the engines employ similar modules and identical parts, which reduces development costs and ultimately manufacturing costs too. MTU is working together with Pratt & Whitney on the demonstrator engine and development programs for this new generation of commercial engines.

The advantage afforded by geared turbofans is their reduction gear, which decouples the fan from the remaining low-pressure system. This allows the components to run at different speed ranges, which up until now was not possible with conventional fans. The concept also enables the large fan to run at a slower speed and the low-pressure turbine at a higher speed, improving the efficiency of the fan and the low-pressure turbine while reducing the noise level and halving the number of stages in the turbine.

In July 2008, an important milestone was reached for this new generation of aero engines with the first flight of the geared turbofan demonstrator engine on the Pratt & Whitney flying test bed. During the 43 hours of flight tests on a Boeing 747SP, outstanding improvements in terms of reduced fuel consumption and lower noise emissions were confirmed. When the first flight tests had been completed, the engine was reconfigured in preparation for further flight testing on an Airbus A340. The first Airbus test flight took place in October 2008, followed by extensive performance testing in Toulouse, France and acoustic measurements in Moron, Spain. The flight testing on the A340 ran without a hitch and was successfully completed in 2008 after validating the engine’s target performance data.

MTU is also developing the high-speed low-pressure turbine for the production version of the geared turbofan and – in cooperation with Pratt & Whitney – a new high-pressure compressor, which successfully achieved its efficiency targets and demonstrated its operational readiness on the MTU compressor test bed in March 2008. Much of the technological groundwork for the geared turbofan originated at MTU.

Launch customer Mitsubishi Heavy Industries has selected the PW1217G geared turbofan as the exclusive engine for its new 70 to 90-seater MRJ regional jet. Bombardier intends to use a more powerful version of this engine, the PW1524G, as the sole powerplant option for its new CSeries 100 to 130-seater regional jet. Market launch of both airplanes is planned from 2013 onward. MTU has a 15% share in each of these two programs. The geared turbofan is also the optimal solution for the successors to the Boeing B737 and the Airbus A320 family in the short and medium haul category, and the distinct improvements it provides could be enhanced still further if development work were to continue on to a subsequent model.

The core engine of the geared turbofan has a third application in the PW810, a propulsion unit designed for heavy business jets with the launch customer being Cessna Citation Columbus. MTU also has a 15 % share in this program. The first flight is planned for 2011 and the first deliveries for 2014.

At the close of the financial year 2008, the recognition criteria that would enable the development costs for these engines to be capitalized had not yet entirely been met, on account of the lengthy development period.

Even the engines that MTU is currently introducing to the market show clear evidence of the progress being made with respect to meeting the ACARE targets. The GP7000 engine that powers the A380, for instance, is remarkable for its extremely low noise levels and economical fuel consumption. Key components of this engine, namely the low-pressure turbine and the turbine center frame, were developed by MTU. The GP7000 engine program achieved all specified technical objectives at one go, enabling the first engines to be delivered in July 2008 to the launch customer, Emirates.

MTU conducts research and development work on innovative, program-independent technologies for compressors, turbines, engine control and monitoring systems, manufacturing processes, and repair techniques. With few exceptions, the related R&D expenditure was ineligible for capitalization at the time it was incurred, due to the fact that the research phase could not be clearly distinguished from the development stage and the technical and commercial feasibility has not yet been adequately established.

The main focus of development activities for military applications was on the TP400-D6, the most powerful turboprop engine in the Western world, built for the Airbus A400M military transporter. MTU’s contribution to this three-shaft engine is the entire intermediate pressure section, comprising the IP compressor, IP turbine and spool. MTU is also developing the engine and propeller control system in cooperation with French partner Snecma. In January 2008, four engines were delivered to Airbus for flight testing. A further engine successfully completed ground tests on a Hercules C-130 that had been converted into a flying test bed. In May 2008, the TP400-D6 passed the critical “large bird strike” test, which involves a direct bird strike hitting the medium-pressure compressor. The MTU compressor did not suffer any critical damage and was safely shut down as required by the certification authorities.

At December 31, 2008, MTU’s industrial property rights portfolio contained 771 families of patents, 672 of which relate to the OEM business (turbines, compressors, engine systems, and manufacturing processes) and 99 to technologies of relevance to the commercial MRO business. Industrial property rights (patents and utility models) were registered to protect inventions and developments in essential areas of technology.

On average 766 MTU employees (2007: 715) were engaged in R&D activities in the financial year 2008. This represents 10.5 % of the group’s average total workforce (2007: 10.1%). The table below shows the changes in the average number of R&D employees.

MTU also studies issues concerning long-term technological developments and participates in fundamental research projects in collaboration with universities of applied science, institutes of technology, research institutions, competence centers and industrial partners.

At December 31, 2008, MTU employed a total of 7,537 staff, 309 of whom were trainees and apprentices. The number of employees was 6 % higher than at December 31, 2007. This increase is largely attributable to the worldwide expansion of the MRO business, targeted reinforcements in OEM business activities and the construction of the new plant in Poland. MTU’s personnel expenses increased to € 503.2 million compared with € 470.9 million in 2007. Further details are provided in Note 17.2. to the consolidated financial statements.

The increase in the number of foreign employees working for MTU reflects the internationalization of the group’s activities. At December 31, 2008 MTU employed a total of 804 staff in its plants and representative offices outside Germany, compared with 607 at the end of the previous year. A total of 6,733 employees (2007: 6,523) worked at German locations.

It takes a well trained and highly skilled workforce to develop, manufacture and maintain aero engines. MTU therefore attaches great importance to keeping its employees’ knowledge up to date and regards education as an investment in the future. Educational activities focus mainly on engineering, quality, industrial safety, protection of the environment and language skills.

Staff training measures also have an essential part to play in setting up the new production site in Rzeszów, Poland. Approximately 60 percent of the employees recruited to work at the new site have previous professional experience in the aerospace industry. This provides them with an excellent basis for obtaining the more advanced qualifications that will permit them to work as test engineers, controllers or quality engineers. 140 employees have been trained in work processes and quality standards with the help of German-Polish mentors at the three German plants.

With its Junior Entrance and Trainee program (JET), MTU has created a new instrument ensuring that new members of staff acquire the necessary skills. JET provides good prospects for people starting out on their careers because the 18-month program is based around those departments that need to recruit new staff. Before starting out on the program, a specific target post is identified for each of the participants, allowing them to make the appropriate preparations and pursue their own personal development plan until such time they take up their post.

The number of people to be found on the international employment market with the specialist knowledge and necessary experience for dealing with the production and maintenance of modern engines is relatively small. Training is therefore a key strategic element in MTU’s structured approach to building up a future supply of qualified workers and maintaining the company’s competitive edge. Increasing the number of apprenticeships in technical fields and providing employees with opportunities for further training systematically increases the availability of suitably qualified employees within the company and safeguards MTU’s specialist expertise. The number of trainees pursuing technical apprenticeships and participating in dual study programs increased sharply in 2008: With a total of 301 apprentices at its German sites, MTU’s apprenticeship quota reached almost 5 %.

The attractive working environment and the wide range of opportunities for further training are key reasons for the low staff fluctuation at MTU. As in previous years, the fluctuation rate for 2008 was 4.4 % (overall figure for Munich, Hanover and Berlin). The number of voluntary departures by administrative employees was even lower than 1 % (Munich). A clear sign of employee satisfaction is the fact that, once again, MTU was selected as one of the TOP 100 employers. In conjunction with the geva-institut, the job magazine “karriere” (published by the Handelsblatt group) carries out a comprehensive study every year to assess German employers. MTU has participated in the study since 2007 and has once again improved on its position. In the latest ratings, MTU was awarded 28.5 out of a possible 30 points, thereby reaching 13th place among the best German employers.

The online employee satisfaction survey is an important source of feedback and information for MTU. The response rate of over 70 % demonstrates the high degree of motivation of MTU employees. Good communication at the preparation stage and consistent support from all management levels have helped to achieve this high level of interest. The survey is carried out every two years. Containing 47 questions, the questionnaire used in 2008 was similar to the one first used in 2006, thus enabling a direct comparison of results. The majority of employees gave MTU a positive rating for competitiveness and pay. Leadership and employee involvement emerged as areas for potential improvement. These findings will be incorporated into a comprehensive change process.

The profit sharing scheme devised in 2007 for all categories of staff (working under collective bargaining agreements and freely negotiated contracts) was implemented for the first time in 2008. This means that a consistent system for assessing performance is now in place at all levels of the enterprise. The bonus system is based on the success of the company as a whole as well as on the individual’s performance in his/her own area. The key for determining the level of bonuses is the attainment of MTU’s targets, measured in terms of operating result and free cash flow. Further aspects of this important component of remuneration were agreed upon by the end of the year.

In 2008, MTU introduced its stock option program for employees as a means of promoting loyalty to the company and enhancing its attractiveness as an employer. MTU matches the amount invested by employees at a rate of 50 %, subject to a vesting period of two years. The total amount invested by all employees was approximately € 4.9 million. Further information on this subject is provided in Note 30.4. to the consolidated financial statements.

In the light of the developments taking place in the field of aviation, MTU attaches great importance to the long-term nature of its human resources (HR) strategy. Demographic change, the efficient organization of HR processes and the expansion of MTU are the three most important strategic factors.

Generating added value remains the prime objective of HR activities, with the focus on enhancing MTU’s attractiveness as an employer, maximizing organizational flexibility in order to be able to respond quickly to changing requirements and reducing personnel expense. Well-targeted measures helped MTU to make good progress in all of these areas in 2008.

Well-qualified, motivated employees constitute MTU’s most valuable resource and their safety and security are therefore a top priority. The objectives, measures and responsibilities relevant for health and safety at work are clearly defined within a group-wide management system. Internal and external audits are regularly performed to check the effectiveness and current status of all health and safety measures and to identify points for improvement. Thanks to these measures, the number of workplace accidents remained at the low level of 4.1 per 1,000 employees in 2008; at the end of the 1990s the figure was twice as high.

MTU’s health management program provides all employees with access to medical staff on site and also to counselors specializing in support with regard to social, communication and mental health issues. In addition to providing treatment in acute situations, the on-site doctors also offer a wide range of preventive healthcare measures.

Those involved in health management also permanently endeavor to make improvements. MTU has been part of the “Enterprise for Health” (EfH) network since 2004 in an effort to develop and establish a comprehensive health concept throughout the company. 19 European companies have joined forces to create networks and define benchmarks relating to health, employee motivation, a business culture based on cooperation, and economic development.

At an early stage, MTU identified the importance of being able to combine family and career as a factor influencing a company’s appeal as an employer. Since 2001, the company has allowed regular audits relating to career and family to be carried out by the Hertie-Stiftung. MTU was awarded its certificate once again in 2008. Whereas in the past the emphasis was mainly on developing and reinforcing family-friendly structures and regulations, the focus for the next three years will be directed towards encouraging more staff to take up existing offers. These objectives are especially relevant in terms of corporate culture and leadership and should enable employees to make better use of existing structures and arrangements. Further information on MTU‘s human resources activities is available in the separate Human Resources Report 2007/2008.

For MTU, involvement in society does not end at the factory gate; it goes further, permeating into the environment beyond its work sites. MTU supports local and regional associations, organizations and institutions as a benefactor, sponsor and network participant.

For example, the company works in cooperation with schools in the areas near to its German sites. Pupils are given topics for home assignments and offered work experience with the aim of helping young people to decide on a career and become interested in technology at an early age.

MTU has set up the “Social Step” program for its management staff. Managers spend two weeks working in a social field – for example at the railway mission or in a hospice – in order to gain valuable experience for themselves and their work.

MTU is actively involved in scientific development and research. For decades, cooperation arrangements with universities and research establishments have been a major component of MTU’s research and development activities. Strategic working alliances have been built up with expert research partners in order to strengthen links with universities and safeguard MTU’s innovative capabilities. Cooperation arrangements with leading German universities and research establishments have been stepped up over the past years with the establishment of six centers of competence. Each center specializes in a particular area of research, such as compressors or repair techniques.

MTU actively supports the networks of universities and research establishments specializing in relevant technological areas. Engine prototypes are made available to universities and colleges, MTU experts hold lectures and act as mentors for those carrying out experimental projects or writing diplomas and doctorates; students are given active support whilst carrying out their assignments and final theses. The company awards the Heilmann prize every year to a young scientist who merits recognition for achievements in engine technology.

Bauhaus Luftfahrt is a further MTU initiative. In conjunction with the Bavarian government, EADS and Liebherr-Aerospace, MTU founded this registered association in 2005. It is a think tank whose task it is to apply interdisciplinary working methods to develop concepts for aviation in the future and to strengthen cooperation between research and industry.

Environmental issues and challenges associated with the onslaught of globalization have turned environmental and resource protection into an increasingly important issue nationally and internationally. For the MTU group, responsibility for the world outside is not a compulsory exercise but part and parcel of the responsibility the company assumes for its employees, customers, partners and neighbors. Open dialog with customers, partners, government agencies and neighbors forms an integral part of the company ethos.

Protection of the environment is among its fundamental corporate goals and is firmly enshrined in the corporate philosophy. The corresponding actions are implemented by means of an integrated management system and constantly fine-tuned as part of continuous improvement. Implementation is in harmony with the other corporate goals and subject to regular Board of Management scrutiny. The responsible use of resources and materials as well as the development of eco-friendly, low-emissions aero engines remains a primary aim.

Stringent environmental criteria are applied to all processes and systems – starting with development through production to the maintenance of aero engines – that meet statutory requirements as an absolute minimum. Based on these criteria, MTU-internal standards are derived that are binding for all group locations. Their compliance is regularly checked and certified by internal and external audits in accordance with DIN EN ISO 14001 – and also in accordance with the Regulation of the European Parliament and Council EMAS (Eco Management Audit Scheme) at the German locations in Munich and Hannover. MTU’s integrated management system ensures that measures to protect the environment are reviewed and enhanced as part of the process of continuous improvement. Progress with respect to targets is regularly assessed by the Board of Management and the results of these assessments are published in the sites’ environmental impact statements. This commitment extends even further. For instance, MTU Aero Engines, Munich is a signatory to the Bavarian Environmental Pact and supports environmentally friendly measures adopted by the Bavarian government and the City of Munich.

One of MTU’s key environmental protection aims is to save resources. Take, for example, the reuse of engine parts after repair. Thanks to new methods and processes around 70 % of all engine blades are reused two, three or even four times. Standard practice includes using fewer resources by reducing the consumption of raw materials and energy through the direct recycling of materials in the original loop. In this area, too, MTU is making great efforts to combat climate change. Given the present high energy prices, these measures have the added advantage of improving MTU’s cost-efficiency.

Together with the leading aeronautical companies, MTU has committed itself to implementing the long-term environmental targets for aircraft defined by ACARE (Advisory Council for Aeronautical Research in Europe): CO2 emissions are to be halved by 2020 (with engines expected to contribute 20 %) and NOx emissions reduced by 80 %; noise levels are also to be halved.

MTU’s involvement in the GP7000 engine for the Airbus A380 represents the first step towards achieving these targets. A combination of advanced aircraft design and turbofan technology has enabled a reduction in specific fuel consumption from the current average of 4.3 liters per passenger per 100 km to 2.9 liters. MTU is responsible for providing, among other things, the key component for the GP7000: the low-pressure turbine. Efficiency of over 93% has been achieved for the first time in this respect.

MTU’s longer-term answer to the ACARE targets is the Claire (Clean Air Engine) technology program: In three stages between now and 2035, carbon dioxide emissions are to be cut by 30 % and perceived noise halved. This will be achieved through a combination of counterrotating geared turbofan and heat exchanger.

A key contribution to improving aero engine concepts will come from fine-tuning the technology used in the MTU components in order to exceed the current benchmarks for efficiency, weight and component load. Efficiency in excess of 90 % and weight reduction of at least 20 % have been achieved with the high-pressure compressor. And efficiency of over 93 % and weight reduction of 25 %-plus are sought with the IP turbine. Key technology areas include the continual improvement of 3D aerodynamics, more advanced materials and new designs. Enhanced efficiency and lower weight dramatically reduce fuel consumption.

MTU is also participating in the “eco-efficient flying” beacon program set up by the German Aerospace Industries Association (BDLI). Its aim is to make emissions-neutral flying a reality by the year 2050. The necessary technologies, including alternative fuel sources, are being defined in a coordinated action plan, and responsibilities are being allocated for different parts of the program. Air travel on terms that meet the needs of modern society will thus still be assured in an era of tightening environmental standards and depleted crude oil reserves.

The elimination of environmentally harmful production and repair processes and materials will also contribute substantially to reducing the environmental impact of future products. This includes a ban on the use of mercury, cadmium and chromate in materials used for components, joints and coatings.