Stricter Carbon Pricing And Fleet Delays Will Impair Viability

Key Takeaways

• Rising regulatory, environmental, and structural costs, coupled with slow fleet modernization, will limit Lufthansa's ability to protect margins and maintain profitability.
  
• Lasting declines in business travel and passenger shifts to alternative transport will negatively influence revenue growth and ticket yield quality.
  
• Continued strong international demand, operational improvements, and favorable external factors position Lufthansa for sustained revenue growth, enhanced margins, and improved group profitability.

Catalysts

Operates as an aviation company in Germany and internationally.

• The accelerating pace of climate regulation and anticipated increases in EU carbon pricing will significantly raise operating costs for Lufthansa, particularly as efforts to pass along higher ticket prices to consumers are likely to dampen demand, ultimately constricting both revenue and net margins over the medium
• to long-term.
  
• The ongoing shift toward virtual meetings and remote work is expected to drive a permanent decline in lucrative business travel, a segment where legacy carriers like Lufthansa are highly exposed; this will create persistent pressure on yields and top-line growth, especially as ticket mix continues to skew toward lower-margin leisure traffic.
  
• Heightened societal emphasis on sustainability and the prevalence of flight shaming, especially in Europe, threaten to erode passenger growth and incentivize travelers to shift to high-speed rail and other transport alternatives, undermining Lufthansa's future revenue streams.
  
• Delays in fleet modernization-exacerbated by supply chain bottlenecks and persistent delivery issues from major aircraft manufacturers-are likely to leave Lufthansa with a structurally less efficient fleet relative to competitors, resulting in higher fuel, maintenance, and personnel expenses that drag on net margins for several more years.
  
• Prolonged structural cost inflation-including escalating labor costs from legacy union agreements, rising airport and air traffic control fees, and unavoidable expenditures related to environmental compliance-will outpace Lufthansa's ability to implement compensating productivity improvements, leading to continued operating expense growth and pressure on earnings.

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 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.2% today to 3.8% in 3 years time.
• The bearish analysts expect earnings to reach €1.6 billion (and earnings per share of €1.34) by about July 2028, up from €1.2 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 4.8x on those 2028 earnings, down from 7.4x today. This future PE is lower than the current PE for the GB Airlines industry at 7.2x.
• 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 9.21%, as per the Simply Wall St company report.

Deutsche Lufthansa Future Earnings Per Share Growth

Risks

• Strong and sustained demand for international air travel, driven by record-breaking sales above €8 billion for the first quarter and robust pre-booking levels across all regions, points to enduring top-line revenue growth.
  
• Fleet modernization and expansion, with significant delivery of next-generation, fuel-efficient aircraft and major investments in cabin upgrades, are set to lower operating expenses and support margin improvement over the long term.
  
• Lufthansa Technik and Cargo segments are delivering high revenue and EBIT growth, with Lufthansa Technik described as a digital powerhouse and Cargo benefiting from healthy demand due to resilient e-commerce and global inventory cycles, strengthening overall group profitability.
  
• Strategic flexibility, including dynamic capacity management, operational excellence initiatives, and a comprehensive cost-reduction turnaround plan, allows quick adaptation to volatile demand and cost environments, thus helping to protect net earnings.
  
• External tailwinds, such as lower fuel prices, hedging strategies that provide cost stability, potential tax relief from the German government, and possible positive macroeconomic policies, generate upside to margins and free cash flow going forward.

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 €42.2 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 9.2%.
• Given the current share price of €7.66, the bearish analyst price target of €5.0 is 53.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.