Fraport AG (OTCPK:FPRUF) Q3 2022 Results Conference Call November 8, 2022 8:00 AM ET
Company Participants
Christoph Nanke – IR
Stefan Schulte – CEO
Matthias Zieschang – CFO
Conference Call Participants
Stephanie D’Ath – RBC Capital Markets
Ruxandra Haradau-Doser – Kepler Cheuvreux
Elodie Rall – JPMorgan
Marcin Wojtal – Bank of America
Dario Maglione – BNP Paribas Exane
Marco Limite – Barclays
Achal Kumar – HSBC
José Arroyas – Santander
Operator
Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Conference Call of Fraport AG [Operator Instructions]. May I now hand you over to today’s host, Christoph Nanke, Senior Vice President, Head of Finance and IR. Please go ahead, sir.
Christoph Nanke
Thank you, Emma, and a warm welcome also from my side. I have with me at the table, our CEO, Stefan Schulte; and our CFO, Matthias Zieschang. We have a lot of topics to talk about today, so let’s do not wait and start the presentation.
Stefan Schulte
Yes. Good afternoon, ladies and gentlemen, also from my side to this year’s Q3 presentation. Let me start my presentation with a very positive message. First, we are proud, I may say so, of the financial achievements in the past quarter on EBITDA. We managed to come back to pre-COVID levels, and we are fully on track to be financially recovered on a full year base latest in fiscal year 2024. On traffic, Frankfurt is showing a good trend here. Q3 also achieved roughly 75% of our 2019 benchmark year. Also the current winter flight schedule looks very promising. With regard to our International portfolio, here a higher share of leisure or touristic traffic led to an even quicker recovery on average. Financially, as said before, our Q3 EBITDA is back on precrisis level. Key drivers for the financial performance were our International Activities with Fraport Greece being on top. Also, our operating cash flow improved strongly. Correspondingly, we achieved a positive free cash flow in Q3 despite the major construction work going on in Frankfurt and also in Lima. Operationally, the past quarter was challenging in Frankfurt for many reasons. However, due to our close cooperation with our aviation partners, we nonetheless managed a stable operational business during the key summer season.
Looking ahead, we have implemented strong measures to return our high-quality as major European hub. But before going into many details here, let me have a closer look on our financial performance first. I’m on Slide 4. Our key financial highlights for the third quarter. Total group revenues, excluding IFRIC 12, recovered by roughly EUR250 million and achieved a level of more than EUR900 million. Compared to the benchmark quarter, so Q3 2019, this represented a strong recovery of 95%, so almost entirely recovered. Key driver for the increase in total revenues were our International assets, mainly Fraport Greece. Frankfurt, our home base also recovered to a level of close to 85%. On EBITDA, due to a higher cost burden, Frankfurt was a level of about 67% of 2019 while our international airports already exceeded the pre-COVID levels at 130%, so really good. In total, this led to an EBITDA of EUR420 million or, as mentioned, 96% of 2019. On the level of EPS, we recorded a stronger decline compared to 2019. Here, the profit before tax was still much comparable 2019. We however faced a higher tax rate this year due to the effects from the full write-off of our loan made to Thalita Trading Ltd., so St. Petersburg. Applying the same tax rate as in 2019, our EPS would have been close to EUR2. So clearly more comparable to the 2019 level. Thanks to the strong recovery of our operating cash flow, our free cash flow was positive again at EUR125 million. Our free cash flow per share stood at EUR1.35 and was just 10% short of our 2019 benchmark year.
All in all, a strong financial result and Matthias will talk about this later more in detail. Whereas a strong recovery comes from, I’m on Slide 5, and I mentioned this already. Here you see the very impressive recovery of our International Activities in 3 key points. Firstly, the traffic performance was just fantastic. 27 million passengers crossed our majority-owned airports were pretty close to the level of 2019 where we reached our all-time high at 29 million passengers. The traffic performance in combination with higher prices and improved retail offering led to an even better EBITDA recovery. At 130%, the International segment clearly outperformed the 2019 benchmark year and also our expectations. Key driver for the strong EBITDA increase was our investment in Greece, EUR179 million, Fraport Greece did not just account for 69% of the International Activities segment EBITDA but also represented 42% of our group EBITDA in the third quarter. That’s really impressive. But also Fraport USA and Fraport Brasil were about the 2019 EBITDA level, while Lima Airport was pretty close to it. Correspondently, our International Activities segment accounted for the majority of our group EBITDA at more than 60% in this third quarter.
We go to the business development. I’m on Slide 6. And starting another towers Fraport Greece. Fraport Greece achieved another rebalance for the COVID-19-related impact on its business operation. This time, we discuss the adverse impact on our business in the first half of 2021. As you will remember, despite the availability of like since 2021 was still very much impacted by COVID-19. The chief compensation now amounts to roughly EUR58 million and split into the cancellation of fixed concession component, which is around EUR24 million booked in this quarter or this first 9 months and a residual share of roughly EUR34 million. And this residual amount will be booked against our variable concession obligations next year or next years. Also at Fraport Brasil, we applied for another rebalance to COVID-19-related impacts. Here we discuss the impact of the current year or fiscal year 2022. This year, the Omicorn variant adversely impacted the last winter season globally. Our northern winter season is more decisive for Fraport Brasil and as it is summer season in Latin America. On this matter, we expect to hear back from the authorities by end of this year, so nothing booked up to now. Simultaneously Porto Alegre applied to redeem all fixed concession charges in line with the offer made by the local aviation authority, ANAC because it’s very favorable to do this. In case of an approval, this should lead to a net positive impact on our group account. Good news, we also received from Fraport Twin Star in Bulgaria, the concession renter approved our request to extend the concession duration by five more years until fiscal year 2041.
August, we also saw at Fraport-TAV Antalya here the construction works at the terminal for the new concession started. Simultaneously, we looked in further funding for the CapEx in the amount of some EUR178 million. Going on to next slide, I’m on Lima Airport. It’s a very positive information. First, we have meanwhile finished the construction works that’s a new runway, hence the new tower. They shall become operation next year, supporting the operational ramp-up at Lima Airport. On this Slide number 7, you also see the progress of our new terminal. As you know from our previous publications, we decided to move back from a temporary dual terminal use to a single terminal use already from the beginning of the new terminal operation. We have agreed with the contractor on the terms and are finalizing the amendment of the existing terminal, EPC contract. Under the extended EPC, the terminal areas will be expanded short term to accommodate for the expected passenger growth over multiple years. Moreover, we can close down the existing terminal and save on operational cost and maintenance CapEx. The financial impact of the extended EPC, you can see on the chart why we prepared for you for some USD 300 million CapEx next year, the amendment and other items. So the extension will lift this range by another USD 50 million to USD 100 million. The same is the case for fiscal year 2024 and so on. The new terminal itself will be commissioned as planned at the start of fiscal year 2025.
Coming back to the current development, which is shown on Slide number 8 with our traffic figures. As mentioned before, we recorded a strong traffic recovery in our international airports, Fraport Greece in particular, showed a very good performance, but also Antalya Airport performed very good and showed traffic results pretty close to the level of 2019. Our LatAm assets also recorded an improving trend in Q3. Here, the upcoming summer season will be more decisive. For the remainder of our European portfolio, Slovenija and Twin Star, the picture is different. Slovenija is still impacted by the absence of Adria Airways. So the former national flag carrier, which left the market in September 2019. And 2019 is also a high basis for Varna and Burgas. In addition, these two airports in Bulgaria, they suffer from the war in the Ukraine, the Bulgarian Black Sea Coast is one of the closest European tourist destination to the Ukraine, which makes it less attractive for tourist this year. Moreover, in opposite to Turkey, Bulgaria has imposed a strict flight ban to Russia. So we are experiencing a special situation in Varna and Burgas. Moving to Frankfurt, our home market. Here, the traffic in the first nine months was negatively impacted by Omicron in the first quarter, especially with a very weak traffic this first quarter. More recently, we saw the traffic momentum picking up again during Q3, Frankfurt achieved some 74% of the pre-pandemic level. This number also could have been some better, but we missed out part of the recovery due to the operational issues in Frankfurt and in Germany in general because we are very close and close up to Eastern Europe territorium with all the restrictions we got in the aerospace with NATO parts going across from west to east and blocking of the aerospace in Eastern Europe or sharp reduction of the capacity over there. But at the end, we managed to get out without a big crush and to stabilize the operation.
Coming to the staff, I’m on Slide number 9. We give you an update on this slide. As you are aware, we reduced our Frankfurt labor force compared to 2019 by more than 4,000 employees. A few things are, however, important to highlighting Ground Handling, we have started to hire back people since end of 2021, third, fourth quarter in 2021 already. And in total, we currently employ roughly 81% of our 2019 peak summer level in Ground Handling. The same rate of people we are currently employing in our security subsidiary, FraSec. So given the tight labor market and the need to handle the high peak load situation, we also had to recruit temporary staff or lease personnel in total about 800 to 900 leased employees where with us during August and September, this led to a total head count recovery in Ground Handling of up to 90%. And I mentioned traffic was around 75%, 76%. So it’s not really a tough issue. It’s more an issue of qualification, but it’s in addition also an issue in general on aerospace, on delays, flight in and so on from other airports across Europe on shortness of staff with our aviation partners and then that was unaware of the problem. So staff is enough there. That’s not the topic. But the topic is now qualification across the winter to bring it up to the necessary levels. And to be prepared for an even stronger year, we expect from today’s point of view for next year 2023.
If I may go a little bit more in detail, direction security business, I’m on Slide 10. As you are aware, we will take over the responsibility to manage the security process in Frankfurt next year. The takeover is a very important step for us as the security process was in the past, a major pain point for many travelers prior to COVID. So we are very pleased to present you some of our first steps already today. Given our new role, we have already started to procure multiple computer tomography scanners, which are gradually being rolled out in Frankfurt and that’s really a great achievement because if we discuss this with the federal government that will not get the next cities before the year 2026. We could make it, and we’ll — they are already on the way to Frankfurt Airport, and we will get them into operations in the first quarter of next year. So that’s very, very positive because it means more speed for our passengers, means more comfort for our passengers because we don’t have to take out any longer than liquids and notebooks and whatever and you will have less waiting times at the security control that means more time to relax and hopefully, to retail, to do retail offerings.
If we look at the winter, the winter schedule. So the near-term future, that’s looking very promising. I’m on Slide 11, which was a winter flight schedule, just started. On average, we expect up to 90% of our pre-COVID capacity in Frankfurt to be restored. The strongest recovery we are seeing on North Atlantic routes where traffic may be even exceeding the 2019 level for Europe. Seat capacities also looks strong at around 90% of 2017 level, just lagging behind is Far East with a level of 77%. And also, if we look at the October numbers, we will publish them in the next days. They also have been really positive and also the first days of November have been positive in Frankfurt, but also across on our international portfolio. So that’s all very good. Going ahead on Slide number 12. On this chart, you can see the latest addition to Frankfurt Airport. We are very committed on our ESG strategy and our targets. You know that we want to be CO2 free by the year 2045 officially and with very clear cut down in the year 2030. So for Frankfurt, the year 2030 is already the target to be down on 75,000 tonnes of CO2. I’m quite sure from today’s point of view that we will fulfill this obligation even earlier or, let’s say, this way, 2030, probably I would expect from today’s point of view, we are already down to a level of 50,000 tonnes CO2 here in Frankfurt with all the measurements we take. Here on this slide, you see the new plant at this point to cover a mid-single-digit percentage of our electricity need here at Frankfurt. So together with our new big wind park project offshore in 2026, the photovoltaic plan will cover the majority of our future electricity needs. So we will be served mainly by wind power, and that’s the important thing to get there and to take all the measurements which are necessary.
Turning to Page 13. My last slide of today’s presentation, our outlook, thanks to the strong year-to-date passenger performance especially also on the international side, we expect to achieve the upper end of all key performance indicators of our upgrade first half guidance. So Frankfurt passengers should amount to 50 million passengers, our group EBITDA should achieve up to EUR970 million, and we are quite sure to achieve the upper level there. For the group EBIT up to EUR520 million and group results in up to EUR100 million depends, Matthias will cover this a little bit more, maybe even a little bit higher than this EUR100 million, but that depends on a lot of factors. Just the dividend remains for the time being at no distribution. And having said this, I would like to thank you for your attention and now, Matthias, with the financials.
Matthias Zieschang
Thank you, Stefan, and also good afternoon and a warm welcome from my side. Before we take a closer look at the financial performance of our segments, I would like to start today with a short view on our historic financials and where we stand today compared to that. Here on Slide 15, you find the development of our EBITDA on top and our EBIT on the bottom reaching back until 2017. As you can see, we clearly achieved the turnaround after the total breakdown in 2020. We very quickly increased our operational results again now that we are seeing traffic volumes recovering all over our airport portfolio. Like this, we are on a very good way to reach our former strength again. Already this year, we expect to be more or less back on the 2017 level with regards to EBITDA. Now that the momentum is quite strong with passenger numbers expected to grow further over the winter flight schedule, we are absolutely confident to reach the 2019 operational results, again, latest by 2024. And this even at lower passenger numbers than in 2019 and despite high inflation numbers.
Now let’s go into the financial breakdown by segments starting on Page 16 with Aviation. In this segment, we are quite satisfied with the recent developments. First of all, with the revenues that increased to around 85% of 2019 figures in Q3 at an increased passenger level of 75%. Based on the development we saw in H1 of this year, this leads to revenues of more than EUR600 million, which reflects roughly 80% of nine months 2019. We expect this positive trend to continue in Q4 on the back of further increasing passenger numbers. Despite increasing traffic numbers, we only incurred a minor increase in OpEx compared to Q2. All in all, we saved more than EUR100 million or 18% of total OpEx compared to nine months 2019. Looking at the EBITDA performance in Aviation, please bear in mind that the strong 2021 performance was based on special items in the amount of totaled EUR218 million. Focusing on Q3 stand-alone, it becomes clear how strong the performance actually is. With EUR79 million, the Q3 EBITDA reaches around 80% of the 2019 figure and is 2.5x as high as the 2021 EBITDA. As a consequence and as expected, the margin of the segment increased further to more than 32% in Q3.
Coming now to our Retail & Real Estate segment on Slide 17, and I would like to start with some good news here. After having seen our retail spend per passenger under pressure in Q2, we were able to stabilize it in Q3 at EUR3 and thus achieved a slight improvement over Q3 2019. This is very positive having in mind that we are still lacking around 50% of our advertisement revenues. Beginning, traffic recovery to and from Asia definitely helps the retail performance, but is still rather limited and slowly developing. Looking into the remaining revenue streams, we feel very comfortable with the overall performance seeing that parking recovered to around 85%, and real estate exceeds 2019 levels by 11%. On the other side, especially higher energy prices of around EUR8 million in Q3 resulted in an OpEx level, which was more than 10% above Q3 2019. If adjusted for the price increase, the underlying OpEx would have been 17% lower if compared to nine months 2019, which is very positive. All this leads to an EBITDA in Q3 of EUR91 million, which represents roughly 85% of 2019 and lifts the nine months figure to around 75% of the precrisis level. The EBITDA margin remains high at 75% in Q3 and at 73% year-to-date.
Moving on to our last Frankfurt segment Ground Handling on Slide 18. A continued high level of revenues in the area of around 80% compared to Q3 ’19 lifted 9 months revenue to around 75% of the precrisis level. However, a strong summer season with extreme traffic peaks during the day, further increase the need for personnel on the apron, which is why we had to bring in additional external staff to get along with the operational challenges we were facing. This, of course, heavily affected non-staff costs in Q3, which is why the segment’s total OpEx in Q3 was similar to OpEx in 2019. Looking at the 9 months performance, we still realized savings of around 11% on the back of around 20% staff cost reductions. Now despite a good revenue recovery, OpEx developments put the segment’s EBITDA heavily under pressure, so that it was clearly negative at minus EUR10 million in Q3. As Stefan pointed out before, we work on increasing the productivity of current employees, and we also have to apply for higher charges to compensate for higher costs incurred. The target we follow is absolutely clear, improved profitability and finally generate a positive EBITDA again.
Having looked at the individual performances of the Frankfurt segments, let me now jump into the update of our cost savings. Where do we stand today? On the top left of Slide 19, you see the development of the total costs incurred in Frankfurt on a quarterly basis compared to last year and 2019. All of you are aware that we are finding ourselves in a challenging market situation at the moment with high energy prices, inflation and on top of that, a fast ramp-up in operations. Therefore, I think it is fair to say that in light of this environment, we are very successfully running our cost-saving initiatives. In numbers, this means that we saved almost EUR160 million this year compared to 2019. A major share, namely more than 80% comes from staff cost savings. And this is not a surprise as we are still running the company with 4,200 employees less than at year-end 2019. The remaining 20% come from other OpEx, which is adversely affected by the developed deployment of external staff. We will see some shift here. Yes, we are rehiring in our Ground Handling segment and becoming more independent from external staff. Again looking ahead towards the end of the year and remaining cost savings potential, we need to be realistic that our target to save up to EUR250 million will not be achieved. This is, however, primarily driven by the prevailing macroeconomic developments, i.e., the skyrocketing inflation rather than missed efforts. Nevertheless, of course, we will work hard on savings wherever it is possible and reasonable, which is why we still target a cost savings of up to EUR200 million for full year 2022 compared to 2019.
Now let me come to the financial performance of our international airports on Chart 20. Having a look at the EBITDA contribution of the individual assets, it is obvious that Greece with an EBITDA of more than EUR250 million, out of which about 70% came from Q3 is the most important driver of the segment as well as the group financials. But also, all other investments incurred a positive EBITDA with Lima, Fraport USA and Brasil being the biggest contributors following Greece. Jointly, the majority-owned international activities and Frankfurt Services contributed almost EUR500 million to our nine months group EBITDA, a share of around 60%. Digging a bit deeper into the segment’s P&L on Slide 21 shows the positive results we just saw in my previous slide. All relevant financials from underlying revenues via OpEx to EBITDA and EBIT developed in the right direction in Q3 as well as in the year-to-date figures. Supported by quicker traffic ramp-up than in Frankfurt, lean airport management and sustainable cost savings. The EBITDA margin after nine months increased by 6 percentage points compared to 2019 and reaches 52%. At the first glance, it seems striking that other OpEx increased over 2019, however, this is especially driven by the variable concession fee kicking in for Greece in the amount of roughly EUR20 million. Even if adjusting for one-offs on other income from Greece as well as from Xi’an of in total, EUR78 million, we recorded a clear improvement in all operational results.
On my next slide, I would like to give you an update on our cash flow in the first nine months of 2022 and the resulting indebtedness. Starting on the left side of the chart, you immediately see a very positive development. The green bar gives you our current operational cash flow for the year in the amount of EUR628 million, so it’s 3x higher than in 2021, which was primarily driven by a strong Q3 performance, which I will get into — get to in a minute. Of course, as you all know, our current CapEx exposure, especially to growth projects weighs on the free cash flow performance. Overall brick-and-mortar CapEx so far amounted to EUR795 million. This year, which was well in line with our expectations. Looking at our biggest growth projects, namely Frankfurt T3 and Lima, they incurred cash outs of EUR605 million. Moreover, the new Antalya concession led to cash outs of EUR375 million. Summing up all relevant effects leads due to a negative free cash flow of minus EUR609 million. However, when subtracting the one-off effect from the equity contribution for the new Antalya project, we ended up at minus EUR234 million. Taking all this into consideration shows the strong potential for our free cash flow, excluding our growth CapEx. To end this slide, let me quickly have a look at the right side of the chart where you see that our net debt increased over the course of the year to EUR7 billion. This reflects a net debt to last 12 months EBITDA of 7.3, so a clear improvement compared to 2021.
On my next slide, as mentioned before, I would like to have a closer look at our Q3 cash flow development. Around 70% of the total OCF or more than EUR440 million are coming from Q3, which even outperformed the OCF of Q3 ’19. I do not want to go into each details of this slide now as in the individual lines, there are no major changes to the Q2 steps. However, what is important for me to draw your attention to is the potential that we are going to see once traffic is further recovering. Already now supported by the ramp-up over the summer season, we incurred a free cash flow of EUR351 million in a single quarter, if excluding for the running growth projects. Now even if we include those projects, our Q3 free cash flow was clearly positive at EUR100 million to EUR125 million. So coming from CapEx exposure to our cash position, which is, of course, correlated. On Slide 24, you’ll find the development of our liquidity since year-end 2019 on a quarterly basis backed by the positive free cash flow and additional financing activities in Q3, we were able to further increase our available funds to more than EUR4.5 billion. This bolster gives us enough comfort to reach fiscal year 2025, having in mind our maturities and refinancing measures over the next years. However, we still have good access to the market and will make use of further financing opportunities when it is reasonable. As you know, we are currently working on the new Lima project finance to cover the CapEx for the new terminal. All in all, regarding liquidity, we feel very well positioned within the current market environment.
Moving on to my last slide for today, presenting an update of our repayment chart. For this year, in blue, you see the refinancing of the bridge loan for the Lima project, which is due at the end of the year. Apart from that, there are no more major items on the agenda over the next years. On the top right, you see that our average interest rate for the group of 2.2% has not changed despite some new financing activities we took on over the course of Q3. With this, I would like to conclude today’s presentation and open the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] First question is from the line of Stephanie D’Ath with RBC.
Stephanie D’Ath
The first one is on results held — sorry, results from investments held at equity. For the third quarter, it was above EUR50 million, thanks to Antalya, which was about EUR100 million and Thalita average EUR10 million. I was just wondering what was making the difference in the delta of minus EUR58 million? My second question concerns the taxes. I was wondering if you could maybe explain to us what to expect for the full year and especially the third quarter was at EUR136 million on a profit of EUR287 million, which implies of EUR47 million tax rates seem to highlight there. And then my third question, please, is on traffic. So we have seen 78% of pre-pandemic traffic in October, which is a 4% month-over-month improvement. I was curious to have your view on whether those levels would continue to improve further in the year and especially the new year or if you were expecting slowdown of the improvement rate?
Matthias Zieschang
First question at equities. So when I look into the numbers, Q3, we had — in Q3 2022, we had EUR51.2 million results from companies accounted for using the equity method. This is coming primarily from Antalya, and Antalya generated EUR100 million. So we own 50% and the equity treatment is 50% of it. So it’s EUR50 million from EUR100 million coming generated at Antalya. Second question, taxes. This is…
Stefan Schulte
That’s your question or not?
Stephanie D’Ath
Yes, it does answer my question for the first one.
Matthias Zieschang
So second is taxes. It’s a special — normally, we have a tax rate on group level of maximum 30%. In the moment, it’s much higher. This has to do with just one item. This is a treatment of the write-off of the EUR160 million shareholder loan. So the shareholder loan is offered from our Malta subsidiary to the holding company in Cyprus, which has 100% of the shares of St. Petersburg. So we have written off the EUR160 million. And of course, this is tax deductible, but on Malta, the net tax is just 3%. So with other words, with the write-off of the EUR160 million of the share loan, our tax shield is just 3% from or 4% from EUR160 million. And this led and leads to the situation that this is spoiling our tax rate that you see in the moment a 50% tax rate. But this is just due to this one-off of the write-off of the St. Petersburg shareholder loans. So looking forward, we are coming back to the regular tax rate of the group of maximum of 30%. And the third question?
Stefan Schulte
The third question was…
Stephanie D’Ath
And that’s also valid for Q4 then?
Matthias Zieschang
Back to normal, yes.
Stefan Schulte
Your third question was if I get it — got it correct on traffic. How is our expectation for October, November, December. So for the remaining year. And I mentioned already that we have seen a really strong October. We will publish the numbers tomorrow or the day after or on Friday, I don’t know exactly. All we expect is that we will stay on this strong level. As mentioned, we see more level on minus 20% compared to pre-COVID, minus 23%, so 10% points better than what we have seen in the third quarter. Of course, the absolute numbers are coming down. That’s normal, but the demand is very strong and also ties quite strong across all airlines. So yes, we are expecting a positive fourth quarter.
Stephanie D’Ath
And for early next year, you would — you don’t see any indication that the trends will change?
Stefan Schulte
It depends. We are in principle, quite positive. We discuss with other airlines, with the community, in general, they are all very, very bullish, despite that we will going into a recession. Nobody knows exactly despite some energy problems and so on. But the bonds in principles were positive. So we also will be prepared for a higher traffic volume, for higher passenger numbers next year. You can, of course, ask how could this be? If you look at the German mode, it’s a German discussion, on the one side, yes, we are probably in the upper segment of people consuming something. Second point is probably that whatever we get as polls, as consumer preferences, vacation and flying to Southern parts of Europe is on a very, very high preference for the population. If they have to save money, they would take a hotel, a cheaper hotel or a day less or something like this. But we have to see. In addition, positive passes that we expect especially on the business traveling side and then on the intercontinental side, additional recoveries, which we haven’t had up to now. So there are some positive factors. From today’s point of view, it’s not a guidance, but what we will see from today’s point of view, a further increase next year.
Operator
Next question is from the line of Ruxandra Haradau-Doser with Kepler Cheuvreux.
Ruxandra Haradau-Doser
Congratulations on the performance. Three questions, please. First, a little difficult to understand the capacity recoveries this winter to 90% of 2019 level in the context of Lufthansa indicating that they will operate only 80% of their winter precrisis capacities. And some low-cost carriers not flying anymore to Frankfurt. So which airlines are driving this strong recovery in capacities and is Lufthansa operating more capacities in Frankfurt than at other airports? Second, congratulations on the recovery of EBITDA to 96% of precrisis level in Q3. Considering the nine month performance and your target to be at the upper end of the full year EBITDA guidance, it implies you expect in Q4 an EBITDA around 40% lower than in 2019. Despite, as you mentioned, capacities in Frankfurt being resort to 90% of precrisis level during the winter flight schedule. So do you expect any negative one-offs in Q4? And third, capacities at 90% of precrisis level already this winter. In 2019, you operated around 10% above the nominal terminal capacity. So do you see some chances to open Terminal 3 or Pier G earlier than planned?
Stefan Schulte
Let me start with the first question and the third question. And I assume that Matthias will take the second one. On the winter schedule, we gave you the official numbers regarding the coordinated slots, that’s on a 90% level. I just mentioned already if I look at October and estimate November, December, that’s more on the 80%, 80% to or 82%, something like this, or 78% so more on the 80% level. So that’s probably in line with Lufthansa. I would expect that we won the winter scale around 80% effective flights or effective passenger numbers even the coordinated number of slots is already on 90%. But it will depend very much at the end on the demand. And the demand seems to be strong. So it’s a seat factor at the end and so on. But as mentioned, at the normal, we are roughly a little bit above 80%. Regarding Terminal 3, that no, it’s absolutely clear. We will open up Terminal 3 beginning of 2026, and we will not take it any further earlier. It’s the summer season of [2006], and yes, you know that we are flexible on Pier G. But from today’s point of view, it’s also absolutely clear that we will not open up Pier G next year because for next year, if I take it in total, we don’t need it, we have enough terminal capacity and then that will work in Terminal 1 and Terminal 2.
Matthias Zieschang
Second question, do you expect negative one-offs, the answer no, as of today, we don’t see any negative one-offs. So your observation is correct when you ex the Q4 numbers from 2019, we will end up very high. But this is compatible to our outlook. So we said we will end up at the very high end, and this means we are running against EUR1 billion EBITDA for this year. And whether it’s EUR20 million less or EUR20 million more, everything is possible. We have to see how the volatility regarding energy prices, wages, et cetera, extra shifts, but also remaining traffic. So there’s — again, there’s a lot of volatility. We do not expect any negative one-offs. We are very optimistic and looking forward that the numbers at the end of the day will be very positive.
Operator
[Operator Instructions] The next question is from the line of Elodie Rall with JPMorgan.
Elodie Rall
The first one is on your outlook for OpEx next year in light of the tariff increase that you have secured, right, of 4.9% for ’23. Is this enough that tariff increase or do you anticipate that you will need to ask for more? And I suppose this would be for ’24 and what kind of tariff increase at this stage do you think you need for ’24 after that? My second question is on — just to come back on your cost saving guidance. I think you said this time, you’re thinking of EUR200 million of sustainable cost savings that’s compared to EUR250 million before, but you have — I think you told us you are running at EUR157 million run rate. So I just wanted to understand how to reconcile to that EUR200 million of sustainable savings? Is that because you’re seeing energy costs going down from here? And my last question is on refinancing cost. So I appreciate you have high liquidity levels but you have about 35% of debt maturing over the next 3 years. So what kind of increase in financing costs should we model or do you expect in your base case in the next few years, so per annum?
Stefan Schulte
I’ll take the first question. Yes, we are in an inflation environment, if I may say so, that means we will see higher costs, and we have to make sure that we also see higher revenues on that. The positive thing is, and you have seen this on the third quarter, but also in general with the 9-month figures, we have a very high portion of the international business already and with all the concession agreements over there, most of them have an inflation clause in. So it’s not an adjustment more or less not 100%, but mostly 90% of the inflation, we can take forward and can roll it over with higher aviation fees on that side. Second point is we are very well protected on the retail side and the real estate side because on the real estate, we also normally have an inflation clauses in most of the contract. And on the retail side, it depends, of course, somewhere how the prices of the tenants are increased by inflation because of inflation also in the airport, and we get our variable fee out of that. Regarding aviation fees in Frankfurt, yes, that deal was done earlier. It was, at that time, a quite good deal that’s fixed for next year, but we will take into account those inflation scenarios for the next years also regarding aviation fees, and it depends somewhere, negotiations will start somewhere. That’s too early now on traffic increase, but for sure, also on fee increases, there’s no other way around if you take out the cost increases.
On central infrastructure, if I take Ground Handling as a remaining segment in Frankfurt, of course, we have to open up whatever is to open up as contracts with airlines to bring up the price over there for handling because we also have much higher costs. Sometimes it’s possible to put through inflation clause. Sometimes it’s sharp increase. But there are several hundred contracts. So it’s too early to say what the average result at the entries, but we are working on this already, and we take up always contracts in the size of packs of 50 contracts now, 50 contracts in 1 month and so on because we have a lot of inflation, a lot of negotiations there. On central infrastructure for the Ground Handling baggage system, we asked for an increase for next year of 10%. That’s now — the consultation is now running. So all I can give you somewhat of an overview that we are really working on these things, and I’m quite optimistic that we get most of the things through.
Matthias Zieschang
Second question was regarding our interest exposure. And here, the answer or the mechanics of the answer are relatively simple. We have a gross debt of nearly EUR11 billion. In total, the weighted burden, interest burden is in the moment 2.2%. And you see on Slide 25 in our presentation, how the repayment schedule looks like for the next couple of years. So it’s a very balanced schedule. So in other words, we have to refinance about EUR1 billion per annum and this characterizes the interest exposure. So whenever we come to the market as of today, we have to pay in the moment about 4.5%, which is clearly more than what we paid in the past. But again, it’s just an increase always regarding EUR1 billion. And so depending whether the new financings have interest levels of 4%, 5%, you can calculate what does it mean for the interest. Results on the other side, we have the liquidity. Total liquidity is EUR4.5 billion, thereof EUR700 million credit line. So we have cash on hand EUR3.7 billion, EUR3.8 billion. And theoretically also, we could use these funds to finance the repayment amount in the next three to four years. So with other words, if you would go down to zero, which we are not going to do, there wouldn’t be any additional interest burden for us. And we have these options. We can play with the current level of liquidity. But even if we keep on running this EUR4.5 billion and the theoretical exposure per annum is EUR1 billion times X and X is the difference between the 2.2% from the past and the new refinancing cost in the next years.
Operator
Your next question is from the line of Marcin Wojtal with Bank of America.
Marcin Wojtal
Firstly, on incentives to airlines. You mentioned that there was EUR23 million revenue dilution in the nine months because of these incentives. Is your plan to continue with a similar incentive scheme in 2023? That’s my first question. Second of all, can we get an update on Terminal 3 construction, please? Do you still expect CapEx to be around EUR4 billion, is everything on budget? And what is percentage of completion, if you could update us? And lastly, if I can come back on refinancing, please. What is your volatility course of action? Are you planning to indeed run down the cash balance a little bit, or are you planning to issue Eurobonds, or you think you will be switching a bit more back into bank financing? What are the options available?
Stefan Schulte
Thanks for those questions. Let us start with Terminal 3 commitment and order, so tendered out and then committed as contracts are roughly 80% of the budget completion, our estimate probably 60%, 65%. So whatever is construction that’s done, the roof is done. All the glasses is already under work in progress. So we are now really in the technic, whether it’s cleaner, whether it’s heating, whether it’s whatever you have to bring into as technic into the terminal. So we’re very much online, on time, on budget. We don’t see any bigger risk on that side. We are even making very good progress on the skyline. We got the first train over there, but also there was also construction. So yes. It may be surprisingly for you, but we are on budget and we are on time, and I’m quite optimistic on that side. I think we have a very, very good team over there.
And team, which is also doing jobs in advance because they see sometimes that supply chain is difficult, and we take those things that informed on ground here that we can get the progress done as planned and organized as planned. Regarding the incentive program, there is a small incentive program in place also for the year 2023, that’s linked to growth, but it’s not a big one. Yes, Matthias can give you more details on that side. It’s linked to passenger numbers. That’s the topic. So at the end, we did for this year and for the next year, a passenger incentive program, the more they grow over a specific threshold up to a maximum, they get some rebate and that’s positive because we have 100% of the revenues, giving something back. Whether we continue this in the long run, I don’t know, we have to see that’s not negotiated and there’s nothing done. But I think it’s really in our favor to do this way. Regarding cash balance.
Matthias Zieschang
Yes, cash balance, first of all, you asked what could be or what will be the instrument. So this is absolutely open. In the moment we have a clear preference in favor of so-called promissory notes in German Schuldscheindarlehen and not to Eurobonds, why? Because there’s always a mismatch between the interest level of promissory notes on one side and Eurobonds on the other side. And in the moment, the gap is very high in favor of the promissory notes. That’s the reason why for the next couple of months or quarters, we have a clear preference for promissory notes. So — and then I mentioned also the option to use our cash funds. But in the moment, in the moment means, I would say, for the next couple of 12 months, there’s no intention to go down with a EUR4.5 billion liquidity reserve. But looking forward, this means ’24 onwards then I think it could be that we are going down with a high liquidity. But in the moment, we feel very comfortable we have full access to any market, any capital markets or debt markets. That’s the reason why also due to the high volatility, which is still in the market, we feel very comfortable with a high liquidity level.
Operator
[Operator Instructions] Next question is from the line of Dario Maglione with BNP Paribas Exane.
Dario Maglione
Three questions from me. The first one on OpEx in Frankfurt. What kind of savings should we expect for 2023 compared to 2019? And will this include the consolidation of part of the temporary staff? Similar question on the OpEx again. You mentioned that you’re using more expensive temporary staff in Ground Handling. I think you’ve talked about 660 people. How much more expensive is that — is kind of temporary effect? And the third question is on the debt level. In what kind of traffic scenario do you think your current level of debt is not sustainable?
Matthias Zieschang
First question, OpEx in Frankfurt. So the backbone of our activities has been the reduction of more than 4,000 FTEs here at the Frankfurt site. And if you look now on the current numbers, we had — in the beginning of the year, we had minus 4,400, now we stand at minus 4,200. Yes, there will be some ramp-up in Ground Handling, while on the other side, we still have pressure on limit admin functions. So there will be a partly compensation by further reductions on the other side. To make the long story short, also in the next couple of 12 months, we will end up at around minus 4,000 people. So this is times average salary, we have a savings potential also for next 2 years of about — not at about, of more than EUR200 million. But on the other side, which is — and this is more or less sustainable, which runs against us now is the skyrocketing inflation, inflation on the energy price side as well on higher tariffs on — for the employees. And we have to see now what will be the new tariff numbers for our employees in ’23, in ’24. This is, so to say, it’s linked to inflation.
This is, of course, compensating these savings generated by the volume effect, i.e., minus 4,000 times X as an average salary for the guys. And FraSec, of course, has nothing — of course, has something to do because still we have the personnel cost for FraSec, but up from the 1st of January 2023, we have a deep consolidation of the FraSec or part of the FraSec, which is doing the security business on the so-called Paragraph 5. So operating the security lines inside the terminals in Frankfurt as well as outside Frankfurt. This means we consolidate about 2,000 FTEs. So overnight, then the total number will not be minus 4,000, but minus 6,000 in January 2023. So of course, we have in this logical second also a reduction of the personnel expenses for these 2,000 people of FraSec. But on the other side, because we are then responsible for the security business, we charge the service to the airlines, and we receive these services then from I-SEC and Securitas as well as FraSec, and we have to pay for it. And then this is booked as material expenses.
So there is a switch or a swap reduced personnel expenses on one side and higher material expenses because we buy it now from a company which is our side. And on the other side, we have higher revenues. Why? Because we so to say we sell the additional costs for doing the service to the airline. So it will be a complicated operation, so to say, in our P&L. We will make it fully transparent. But again, the net numbers are that these carve out of FraSec is P&L neutral, will show an FTE reduction of minus 200, reduced personnel expenses 2,000 times X is the average salary for these guys. But on the other side, it’s the same amount, higher material expenses because now we buy this service from FraSec, which is deconsolidated up from January ’23. Then debt, what was the third question, debt level.
Stefan Schulte
Sustainable debt level.
Matthias Zieschang
Sustainable debt level, so we — first of all, net debt as of today or end of Q3 is exactly EUR7 billion due to the fact that the free cash flow is still negative until we reach the breakeven, we will go up close to EUR8 billion. So this will be the maximum of the group indebtedness. But on the other side, we are focusing on the key number, net debt to EBITDA. Here, we made good progress. You see in the numbers, we end up at 7.4x, which is a clear improvement again compared to last year where we have been above 8x. Our target number is 5, maximum 5x net-debt-to-EBITDA. And as of today, we will reach this in 2025. So we ramp down to the long-term sustainable level of 5x. And the improvement will be year-by-year.
Dario Maglione
Temporary staff.
Stefan Schulte
The temporary staff, you had a question. The second question, yes, we had temporary staff and some are on Ground Handling. I think the number I mentioned was around 800 to 900. The contracts are different depending we assume we are working together, what I would say on average, probably around 20% more than if you would hire them directly. Looking forward, we will always have some temporary staff probably will be, if we compare next summer peak with this summer peak, it will be somewhat reduced because we have more on our own company, less temporary, but we will also have some temporary and it makes sense even with plus 20% on average because if you don’t use them in the full year, but more for the peak summer months, and then it’s better just to have them three, four, five months instead of paying them full year.
Operator
Next question is from the line of Marco Limite with Barclays.
Marco Limite
I have a question about your free cash flow projection. So if I’m not wrong, you were guiding in Q2 for free cash flow breakeven in 2024. You have today announced some sort of front-loading of CapEx for Lima. So just wondering when do you expect now the group to be free cash flow breakeven? The second question is again on free cash flow and medium term CapEx. So again, in the second quarter, you were guiding for CapEx levels to go back to maintenance levels in 2028. So just if you can — if you pulled out some more color for your CapEx expectations for 2026 and 2027, given that, of course, Terminal 3 and Lima CapEx will be over by then. So you will have some more CapEx in ’26 and ’27. Just if you can remind us for what maybe we’ll have some CapEx to do for Terminal 2? And third question, if you could please remind us and this is on Lima CapEx. How the front loading of the CapEx you have announced this morning work? With the second quarter conference, you said that there was a net increase of CapEx of about EUR100 million, EUR150 million. If I made the math right from the chart, the additional CapEx are announcing today is about EUR300 million, EUR350 million. So you’re basically saying you’re increasing the net CapEx by EUR200 million. So yes, if you can explain that, please.
Stefan Schulte
You start with the free cash flow.
Matthias Zieschang
So as you mentioned, our outlook is today and was to achieve breakeven in 2024. This was before the change of the CapEx structure in Lima. You mentioned it. So the front loading that we are now going to construct something which was planned to build much later, so end of this decade. And in total, it’s more or less neutral, but it’s again front loaded. And we have to see now with the new front, everything new medium term planning, what does it mean whether we can stick on the ’24 target or there’s a change in 2025. So now we are in the final calculation of the new plan, and we have to see what will be the outcome. And regarding the other big programs, so there is nothing new. So we already said that in the beginning of 2025, Lima will be ready. So the inauguration of the new midfield terminal also in combination with the second runway. So it’s absolutely on track and T3 is also on track. And here the time schedule is to open these terminal with a summer schedule 2026.
So with other words, then the two programs are over. And you see also our proven track record regarding Brazil and Greece, where we showed when we are over with the expansion programs, we go down on a very low maintenance CapEx level. The same will happen then for Lima and Peru as well as here for the site in Frankfurt. So we go down to the maintenance CapEx levels, which will be in total for the group of maximum of EUR400 million per annum. Last topic regarding T2, what we are going in ’26 and ’26, we are opening T3 and then temporarily, we are going to close down T2 because it doesn’t make sense to run at the same time three terminals, while the traffic demand or the passenger numbers are ramping up. So it’s a backup terminal and whenever the need is given to reopen, we are going to open T2. This means in the next couple of years, there’s nothing in the plan because we have it as it is and just in a very long run, it can be that we invest money in Terminal 2.
Stefan Schulte
So regarding Lima, I think that was the other question. You are right with the extension on the one terminal that we can go up to 37 million passengers. So that’s the capacity we’ll build and we want to inaugurate, as Matthias mentioned, beginning of 2025. So we do it in two steps. But 2025, beginning of 2025, the full capacity will be there. This addition now is EUR300 million gross CapEx. And I think that was also in the one slide spread it over 3 years. But you have to calculate against this, all the savings operationally but also maintenance and so on, on the Terminal 1 or on the existing terminal and the old terminal which, of course, which is an older one. So it costs a lot of money on that side. And that’s the reason we mentioned the EUR150 million net amount whether it’s exactly the same years we have to be a little bit careful. So you have always a front loading on the CapEx, but the savings are coming a little bit later after closing down the existing terminals in the next years. But they are already then savings because we start already with a single terminal operation in 2023 because there, we have already a capacity in place of 24 million, 25 million passengers. And then the extension is coming up to the level of 37 million. So the first savings in at least in 2024. But 2023, there is a question mark on that depends how the transition from the one terminal and the other terminal is exactly looking.
Operator
Your next question is from the line of Achal Kumar with HSBC.
Achal Kumar
I’m so sorry if these questions have already been answered. I was dropped off in between. So I have a couple actually. I have 3 questions, if I may. So first of all, I just want to understand what kind of flexibility would you have in terms of CapEx in case there is a significant slowdown in demand. So would you be able to delay some of the CapEx or — so that is my first question. If you could please help on that. Secondly, your retail revenue per passenger is already higher than 2019, while Chinese — but the high spender Chinese people have not yet returned back. So what do you think? I mean, do you think — how do you see retail revenue per passenger going into 2024 when probably you might see China opening up. And finally, on the balance sheet, so you have a significant amount of debt. So how — what — I mean, do you — I mean, do we expect some kind of balance sheet restructuring, capitalist restructuring or how do you see your balance sheet at the moment? And how comfortable are you on that?
Stefan Schulte
The third one we already answered, but maybe we shot another answer on the balance sheet. On the first one, on CapEx, we always showed I think also over the crisis that we have some flexibility, if necessary, but we also reduced it already very much. One thing is clear, if you have construction at Terminal 3 or a terminal like in Lima. If you start to construct it, you should not delay because of a slowdown in traffic. Then you have to fulfill it because other words, it’s getting more expensive as the savings are. So additional costs would be over proportional but to be also quite clear, we don’t see a slowdown in demand. The signals we get from the market are exactly the opposite. The question is whether we can capture with all the additional demand and the slowdown, we don’t see at all. And there are no worst-case scenarios this way, even if we would have a lot of worst-case scenarios, but not on a slowdown in demand.
Matthias Zieschang
Regarding retail, as you mentioned, momentum is good. First two quarters have been weak at Frankfurt Airport. Now Q3 is stabilizing, and now we are a little bit — even a little bit better than Q3 2019, 1.7%, nearly 2% and today, we received the preliminary figures for October this year, and this is very, very promising. So in October, the spend per pax at Frankfurt was EUR3.40. So good recovery year-to-date, we are now at EUR3.05. And given the current momentum, we see the full year number at EUR3.20 as of today. So this is, I think, very, very promising. So it goes in the right direction, and we think so the bottom line or the bottom is reached and we are looking forward a good recovery. Balance sheet clear answer, we feel fine with the balance sheet. There will be no restructuring. And we ramped down over time to, again, 5x net debt to EBITDA. There is no need for anything to adjust. It’s temporarily, yes, too high, but this is due to corona. And now we are improving, EBITDA goes up, and we will reach the level of indebtedness of about EUR8 billion, and that’s it. And then EBITDA goes up and up. And on the other side, when the free cash flow generation is there, we will use these funds to also bring down the absolute indebtedness of the group.
Achal Kumar
Sorry, in terms of net debt to EBITDA, you said you’re at 5x. So what is your comfortable level in terms of net debt to EBITDA? And at what level you would think of a capital restructuring?
Zieschang Matthias Again, our target always was 5x, and of course, there was the overrun due to corona where we went up to, I don’t know what, and now we are at 7x. So we’re just running down to the target and the target is 5x again, and this will not change over time. And so in about 2025, we will back in these, let me say, satisfying range. And again, there’s no need for any restructuring.
Operator
Next question is from the line of José Arroyas with Santander.
José Arroyas
Just two questions for me, please. In the Q2, you mentioned that you have done a preliminary analysis of the international activities going into 2023 and you thought that the portfolio could deliver on a preliminary basis about EUR500 million EBITDA. Has that assessment changed as of today, or is it better, same or slightly worse than that? That will be my first question. And my second question is on Slide 7 on the Lima Airport CapEx. There seems to be a base case and an upper case for the CapEx. And I wanted to understand what drives the base case CapEx to the upper end of the range, if that’s a possibility?
Matthias Zieschang
Yes, as you mentioned, we said in the early beginning of the year that we expect about EUR500 million contribution from the international business. As of today, we already achieved this. So it will be more in Q4 coming on top of this. So it’s better than this what we saw in the beginning. That’s also the reason why we adjusted our outlook for the full year, some months ago, and we are still optimistic. And I think on Friday, we are publishing the new traffic number, is it correct, Friday. And I can say Friday will be good for us and for you. So momentum is strong. And this means we can translate the higher passenger numbers in the international business also in better EBITDA numbers. So that’s the reason why we are confident to run against EUR1 billion EBITDA.
Stefan Schulte
And regarding Lima, that’s not a worst case and the best case. Sorry, probably we should have done it a little bit more clearer. The separation here between further EPC scope and further EPC scope range, that means at the end, I try to explain this a little bit in my speech. You have a direct EPC scope, which is contracted with an EPC contractor really on the terminal itself. And then we have some amendments, which could go with the EPC contractor, but which could also go with other companies which are not negotiated at the moment, baggage conveyor system, something like this for the extension, some other items, which could be depending on what we do there in detail because that was not in the focus up to now that could be in the range of EUR50 million to EUR100 million, but these are additions at the end where we have to go through the detailed planning phase and so on, which is not done. So we may be a little conservative, it could be, that’s so-called amendments. But the most important thing for us was really to get the EPC contract through even with the addition up to the level of 37 million passengers, 37.5 million passengers because now we can go into the negotiations with the project financing banks and the amendments are not important for that. And there, we have enough time to go and to focus on that for the next phase.
Matthias Zieschang
Perhaps in addition to this, when we talk about the CapEx for Lima, you always have to see what we are constructing based on an EPC contract, which is denominated in U.S. dollar. And we talk always in our balance sheet about euro, and it can be if the dollar goes up, if you have EUR1 billion CapEx denominated in dollar and the dollar goes up or down 10%. And we always have a volatility of EUR100 million. This is a little bit not the problem. But what you always see as a, so to say, variable in the CapEx depending from the current dollar rate and the dollar at the moment is strong. So this costs us in the translation something on a euro base, but this can also change overnight. But that’s the reason why we cannot exactly fix it like in Frankfurt, where we always say it’s EUR4 billion, but this is denominated in euro and the construction is in euro. Lima, again, it’s in U.S. dollar. And so far, it’s a natural hedge because also on the revenue side, we are collecting the fees for the international passengers in U.S. dollar. So this is a perfect natural hedge. But we have this translation effect between the exchange rate dollar versus euro.
Operator
There are no further questions on the line. I would like to hand back to Christoph Nanke for closing comments.
Christoph Nanke
Thank you, Emma. Yes, thank you for participating. Thank you for all your interesting and good questions. If anything further comes up to your mind, please give us a call in IR, and wish everyone a good day. Thanks.
Stefan Schulte
Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference call of Fraport AG. Thank you very much for joining. You may now disconnect.
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