Despite the possibility that the average U.S. dollar exchange rate might weaken in the course of the year, MTU anticipates higher revenues in 2011 than in 2010. The company expects operating profit (EBIT adjusted) to remain close to the previous year’s level. The projected growth in global air traffic, if realized, will have a beneficial impact not only in the immediate future but also in the years to come.
5.1. GENERAL ECONOMIC CLIMATE
The global economy continues to grow. The Economist Intelligence Unit (EIU) estimates that the global economy will expand by 3.0% in 2011. The EIU also predicts a growth rate of 3.0% for 2012. The International Monetary Fund (IMF) is slightly more optimistic, and is forecasting global growth rates of 3.5% and 3.6% for 2011 and 2012 respectively.
With forecast growth rates in excess of 4% over the next two years, the Asia-Pacific region will continue to lead the way. A similar trend is expected for Latin America and the Middle East. Growth rates in North America and Europe in 2011 are expected to be lower than the global average, at 2.6% and 1.6% respectively, and economic growth in these regions is expected to remain at around this same level in the medium term. The forecasts suggest that the balance of world economic power is shifting from the developed economies to the strongest among the newly industrializing countries, especially those in Asia.
5.2. INDUSTRY-SPECIFIC DEVELOPMENTS IN THE AVIATION SECTOR
Forecasts by IATA in December 2010 and Airline Monitor in July 2010 both foresee an increase of 5.2% in passenger traffic in 2011, while freight traffic will do better in IATA’s estimate, with a plus of 5.5%. Industry growth rates will thus begin to stabilize at their normal long-term level again. The Asia-Pacific region looks set to head the way in air traffic growth, too, with the North American continent also recovering sufficiently to generate new growth. Growth will be more muted for European airlines, given that the rate of economic recovery is estimated to be slower in Europe than elsewhere.
Airline Monitor is predicting a 5.2% rise in airline capacity for 2011, with air traffic growing in the same measure. The engine maintenance and repair sector (spare parts and overhaul) is likely to profit from this development.
IATA predicts that airline revenues will rise by 5.9% in 2011 compared with 2008 levels, as a result of the increased volume of air traffic, and expects industry profits to reach U.S. $ 9.1 billion. This should have a renewed positive impact on orders for new aircraft. Confidence in the expanding aviation market and the availability of new, efficient aircraft types is likely to speed up purchase decisions.
With a combined order backlog of 7,180 single-aisle and widebody aircraft, Airbus and Boeing have work for another six to seven years at current production rates. Half of these orders were placed by airlines from the Asia-Pacific region or the Middle East. By 2012, the two aircraft manufacturers intend to boost their production by 25% – both for single-aisle aircraft (the A320 and 737 series) and widebody jets such as the Boeing 777 and 787 and the Airbus A380.
Since the dramatic slump in March 2009, activities in the business jet sector have been picking up slowly but surely, with growth rates of 10-15% being recorded in 2010 compared with 2009. The number of used jets on the market dropped to around 15% of the total fleet, but this is only slightly lower than the 2009 level of 17%. Deliveries are not expected to increase substantially in 2011 as overcapacity still needs to be worked off. The anticipated upswing will not take effect before 2012.
5.3. OPPORTUNITIES FOR MTU
OPPORTUNITIES PRESENTED BY CHANGES IN THE OPERATING ENVIRONMENT
MTU’s systematic, forward-looking investment in basic research and innovative engine technologies designed to lower fuel consumption and emissions, reduce noise and cut costs serves to strengthen the company’s position as a leader in innovation and technology. This, in turn, generates opportunities for the company to expand its position within risk- and revenue-sharing partnerships and to participate in lucrative new engine programs. The MRO segment, too, is likely to benefit from rising demand and access to new engine programs.
In the military sector, the company has a long-established reputation as a skilled partner capable of offering its customers wide-ranging system know-how in the areas of product development, manufacturing and maintenance, thus opening up further opportunities to develop new engine technologies and refine existing ones.
OPPORTUNITIES PRESENTED BY THE COMPANY´S BUSINESS PERFORMANCE
An improvement in the exchange rate parity between the euro and the U.S. dollar would lead to a modest improvement in MTU’s earnings situation. If energy prices were to stabilize or even retreat to a lower level, and if commodity prices were to fall, this would have a positive effect on MTU’s cost structure and hence on its future business results.
Other opportunities are listed in the SWOT analysis presented in Section 6.4, which forms part of the risk report. For information on how identified opportunities can be exploited and how associated risks can be avoided, see Section 6. (Risk report).
5.4. FUTURE DEVELOPMENT OF MTU
The statements below are based on the knowledge available at the beginning of 2011 and possess a high degree of uncertainty owing to the number of new programs.
NO CHANGE IN PERFORMANCE INDICATORS
‘EBIT (adjusted)’ and ‘free cash flow’ constitute the two performance indicators by which the MTU group controls and measures its success, both today and in future.
PLANNED CHANGES IN BUSINESS POLICY
The company does not intend to make any fundamental changes to its business policy in the years ahead.
NEW PRODUCTS AND SERVICES
As early as the financial year 2008, MTU joined several new engine programs that will account for a predominant share of its revenues in the decades to come. The company estimates the market volume of these programs to be worth a total of approximately € 30 billion over their entire projected lifetime.
In the coming financial years, the company will be looking to drive forward development of the geared turbofan for new engine programs and place volume production of the turbine center frame for the GEnx engine on a firm footing.
OUTLOOK FOR 2011
MTU’s targets for the financial year 2011 are as follows:
Although the U.S. dollar exchange rate could possibly be weaker in 2011, the company expects revenues to increase by 7-8% compared with 2010. MTU’s risk- and revenue-sharing agreements with leading engine makers and its strong presence in its home market will serve to keep the regional distribution of the company’s revenues stable, and it plans to achieve over 80% of its total revenues in its traditional markets of North America and Europe. Consequently, MTU does not expect to see any major changes in its sales markets in the coming financial years.
REVENUES BY OPERATING SEGMENT
The revenue forecasts for the commercial and military engine business and the commercial maintenance business in the financial year 2011 are based on the following assumptions:
- Compared with the financial year 2010, MTU expects to see a substantial increase of 15-20% in revenues from the volume production of commercial engines and an increase of 5-10% in revenues from spare parts sales. This assumption is based on the ramp-up in deliveries of the GEnx engine for the Boeing 787 and 747-8, increasing revenues from the GP7000 program for the Airbus A380, higher deliveries of the V2500 engine for the Airbus A320 family, reviving sales of business jets, and slightly lower revenues from legacy programs. Identified risks relate particularly to the possibility of further delays in the Boeing 787 and 747-8 aircraft programs and of extensions to the delivery schedule for the Airbus A380.
- MTU expects to see a drop in revenues of about 10% in the military engine business in 2011, mainly as a result of the planned structural reforms to the German armed forces and postponed deliveries of Tranche 3A of the EJ200 engine program.
- Revenues in the commercial maintenance business are expected to increase by 5-10% in 2011. Demand for maintenance services is likely to be better than in 2010, picking up as the economy recovers.
MTU expects its 2011 operating profit (EBIT adjusted) to be roughly the same as in 2010. Earnings in 2011, compared with 2010, are likely to be negatively impacted by higher development expenditure – especially in connection with the geared turbofan programs – and by lower revenues in the military engine business. This will be compensated by cost savings resulting from the Challenge 2010 improvement program.
ADJUSTED EARNINGS AFTER TAX (EAT ADJUSTED)
Adjusted earnings after tax (EAT adjusted) for the financial year 2011 are similarly expected to remain close to 2010 levels. Other factors likely to affect the financial result, in addition to the company’s expected operating profit, include the high estimation uncertainty attached to the U.S. dollar exchange rate and the price of nickel at the balance sheet date, and the fair value of related hedging instruments.
FREE CASH FLOW
The company expects free cash flow in the financial year 2011 to remain on the same level as in 2010.
After maintaining a stable dividend of € 0.93 per share for three financial years, the Board of Management and Supervisory Board intend to propose a dividend of € 1.10 for the financial year 2010 to the Annual General Meeting. Investors can expect the MTU share to yield a substantial return, not only in 2011 but also in future years.
CAPITAL EXPENDITURE AND FUNDING RESOURCES
Capital expenditure in the financial year 2011 will focus mainly on building up production capacity for the GEnx program and on the special operating equipment required for the geared turbofan programs. In 2011, capitalized development costs for the GEnx, GE38 and A320neo engine programs are likely to be in the vicinity of € 30-40 million.
The structure of the company’s funding resources is expected to remain unchanged in 2011. All the projects planned can be financed from free cash flow. Above and beyond this, authorized capital provides the company with further funding options that have not yet been utilized.
MTU expects the size of its workforce in the financial year 2011 to rise slightly, by about 2%.
OUTLOOK FOR 2012
In the financial year 2012, MTU expects to see continuing growth in both the global economy and the aviation industry. Based on IATA’s medium-term forecasts and the aircraft manufacturers’ projected production volumes, MTU’s revenues are expected to grow by around 5-10 % from the level of 2011.
Among the factors affecting operating profit (EBIT adjusted), MTU expects development expenditure to remain at a consistently high level and volume production for the GEnx, GP7000 and V2500 engine programs to increase. Overall, the group therefore expects business performance to remain stable in the financial year 2012, with an adjusted EBIT margin of over 10%. This estimated figure may change if the company acquires additional shares in engine programs.
5.5. OVERALL PROGNOSIS OF FUTURE BUSINESS DEVELOPMENTS IN 2011 AND 2012
The Board of Management of MTU remains optimistic that it will be able to profitably expand the company’s business. In addition to existing programs, recently acquired stakes in new programs will contribute decisively to this development. A sustained market recovery should serve to boost demand in the aftermarket business (spare parts and maintenance). Consequently, MTU expects its free cash flow and operating profit (EBIT adjusted) to remain at the same level as in 2010, enabling the company to offer its shareholders an attractive dividend yield.