Fleet Modernization And Digitalization Will Drive Future Efficiency Gains

Key Takeaways

• Lufthansa's operational improvements and fleet modernization are set to enhance net margins by reducing costs and boosting efficiency.
  
• Strategic expansions and digitalization efforts aim to capitalize on growing air travel demand and diversify revenue streams.
  
• Lufthansa faces increased cost pressures, global operational challenges, and regulatory impacts, threatening profitability and constraining revenue growth and fleet modernization efforts.

Catalysts

Operates as an aviation company worldwide.

• The demand for air travel is growing, and Lufthansa has achieved record seat load factors, which suggests potential for increased future revenue as long as operational capacities can be managed effectively.
  
• The implementation of the Lufthansa Airlines turnaround program, which aims to improve efficiency and productivity, could significantly increase net margins and earnings by addressing structural problems and cost savings.
  
• The modernization of Lufthansa’s fleet with new aircraft is expected to reduce fuel and maintenance costs, enhancing net margins through lowered operational expenses in the long run.
  
• Increasing the use of digitalization and automation will drive efficiencies and ancillary revenues, potentially boosting net margins by streamlining operations and enhancing customer service.
  
• The strategic acquisition of ITA Airways and expansion in Southern markets could result in future revenue growth by diversifying Lufthansa’s geographic market reach and capitalizing on new growth opportunities.

Deutsche Lufthansa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deutsche Lufthansa's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 4.1% in 3 years time.
• Analysts expect earnings to reach €1.7 billion (and earnings per share of €1.3) by about December 2027, up from €1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.5 billion in earnings, and the most bearish expecting €1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2027 earnings, up from 7.0x today. This future PE is lower than the current PE for the GB Airlines industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 3.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Deutsche Lufthansa Future Earnings Per Share Growth

Risks

• Lufthansa faces external and internal factors challenging its financial success, such as delayed aircraft deliveries and operational challenges at its hubs, which could negatively impact its net margins and earnings.
  
• High maintenance costs, missing deliveries of new aircraft, and lower crew productivity compared to pre-crisis levels are putting significant cost pressures on Lufthansa Airlines, threatening the profitability and thereby impacting net margins and earnings.
  
• The aviation industry, and Lufthansa specifically, suffers from ongoing delivery problems with aircraft manufacturers like Airbus and Boeing, hindering fleet modernization plans that are crucial for reducing fuel and maintenance costs, potentially affecting future profitability.
  
• Lufthansa Airline’s competitive environment is strained by geopolitical challenges such as those in its Asia operations caused by competition and rising capacity pressure, especially from Chinese carriers, impacting the revenue generation potential in that region.
  
• Regulatory costs affecting the German market contribute to demand challenges, and given Lufthansa’s high exposure to this market, it might continue to recover slowly, putting pressure on yields and negatively impacting overall revenue growth.

Valuation

• The analysts have a consensus price target of €7.29 for Deutsche Lufthansa based on their expectations of its future earnings growth, profit margins and other risk factors. 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 €5.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €41.9 billion, earnings will come to €1.7 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 8.3%.
• Given the current share price of €6.57, the analyst's price target of €7.29 is 10.0% higher.
• 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.