Annual report 2008

The group tests goodwill for impairment annually. The value in use of each of the two cash generating units or business segments – commercial and military engine business (OEM) and commercial maintenance business (MRO) – at June 30, 2008, was calculated in order to determine their respective recoverable amounts. The recoverable amount determined for each business segment was compared with the corresponding carrying amount.

The calculations are based on the following assumptions:

• These calculations are based on the planned EBIT for each of the two business segments.
• The future free cash flows are then derived from the planned cash flows (cash in-flows and outflows are planned without reference to financing activities or taxation)
• an analysis of possible changes to the planned cash flows, in respect of both the amount and the timing
• The variables that enter into the calculation of weighted average cost of capital (WACC) before tax are: risk-free base interest rate, entrepreneurial risk (market risk premium multiplied by a beta coefficient based on peer group analysis), perpetuity divided by discount rate less growth rate, costs of debt capital and the group’s capital structure

The WACC is measured as a function of the cost of capital, averaged to account for both debt capital and equity capital. The cost of equity capital is first calculated after taxes. For this purpose MTU in 2008 used a risk-free base interest rate of 4.75 %, a market risk premium of 5 % and a beta coefficient of 1.13 based on peer group analysis. The cost of debt capital was 3.9 % after taxes. The tax rate applied to determine the result before taxes was set at 32.6 %. The relationship of equity capital to debt capital was 78% to 22 % respectively. A growth rate of 1 % was subtracted from the above discount rate to determine the present value of the perpetuity.

The detailed forecasting period for the projected EBIT and cash flow figures to determine the value in use covers the three-year period from 2009 to 2011 for which detailed operating forecasts were available. The annual revenue growth rate of the perpetuity after the end of this planning period was extrapolated from these figures on the basis of sustainable cash flows. For both business segments, these cash flows were determined with reference to projected earnings before interest and tax (EBIT) for the ultimate year of the planning period (2011), assuming a sustainable reinvestment ratio for intangible assets and property, plant and equipment.

The calculations present no indications at the present time which could lead us to the conclusion that an impairment loss on goodwill for either of the business segments is necessary.

In order to take account of current developments in connection with the crisis on the financial markets and their corresponding volatility, a new calculation of capital costs was carried out on November 13, 2008. Within the scope of determining their value in use, the updated weighted cost of capital produced no other result for the business segments “Commercial and Military Engine Business” and “Commercial MRO”: the value in use exceeded the carrying amount of the respective business segment also after applying the updated costs of capital. Within the framework of this updated calculation of costs of capital, no change was made to the date of valuation; no new determination of value in use was carried out based on the company‘s planned figures on the valuation date.

The group makes estimations and assumptions relating to future events and conditions. These estimations and assumptions, which imply a significant risk in the form of possible major adjustments to the carrying amounts of assets and liabilities during the next financial year, are discussed in the following sections.

Sensitivity analyses were carried out to determine the possible impact that a sustainable reduction in planned earnings before interest and tax (EBIT) might have on the goodwill amounts allocated to each of the two segments. This analysis included sensitivity factors affecting the calculation of the weighted average cost of capital (WACC).

Assuming a weighted average cost of capital (WACC) of approximately 13 %, the sensitivity analyses concluded that this would not result in any necessity to recognize an impairment loss on goodwill for the respective business segment, even in the event of a long-term reduction in EBIT ranging to 20 % below the earnings forecast established by management for the OEM segment and 10% below the earnings forecast established by management for the MRO segment.

The following sensitivity analysis tables present scenarios of deviations from planned EBIT targets to illustrate under what conditions the value of goodwill for commercial and military engines (OEM) and for commercial maintenance (MRO) would have to be adjusted. Assuming that the WACC remains unchanged, an impairment of goodwill for the OEM segment would first then be indicated by a drop in operative results (EBIT) of 30 % against planned EBIT figures. In MRO business, initial indications of impairment would only then occur if the operative result (EBIT) deviated from EBIT planned figures by around 20 %.

MTU is exposed to credit risks, market risks, and liquidity risks with respect to its assets, liabilities and forecast transactions. The objective of financial risk management is to minimize these risks by means of current financing related activities. This involves the use of selected hedging instruments, depending on the estimated degree of risk exposure. Hedging is principally used to ward off risks affecting the group’s cash flow. Hedging transactions to minimize credit risk are concluded exclusively with banking institutions possessing a credit rating of A- or better.

The group’s basic financial policy guidelines are defined at annual intervals by the Board of Management and monitored by the Supervisory Board. The responsibility for implementing the agreed financial policy and performing ongoing risk management lies with the group’s Treasury Board. Certain transactions require the prior approval of the Board of Management, whose members are kept regularly informed of the extent and amount of current risk exposure.

MTU is exposed to a number of credit risks arising from its operating and financing activities. Outstanding payments in connection with operating activities are constantly monitored on a decentralized basis, i.e. by the business segments. Credit risk is accounted for by means of specific and general allowances. The consortium leaders in the commercial engine and spare parts businesses have extensive receivables management systems in place.

In the commercial MRO business, the responsible MTU departments track open accounts receivable in short cycles. Before a deal is finalized, potential risks are assessed and any necessary precautions are taken.

In the case of derivative financial instruments, the group is also exposed to a credit risk which arises as a result of contract partners not fulfilling contractual agreements. In the context of financing activities, this credit risk is diminished by ensuring that business is conducted only with partners with a credit rating of A- or better. For this reason, the general credit risk resulting from derivative financial instruments used is not considered to be significant.

There are no indications of any concentrations of credit risk arising from business relations, individual debtors, or groups of debtors.

The maximum credit risk is represented on the one hand by the carrying amounts of the financial assets recognized in the balance sheet (including derivative financial instruments with a positive fair value). In this case, there are no material agreements existing at the balance sheet date which could reduce the maximum credit risk (for instance, an offset agreement). On the other hand, MTU is exposed to a liability risk and hence potential credit risk as a result of obligations assumed in connection with risk- and revenue-sharing partnerships and the associated contingent liability. At the balance sheet date, proportionate shares of contingent liability under risk- and revenue-sharing partnerships totaled a nominal amount of € 57.2 million (2007:€ 73.1 million). In addition to these contingent liabilities, the group also held guarantees issued for group companies amounting to € 85.0 million (2006: € 41.5 million).

Transactions in the commercial engine business with key customers in the framework of risk- and revenue-sharing partnerships are subject to special creditworthiness monitoring, because transactions with these partner companies represent a substantial part of the total risk exposure. After volume production of an engine has ceased, there is a risk that expected spare parts sales might not be realized.

A number of different European countries award engine development and production contracts to MTU via the consortia of which it is a member. Here there is a possibility that unit volumes may be reduced or entire production batches of an engine may be cancelled. MTU is additionally exposed to the risk of loss of sustainable spare parts sales.

Accounts receivable, especially those from airlines, are secured by a supplementary credit insurance covering approximately 30 % of the outstanding amount on each contract. Any excess receivable amount over and above that covered by the credit insurance thus represents a credit risk.

More than 80 % of MTU’s revenues are generated in U.S. dollars. Approximately half of this currency risk is offset in the normal course of business by costs incurred likewise in U.S. dollars. Most other costs are incurred in euros (€) and in Chinese yuan renminbi (CYN), and to a lesser extent in Canadian dollars (CAD) and Polish zloty (PLN). Consequently, earnings are dependent on changes in the exchange rate parity between the U.S. dollar and the cited currencies from the order date to the delivery date, in the measure to which MTU does not make use of financial instruments to hedge against its current and future net exposure. In line with MTU’s policy of generating profit solely on the basis of its operating activities and not through currency speculation, MTU makes use of hedging strategies for the exclusive purpose of controlling and minimizing the effect of U.S. dollar exchange rate volatility on EBITDA (or from financial year 2009 onward: EBIT).

Since MTU employs financial instruments merely to cover net exposure, the portion of the group’s U.S. dollar income that is not hedged by means of financial instruments is exposed to exchange rate fluctuations. The remaining, unhedged part of that U.S. dollar income, is affected by changes in the spot rate up to the time of payment.

Translation differences resulting from the translation of annual financial statements into the group’s functional currency are not included.

For accounting purposes, MTU designates future cash flows (forecast transactions) as hedged items to reduce the expected net currency risk exposure. As a result, postponements or cancellations of business transactions and the associated cash inflows do not affect the hedging relationship as long as the actual gross inflow of a foreign currency (per month) exceeds the hedged amount.

To minimize currency risk, MTU principally employs forward foreign exchange contracts forming part of an effective cash flow hedging relationship, as defined by IAS 39, to hedge exposure to variability in cash flows due to exchange rate fluctuations. In doing so, MTU complies with the strict requirements of IAS 39 concerning hedge accounting. Changes in the exchange rate of the currency in which the effectively hedged transactions are denominated have an impact on the fair value of these transactions and hence on the hedge reserve recognized in equity. The ineffective portion of the change in value of the hedging instrument is recognized in the income statement under ‘financial result on other items’. If, contrary to standard practice at MTU, an instrument does not qualify for hedge accounting, then the change in fair value of the hedging transaction is also recognized in the income statement. A certain residual currency risk remains open to exposure, however, since the group’s internal policy guidelines only prescribe the hedging of the most significant, individually identified cash flows.

At December 31, 2008, MTU held forward foreign exchange contracts for a contractual period up to May 2011 to sell a nominal volume of U.S. $ 880.0 million (which translates to € 632.3 million at the exchange rate prevailing at the balance sheet date) at futures rates for a total of € 619.9 million. Changes in the fair value of the forward foreign exchange contracts amounted to € -29.1 million (2007: € 2.1 million).

A gain of € 22.4 million (2007: € 28.8 million) from effective forward foreign exchange contracts realized in the financial year was recycled from equity to revenues. The total amount of the ineffective portion of the fair value of hedging transactions in 2008 was recognized in the financial result as a gain of € 0.4 million (2007: € 1.7 million). At December 31, 2008, net of deferred taxes, fair value losses on forward foreign exchange contracts amounting to € -11.5 million (2007: € 17.6 million) were recognized directly in equity (see consolidated statement of changes in equity).

At December 31, 2008, MTU had hedged cash flows amounting to € 880.0 million for the period 2009 – 2011 (2007 for the period 2008 – 2009: € 305.0 million) by means of forward foreign exchange contracts. The following graph shows the changing balance of the U.S. dollar hedge reserve based on forward foreign currency transactions together with its planned utilization as a hedge against currency risk for forecast cash inflows over the next few years.

On the basis of the increases and decreases in the hedge reserve in 2008, the graph illustrates how changes in the fair value of the effective portion of open financial instruments (forward foreign exchange contracts) are recognized directly in equity, while changes in the fair value of the ineffective portion of the financial instruments are recognized in the income statement under “financial result on other items”. When the contracts become due, the effective portion of the financial instruments is recognized in revenues, while the ineffective portion is recognized under “financial result on other items”.

The nominal amounts of derivative financial instruments used to hedge against currency risk are shown below grouped by contractual period:

There are no forecast transactions for which cash flow hedges were recognized in prior periods that are not expected to occur.

As a further element of its risk management strategy, MTU employs the following derivative financial instruments which do not form part of a hedging relationship as defined by IAS 39.

This type of transaction (commonly referred to as „plain vanilla options“) enables MTU to sell a defined quantity of U.S. dollars at agreed euro exchange rates on a range of different dates. The risk of loss from these transactions is limited to the premiums that have already been paid.

In addition to plain vanilla options, the group also holds structured products as a currency hedge that allow a minimum quantity of U.S. dollars to be sold at fixed exchange rates. These products present the risk that if the value of the euro should fall against the U.S. dollar the group will be obliged to sell a greater quantity of U.S. dollars at the previously agreed exchange rate.

The group also holds a structured product as a currency hedge that allows the company to sell, or under certain circumstances obliges the company to sell, a minimum quantity of U.S. dollars at fixed exchange rates. The maximum volume to be exchanged in these transactions in the financial year 2009 amounts to U.S. $ 240 million. Such products present the risk that if the value of the euro should fall against the U.S. dollar the group will be obliged to sell a greater quantity of U.S. dollars at the previously agreed exchange rate. The product comprises twelve individual currency option transactions for each month from January to December 2009. Should certain exchange rate parities be exceeded on the agreed due dates, MTU is obliged to sell USD to the contracting bank at a firmly agreed USD/€ exchange rate.

A currency holding of a fixed amount of U.S. dollars was sold during the financial year 2008 at the daily rate. The same U.S. dollar amount was repurchased after an agreed period at a previously agreed, fixed exchange rate that differed only marginally from the earlier selling rate. This swap is not material to MTU from the point of view of risk. There is no further currency risk beyond that of the currency holding.

Currency risks that do not affect the group’s cash flows (risks arising from the currency translation of the assets and liabilities of foreign group entities) are not hedged, because the risk involved is insignificant.

As part of the disclosures about market risk, IFRS 7 requires a sensitivity analysis showing the effects of hypothetical changes in relevant risk variables on profit and loss and equity. The periodic effects are determined by applying the hypothetical changes in the risk variables to the financial instruments held at the balance sheet date. This implies the assumption that the holding at the balance sheet date is representative of the whole year.

A large proportion of the non-derivative financial instruments (trade receivables and payables, finance lease liabilities) are invoiced in U.S. dollars and therefore have an impact on net profit for the year and equity, as a result of exchange rate parities. All other non-derivative financial instruments are denominated in the functional currency and are hence not included in the exchange rate sensitivity analysis.

The equity instruments held by the group are not of a monetary nature, and so consequently do not present a currency risk as defined by IFRS 7.

If it is assumed that the exchange rate of the euro to the U.S. dollar had been 10% higher or lower than the actual closing rate on December 31, 2008, the sensitivity analysis based on this assumption produces the following hypothetical effects on net profit for the year and equity:

MTU is exposed to interest rate risk principally in the euro zone, and to a lesser extent in Canada, China, Poland and the United States. To minimize the effects of interest rate fluctuations in these regions, MTU manages interest rate risk separately for net financial liabilities denominated in euros (€), Canadian dollars (CAD), Chinese yuan (CNY), Polish zloty (PLN) and U.S. dollars (USD).

MTU has access to overdraft facilities in the form of a revolving credit facility (RCF) amounting to € 250.0 million made available by a consortium of banks. Within this framework, direct credit facility arrangements have been agreed with three banks, each for an amount of € 40.0 million (ancillary facilities). At December 31, 2008 the group had drawn down € 61.2 million (2007: € 69.6 million) out of the € 120.0 million available under these bilateral banking credit facilities. Of the remaining total line of credit amounting to € 188.8 million (2007: € 180.4 million) at the balance sheet date, € 16.9 million had been drawn down as bank guarantees in favour of third parties. Any credit actually utilized is subject to interest at market index average rates plus an additional margin. Unused credit facilities are subject to a modest loan commitment fee. As at December 31, 2008, MTU and its affiliates had met all loan repayment and other obligations (covenants) arising from financing agreements.

MTU also employs the following derivative financial instruments which do not form part of a hedging relationship as defined by IAS 39. Changes in the fair value of the derivatives embedded in these financial instruments have an affect on the financial result on other items, and hence on net profit for the year and equity.

The purpose of interest rate swaps is to reduce exposure to interest rate fluctuations. This financial instrument involves swapping variable-rate U.S. dollar interest income on U.S. dollar bank deposits for fixed-rate U.S. dollar interest income over a period of five years. This type of transaction is of a purely financial nature and consequently presents no additional currency risk, even if it does present a minor interest rate risk. At December 31, 2008, MTU holds contractual obligations pertaining to 3 interest-rate swaps. The first of these carries a nominal amount of € 10.0 million and is due on April 17, 2013. The company in this case swaps a variable 3-month USD-Libor BBA interest rate for a fixed interest rate.

The second and third are each cross-currency interest-rate swaps. The second interest-rate swap carries a nominal amount of 33.0 million USD and a due date of November 19, 2009, whereby MTU swaps a one-year fixed interest rate for a variable interest rate. The third swap carries a nominal amount of € 40.0 million and a due date of September 22, 2009, whereby the company receives a fixed 3-month USD-Libor BBA interest rate in exchange for a variable 3-month EUR Euribor-Reuters. The negative fair value of these swaps is included in the “financial result on other items” (Note 14.).

Cross-currency swaps are used to swap U.S. dollars for euros and to swap fixed-rate euro interest income for variable-rate U.S. dollar interest income.

This type of financial instrument is used to swap short-term interest for long-term interest. MTU pays interest to the counterparty at the short-term rate and receives interest at the rate for long-term deposits. The minimum deposit required to benefit from this type of transaction is € 120.0 million. The contractual period is 10 years. This swap instrument is paired with a second financial instrument for the same amount (€ 120.0 million), which swaps longterm interest for short-term interest. The contractual period in this case is 3 years. Inverse changes in the yield curve over the long term could have a negative impact on the fair value of this financial instrument. This financial instrument was fully redeemed in May 2008.

IFRS 7 requires the presentation of interest rate risk in the form of a sensitivity analysis. This demonstrates the effects of changes in market interest rates on interest payments, interest income and expense, other income statement items, net profit for the year, and equity. The interest rate sensitivity analysis is based on the following assumptions:

Change in the market interest rate of non-derivative financial instruments bearing interest at a fixed, normal rate only have an effect on net profit and equity if these financial instruments are classified as “at fair value through profit or loss” or were so designated at initial recognition. Consequently, all fixed-interest financial instruments measured at amortized cost have no effects on net profit and equity that must be accounted for. There may be a possible effect on net profit in the event of early repayment or maturity, resulting from the difference between carrying amounts and fair values, which is disclosed in the notes (see also the explanatory comments relating to the convertible bond). The repurchase of units of the convertible bond with a total nominal value of € 27.2 million in September and October 2008, resulted in the recognition of income of € 5.0 million under “financial result on other items” (see Note 14.)

Changes in the market interest rate of financial instruments that have been designated as hedging instruments for the purposes of a cash flow hedge to reduce exposure to variations in payment due to interest rates have an impact on the hedge reserve in equity and are therefore included in the sensitivity analysis. Consequently, financial instruments that do not form part of a hedging relationship as defined by IAS 39 can have an effect on the “financial result on other items” (adjustment of fair value of derivative instruments). These effects are therefore also taken into account in the relevant sensitivity analysis.

The currency derivatives used by the group are only subject to an insignificant interest rate risk, and are therefore not included in the sensitivity analysis.

In the financial year 2008, an average of 55 % (2007: 64 %) of the group’s financial liabilities denominated in euros bore interest at a fixed rate. This average is representative for the whole year.

If it is assumed that the market interest rate at December 31, 2008 had been 100 base points higher or lower, the sensitivity analysis based on this assumption produces the following hypothetical effects on net profit for the year:

In connection with the presentation of market risk, IFRS 7 also requires disclosure of the effects that hypothetical changes in risk variables relating to prices and the fair value of financial instruments might have on net profit for the year and equity. The risk variables of most relevance in this context are the quoted MTU share price, as a factor influencing the conversion option threshold for the convertible bond (see explanatory comments below) and forward commodity sales contracts for nickel alloys.

In the financial year 2007, MTU Aero Engines Holding AG issued a convertible bond with a par value of € 180.0 million. The convertible bond carries a par value of € 100,000 and has a term to maturity of five years. The bond is convertible into registered non-par value common shares of the company corresponding to a proportionate amount (€ 1 per share) of the company’s total share capital and possessing full dividend rights. At a conversion price of € 49.50, the conversion ratio at issue date was 2,020.20. The coupon rate is fixed at 2.75 %, payable yearly on February 1. The present value of future cash flows arising from the contractual obligation was calculated by applying a discount rate equivalent to the 5.425 % market interest rate that the company would have had to pay if it had issued a non-convertible bond.

The expense over the convertible bond’s term to maturity consists of the present value calculated as above, discounted at the applied market interest (measured at amortized cost using the effective interest method). As a result of changes in the yield curve, the fixed coupon rate of the convertible bond may present an interest rate risk, which ultimately represents a market-related fair value risk, out of which differences might arise between the carrying amount and the fair value of the liability portion of the convertible bond at the balance sheet date.

The repurchase of units of the convertible bond with a total nominal value of € 27.2 million in September and October 2008 resulted in the recognition of income amounting to € 5.0 million (2007: € 0.0 million) under the financial result on other items (Note 14.).

The possible effect on the financial result in the event of early repayment, repurchase or maturity is represented by the difference between the carrying amount of € 145.4 million (2007: € 167.3 million) and the fair value of € 118.5 million (2007: € 164.0 million), as disclosed in the notes. The significantly lower fair value of the liability component in 2008 is attributable to distortions of the credit spread for corporate bonds in connection with the financial market crisis, and in MTU’s view is not an accurate reflection of the company’s creditworthiness. MTU considers that the unchanged good credit ratings published by the rating agencies are appropriate and justified. Details of these ratings and the outlook issued by leading rating agencies are provided in Section 3. of the group management report.

To minimize the risk of increasing commodity prices for the necessary quantity of nickel, MTU has concluded 30 forward commodity sales contracts with banking institutions for a total of 1,210 tons of nickel over the period 2009 to May 2011. The contracted fixed prices for nickel range between 10.9 and 36.5 thousand USD per ton. If the market price for nickel on the respective due date exceeds the agreed fixed price, MTU will receive a payment for the difference from the bank with which the contract was concluded. In the opposite case, MTU is obligated to compensate the bank. No effective hedging relationship has been established to cover these transactions. The fair value changes arising from these forward commodity sales contracts are recognized under “financial result on other items” to the amount of € -11.7 million (2007: € -9,7 million). Please refer to Note 14.

If it is assumed that the market price of forward commodity sales contracts for nickel had been 10 % higher or lower, the sensitivity analysis based on this assumption produces the following hypothetical effects on net profit for the year:

Liquidity risk management is the responsibility of the Treasury Board. The controlling process is based on an analysis of all future cash flows according to business units, product, currency and location. The process includes the monitoring and limitation of aggregated cash outflow and cash borrowing. Observed parameters include diversification effects and customer concentration. To guarantee MTU’s solvency and financial flexibility at all times, a liquidity reserve consisting of lines of credit and, where necessary, cash and cash equivalents, is kept available. Transactions in connection with financing activities are conducted exclusively with partners who have an excellent credit rating, and creditworthiness is continuously monitored. Outstanding payments in connection with operating activities are monitored on an ongoing basis. General and specific allowances are used to account for the risk of non-payment (see Note 23.).

The group’s lines of credit consist of a revolving credit facility for an amount of € 250.0 million made available by a consortium of banks in conjunction with agreements that run to March 24, 2010. Within this framework, direct credit facility arrangements have been agreed with three banks, each for an amount of € 40.0 million (ancillary facilities). The funds raised through these lines of credit are generally intended to finance investment in production facilities and are not covered by collateral. At December 31, 2008 the group had drawn down € 61.2 million (2007: € 69.6 million) under these bilateral banking credit facilities. Of the remaining € 188.8 million (2007: € 180.4 million) available at the balance sheet date, € 16.9 million (2007: 16.5 million) had been drawn down as bank guarantees in favour of third parties. As of December 31, 2008, MTU and its affiliates had met all loan repayment and other obligations (covenants) arising from financing agreements. The availability of spare borrowing capacity amounting to € 171.9 million (2007: € 163.9 million) through the unused part of these lines of credit increases the scope and flexibility of the group’s financing opportunities.

The maximum default risk is represented by the carrying amounts of the financial assets recognized in the balance sheet (including derivative financial instruments with a positive fair value). Irrespective of existing collateral, the amount stated for the financial assets specifies the maximum default risk pertaining to the case in which a customer, risk- and revenue-sharing partner, consortium, or similar entity is unable to meet its contractual payment obligations. In order to minimize default risk, depending on the form of payment and amount being serviced, payment arrangements underlying the original financial instrument are secured by collateral as required, credit rating information is obtained, or historical data from the existing business relationship (and in particular payment patterns) are used to avoid payment defaults.

MTU is also exposed to default risk through contingent liabilities and other financial obligations (see Note 43.).

When MTU enters into risk- and revenue-sharing agreements, the company assumes obligations with respect to the sales financing of engines for selected airlines. The means of providing sales financing are generally secured through access rights granted by the consortium leader in an engine program. MTU additionally benefits from safe-guarding clauses drawn up by the leader of the engine consortium, which take the imputed risks and legislative framework into consideration. MTU is of the view that the estimated market value of the financed engines is sufficient to offset potential losses arising from financing transactions. Contingent liabilities arising from sales financing under existing risk- and revenue-sharing agreements amount to a total of € 57.2 million (2007: € 73.1 million). The gross figure represents the total amount of the contingent liability, whereas the net figure, amounting to € 55.3 million (2007: € 71.1 million), is reduced by the corresponding provisions set aside to cover the liability. The financing risk represented by the difference between the accepted financing obligations and the market value of the financed engines, amounting to € 1.9 million (2007: € 2.0 million), was recognized under “Other provisions” (Note 33.).

Guarantees and other contingent liabilities relate to service agreements for gas turbine maintenance and guarantee obligations arising from maintenance agreements amounting to € 19.8 million (2007: € 17.7 million), and investment grants amounting to € 20.9 million (2007: € 20.9 million). The increase in these liabilities is mainly attributable to the initial recognition of contingent liabilities for a government grant that is repayable under certain conditions. However, it is judged unlikely that these conditions will arise.

The following table shows the contingent liabilities in 2007, for comparison:

The following table shows the contingent liabilities in 2006, for comparison:

The contingent liabilities arising from equity investments in joint ventures are as follows:

The capital obligations and guarantees relate to accorded loans and are recognized in proportion to the interest in the joint venture. MTU does not have any capital obligations towards the partner company itself.

Apart from liabilities, provisions and contingent liabilities, the company has additional other financial obligations, particularly pertaining to rental and lease contracts for buildings, machines, tools, office and other equipment.

The contracts have terms of one to eighteen years and in certain cases contain extension and purchase options and/or price adjustment clauses. With regard to rental and lease agreements, payments of € 21.2 million (2007: € 16.3 million) were expensed in 2008.

The total sum of future minimum lease payments attributable to rental and lease agreements (operating leases) which cannot be terminated is as follows (based on due payment dates):

The increase in the nominal total of future minimum lease payments amounting to € 35.1 million at December 31, 2008, as compared with € 29.6 million at December 31, 2007 is primarily attributable to contracts for leased engines in commercial MRO. In 2008, 14 engines were retired and 10 new engines taken into service, the latter in part being leased for significantly longer periods and thus carrying a higher total obligation. These engines are made available to customers as replacements while their own engines are undergoing repairs.

In addition to engine leasing in commercial MRO with a total volume of € 15.6 million, other major individual obligations, totaling € 15.1 million, comprise the future lease payments for an office building at MTU Munich, payments for the building at the air base in Erding in connection with the cooperative model, and for the lease of floor conveyor.

At December 31, 2008, 93 % of the leasing contracts, in arithmetical terms, are due to expire within 5 years. 7 % are valid for more than 5 years, while a small number of leasing contracts have no definite expiration date.

In the two previous comparative periods, the group had pledged securities totaling € 2.5 million to the Nord/LB Norddeutsche Landesbank, Hannover. This pledge was revoked effective January 1, 2008.

At December 31, 2008, other financial obligations comprised order commitments for the purchase of intangible assets, totaling € 5.7 million, and financial obligations for the purchase of property, plant and equipment, totaling € 41.4 million. These financial obligations were thus within normal limits.

The statement details how cash and cash equivalents and the group’s liquidity have changed during the year under review. In accordance with IAS 7 (Statement of Cash Flows), a distinction is made between cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities (see consolidated cash flow statement).

The cash and cash equivalents presented in the cash flow statement comprise the recognized amounts of cash in hand, checks, and credit balances held at banks with a term to maturity not exceeded three months.

The cash flows from investing and financing activities are established directly on the basis of payment.

Cash flow from operating activities, on the other hand, is inferred indirectly on the basis of net profit. As part of the indirect calculation process, changes to balance sheet items taken into consideration in connection with operating activities are adjusted by the effects generated by changes in the composition of the group reporting entity. Accordingly, the changes in the affected balance sheet items cannot be reconciled with the corresponding figures on which the published consolidated balance sheet is based.

Special disclosures are required to be made with regard to relationships and transactions with related companies and persons. Related companies are listed under Note 45.1.2. (Major shareholdings). Not only members of the Board of Management but also members of the Supervisory Board and shareholders are considered as “related parties” as defined by IAS 24 (Related Party Disclosures).

In addition, the disclosure requirement extends to transactions with associated companies and joint ventures as well as to transactions with persons who exercise significant influence on the financial and business policies of the group, including close family members or intermediate companies. A significant influence on the financial and business policies of MTU Aero Engines Holding AG is deemed to exist if a party has a shareholding of 20 % or more in a group company, or a seat on the managing or supervisory board of a group company, or holds any other key management position.

MTU Aero Engines Holding AG is required by IAS 24 to disclose for the 2008 business year, as in prior periods, its business relationships with subsidiaries, associated companies, joint ventures, and members of the Board of Management and Supervisory Board.

MTU maintains normal business relationships with non-consolidated, related subsidiaries. The transactions with these related companies form part of their normal dealings. Transactions between group companies and joint ventures or associated companies were, without exception, conducted in the context of their normal business activities and made on terms equivalent to those that prevail in arm’s length transactions.

No significant transactions were conducted between companies belonging to the MTU group and members of the Board of Management or Supervisory Board of MTU Aero Engines Holding AG, or with any companies in which these persons hold a seat on the managing or supervisory board. This is also applicable for close family members of this group of persons.

Business transactions between companies included in the consolidated financial statements were eliminated in the course of consolidation and are therefore not subject to any further separate disclosure in these notes.

During the course of the business year, companies within the group conducted transactions amongst themselves (intragroup sales). The following business transactions were carried out with non-consolidated related companies in the financial year 2008 and the two prior periods:

The list of major shareholdings shows MTU’s capital share in each company together with the equity that this represents at December 31, 2008 and the profit or loss generated by each company in the financial year 2008:

No group company has conducted any business subject to disclosure requirements with members of the group’s Board of Management or Supervisory Board or with any other individuals holding key management positions, or with companies in which these persons hold a seat on the managing or supervisory board. This is also applicable for close family members of this group of persons.

The following compensation has been paid in the year under review to the Board of Management and the Supervisory Board. Disclosures of compensation for individual members of the Board of Management and the Supervisory Board are made in conjunction with information relating to the German Corporate Governance Code (see the corporate governance report and the management compensation report).

For disclosures concerning the compensation awarded to individual members of the Supervisory Board, please see the management compensation report.