Restructuring, Refinancing, and Recovery as Lufthansa Posts Record Losses; Uncertainty Remains

No-moat Lufthansa’s 2020 results were characterized by the theme of restructuring, refinancing, and recovery as the group posted record losses of EUR 6.7 billion and burned through EUR 3.7 billion in cash. The group ended the year with EUR 10.6 billion in liquidity, consisting of a roughly equally split cash and untapped government-backed equity component. The key question is whether the group can lower the current EUR 300 million monthly cash-burn rate to avoid using the equity component of available liquidity. Debt repayments of EUR 2.5 billion are due in 2021, leaving about a EUR 2.5 billion 2021 cash-burn threshold before utilizing the equity component. It will be a close call, and management is considering alternative measures such as an equity raise and debt refinancing to avoid utilizing taxpayer money. Extreme uncertainty remains, and despite the shares trading at a discount to our EUR 14 fair value estimate, we caution investors about the high risk of equity value destruction due to the high debt levels amid an uncertain path to recovery and cash neutrality.