The Ugly Ducks of Aviation
European airline investors require a strong constitution because turbulence is all but guaranteed.
Consider Deutsche Lufthansa AG, which on Monday said earnings will rise this year when it had previously guided for a slight decline.
As recently as October, the German flag carrier’s shares had hit a four-year low when labor disputes and a glut of new capacity threatened to frustrate CEO Carsten Spohr’s efforts to improve the German flag carrier’s competitiveness. Since then, the stock has more than doubled and recently touched a nine-year high. Shares of its long-suffering rival Air-France KLM also appear to have turned a corner.
Spohr, a trained pilot, has done a decent job since taking the controls in 2014, particularly considering the start of his tenure was overshadowed by the tragic Germanwings crash.
He's reached agreements with strike-prone crew over pension entitlements to repair the balance sheet and made some astute deals to expand the company’s low-cost unit, Eurowings. Investments in the company’s premium cabins are also bearing fruit.
Yet some of Lufthansa’s recent good fortune is down to factors beyond Spohr's influence. Jet fuel prices remain comparatively low and customer demand has picked up this year following a spate of terror attacks. Helpfully, Middle East carriers are facing an array of problems that may constrain their ability to pinch Lufthsansa’s customers. Meanwhile, recent rises in bond yields bode well should help pare the 8.1 billion-euro ($9.4 billion) deficit in Lufthansa’s plan deficit. 1
Investors shouldn’t assume their recent good fortune is baked in. As Bloomberg’s Richard Weiss has noted, Lufthansa’s current share price is 7 percent above the level analysts expect the stock to reach over the next twelve months. The stock now trades at about seven times estimated earnings, after trading at as little as four times last year.
With low-cost carriers like Norwegian Air Shuttle adding more routes across the Atlantic, pricing could start to suffer again. Lufthansa's Eurowings unit (which serves non-hub and long-haul routes) expects to turn a profit year -- but it's still a long way from the double-digit operating margins attained by Easyjet Plc and Ryanair Plc, and the latter is making inroads into Lufthansa’s main Frankfurt hub.
Lufthansa's shares retreated about 2 percent on Tuesday after the company warned unit revenue, or the price it can charge for each seat, will shrink again over the next six months. Long-suffering investors have enjoyed some quite unexpected good fortune -- little wonder some decided to return some firepower to the hangar.
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