Rising EU Costs And Fading Demand Will Crush Profitability

Key Takeaways

• Rising costs from regulation and fleet upgrades, along with overdependence on mature European markets, will challenge long-term profitability and growth.
  
• Structural declines in business travel and intense competition from low-cost and Middle Eastern carriers threaten premium yields and sustained market share.
  
• Fleet modernization, profitable integration of new acquisitions, strong ancillary growth, resilient cargo and maintenance businesses, and ongoing efficiency gains drive sustainable margin and earnings improvement.

Catalysts

Operates as an aviation company in Germany and internationally.

• Despite recent improvements, Lufthansa faces structurally rising operating costs due to increased environmental regulation, higher carbon taxes, and location-specific costs in Germany and the EU, which will put persistent pressure on net margins and erode long-term profitability as regulatory demands intensify.
  
• The long-term shift towards remote work and digitalization threatens to structurally depress corporate travel demand, undermining higher-yield business travel revenues and making it difficult for Lufthansa to maintain premium cabin yields or grow revenue in line with its investments in product upgrades.
  
• Required heavy capital expenditure for ongoing fleet modernization to meet decarbonization and efficiency standards will keep free cash flow under strain and likely increase leverage, further increasing financial risk and placing downward pressure on long-term earnings.
  
• Intensifying competition from ultra-low-cost carriers in Europe and superior geographic positioning of Middle Eastern airlines could steadily erode Lufthansa's market share and yield, especially in both short-haul and key long-haul markets, contributing to long-term revenue stagnation or decline.
  
• Lufthansa's overreliance on the mature and demographically stagnant European market leaves the company exposed to regional economic and political shocks, limiting its ability to capture secular growth in emerging markets and suppressing sustainable revenue and earnings expansion over the long run.

Deutsche Lufthansa Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Deutsche Lufthansa compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Deutsche Lufthansa's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 4.6% today to 2.8% in 3 years time.
• The bearish analysts expect earnings to reach €1.2 billion (and earnings per share of €0.98) by about August 2028, down from €1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.6x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the GB Airlines industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.18%, as per the Simply Wall St company report.

Deutsche Lufthansa Future Earnings Per Share Growth

Risks

• Lufthansa's ongoing fleet modernization, with the delivery of up to 63 next-generation aircraft by end of 2026 and a focus on premium cabins like Allegris, is expected to significantly reduce unit operating costs while capturing higher yields, which supports growth in net margins and overall profitability.
  
• The successful integration of ITA Airways, coupled with early synergy effects in loyalty programs and operations, is already delivering positive adjusted EBIT contributions; this enhances revenue diversification and provides additional pathways for recurring earnings.
  
• Ancillary revenues, particularly from innovative premium products and digital upselling strategies, have outperformed expectations and are still in early stages, indicating strong potential for further growth in ancillary revenue streams and supporting net income growth as premium fleet penetration increases.
  
• The Lufthansa Cargo and Lufthansa Technik divisions continue to deliver record results and provide resilience against passenger market volatility, highlighting the benefits of portfolio diversification and contributing meaningfully to the group's operating profit and earnings stability.
  
• Investments in operational stability, digitalization, and efficiency measures under the turnaround program are already driving material improvements in punctuality, cost control, and reliability, which are expected to further improve operating margins and reduce financial volatility over the medium to long term.

Valuation

• The assumed bearish price target for Deutsche Lufthansa is €5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Deutsche Lufthansa's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.0, and the most bearish reporting a price target of just €5.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €42.3 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €8.04, the bearish analyst price target of €5.0 is 60.7% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.