Company Reports

We Initiate coverage of Lufthansa with a no-moat rating and a fair value estimate of EUR 6.5, supported by robust travel demand, gradual capacity recovery, and enhanced operational efficiency, leading to improved profitability compared with average prepandemic levels.

Lufthansa is a European network carrier utilizing a hub-and-spoke model with major hubs in Frankfurt, Munich, Vienna, and Zurich.

We are dropping coverage of Deutsche Lufthansa. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Deutsche Lufthansa returned to positive EBIT of EUR 393 million in the second quarter, for the first time since the start of the coronavirus pandemic, driven by strong results from the cargo and maintenance businesses and narrowing losses for its passenger airlines. The number of passengers flown in the quarter of 29 million reached 74% of 2019 levels. The group reinstated full-year guidance and is expecting 2022 EBIT to be above EUR 500 million, while free cash flows should be significantly positive. We maintain our fair value estimate of EUR 11 per share, with shares trading in discount territory.

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna, and Zurich and flies under the Lufthansa, Swiss Air, and Austrian Airlines brands. As a result of the coronavirus downturn the group embarked on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size we expect the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 8.5% per year to 2026 from 2019 precoronavirus levels. However, we remain negative about the prospects for shareholder value creation due to the high level of indebtedness.

Deutsche Lufthansa reported strong cash flows aided by advanced booking as the group is approaching EBITDA breakeven. Bookings are looking strong, reaching 2019 levels, while the group echoed a lot of Air France-KLM’s comments around the definite recovery of corporate travel and rising yields. Capacity in the first quarter was 57.5% of 2019 levels and is expected to reach 85% by summer on the back of strong demand. Lufthansa has hedged 63% of its fuel exposure for 2022 and will pass on excess cost inflation to customers. No financial guidance has been provided for 2022, but management maintains its 8% EBIT margin target by 2024. We make no changes to our EUR 8.15 fair value estimate. The shares appear cheap, but we caution against the extreme uncertainty due to the company's high debt levels.

No-moat Lufthansa narrowed its full-year 2021 adjusted EBIT loss to EUR 1.8 billion, from EUR 5.2 billion a year ago, as traffic recovered and the benefits of the cost-reduction programme filters through. The group expects a strong recovery in 2022 but failed to provide financial guidance due to the uncertainty stemming from the war in Ukraine. Russian airspace has been closed to European airlines, which will affect the group’s Asian destinations as it needs to reroute, leading to higher costs. Roughly 20%-25% of precoronavirus revenue was generated from Asian destinations, but we believe the impact will be more on the recovery than current sales as Asian markets still remain restricted due to COVID-19 measures. The group flew 40% of 2019 capacity in 2021 and expects to fly around 70% in 2022 with summer capacity reaching 85% of pre-COVID-19 levels. The industry faces cost pressures from higher airport charges and sharply rising fuel costs. Lufthansa has hedged 63% of its 2022 at 30% below the current spot price of $110, which will mitigate some of the pressures.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

No-moat Deutsche Lufthansa returned to profitability on an operating basis as traffic in the third quarter recovered due to the easing of travel restrictions across Europe and the positive contribution from the group’s cargo business. Group-adjusted EBIT (including restructuring costs of EUR 255 million) equated to EUR 17 million in the quarter, a stark improvement from the EUR 1.2 billion loss in the same period last year as well as a EUR 969 improvement against the second quarter. The group raised EUR 2.1 billion in the quarter, via a rights issue, which brings pro-forma liquidity to EUR 8.5 billion after accounting for the repayment of EUR 5.5 billion in state aid and is more than sufficient to support the ongoing recovery. We maintain our fair value estimate of EUR 8.15 and reiterate our extreme uncertainty rating due to potential shareholder equity value destruction as a result of the group’s high indebtedness.

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna and Zurich and flies under the Lufthansa, Swiss Air and Austrian Airlines brands. As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size we expect the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 8.5% per year to 2025 from 2019 precoronavirus levels. However, we remain negative about the prospects for shareholder value creation due to the high level of indebtedness.

Signs of a recovery are visible as no-moat Deutsche Lufthansa reported free cash flow of EUR 340 million in the second quarter, the first time it has generated positive free cash flow since the start of the pandemic. Revenue of EUR 3.2 billion grew 70%, while an adjusted EBIT loss of EUR 952 million is a 43% improvement against the same period in the prior year as well as a EUR 191 million improvement against the first quarter, driven by increasing passenger numbers and the progress made in the group’s restructuring program. Available liquidity at the end of June totaled EUR 11.1 billion, of which EUR 6.7 billion was cash and the balance was undrawn state aid facilities. No further information on the timing or size of the group’s capital raise was provided. We maintain our fair value estimate of EUR 16 and reiterate our extreme uncertainty rating due to potential shareholder equity value destruction as a result of the group’s high indebtedness.

No-moat Deutsche Lufthansa’s first-quarter 2021 results included expectations for a slower recovery in traffic than previously anticipated and proposed measures for a capital restructuring. The group reported an adjusted EBIT loss of EUR 1.1 billion, a slight improvement compared with a EUR 1.2 billion loss for the same period last year, driven by record EBIT for the group’s logistics business of EUR 314 million. Available seat kilometers, or ASKs, for the quarter were at 21% of 2019 levels, and the group lowered full-year ASK guidance to 40% of 2019 levels, compared with 40% to 50% previously, as recovery expectations are pared back. Available liquidity at end-March 2021 totaled EUR 10.6 billion, of which EUR 4.8 billion was cash and the balance was undrawn state aid facilities. A proposal for the issuance of EUR 5.5 billion in new equity capital will be made at the AGM in May, and the proceeds will be used to avoid utilizing the equity component of state aid, if needed. We will update investors once further details are clarified. We maintain our fair value estimate of EUR 16.00, while reiterating the extreme uncertainty rating due to potential shareholder equity value destruction as a result of the group’s high indebtedness.

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna and Zurich and flies under the Lufthansa, Swiss Air and Austrian Airlines brands. As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size we expect the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 8.5% per year to 2025 from 2019 precoronavirus levels. However, we remain negative about the prospects for shareholder value creation due to the high level of indebtedness.

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.

Globally, airlines enjoyed a strong run in recent share price performance, with the average price appreciation of the six European airlines in our coverage of 17% over the past month. Aside from Ryanair and Wizz Air, which are trading above precoronavirus levels, the balance of our coverage remains below precrisis levels as the pandemic continues to challenge industry balance sheets and cash flows amid a prolonged recovery due to persistent travel restrictions. Besides, increased talk by governments of vaccine passports, which could pave the way for reopening travel, we find little fundamental news that has changed the sector’s prospects, and believe most of the price increases may be attributed to a rotation of capital into unloved sectors from high-flying tech names, which have seen a retreat from recent highs. EasyJet (fair value estimate: GBX 1,090) continues to offer the best risk-adjusted upside in the sector, while low-cost peers Ryanair (FVE: EUR 14.50) and Wizz Air (FVE: GBX 5,000) are trading above our fair value estimates. The legacy carriers, Air France-KLM, Deutsche Lufthansa and International Airlines Group, are trading well below our fair value estimates but come with very high to extreme uncertainty as they face a high probability of capital restructuring, which could hit equity values.

We are initiating coverage of six European airlines with no-moat and stable trend ratings: Ryanair (with a fair value estimate of EUR 14.50), Wizz Air (GBX 5,000), EasyJet (GBX 1,090), International Airlines Group (GBX 320), Deutsche Lufthansa (EUR 14) and Air France-KLM (EUR 6.70). Our no-moat rating for the industry is predicated on low barriers to entry and irrational competition characterized by deflationary pricing, making it difficult to sustain economic profits.

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna and Zurich and flies under the Lufthansa, Swiss Air and Austrian Airlines brands. As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size we expect the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 11% over the five-year period to 2024 from 2019 levels. However, we remain negative about the prospects for shareholder value creation due to the high level of indebtedness.