Company Overview of Lufthansa Group

Lufthansa Group is the flag carrier of Germany, founded in 1953. Combined with its subsidiaries, it is the second-largest airline in Europe in terms of passengers carried. Lufthansa Group is one of the five founding members of Star Alliance, the world’s largest airline alliance, formed in 1997.

Besides its own services and owning subsidiary passenger airlines Austrian Airlines, Swiss International Air Lines, Brussels Airlines, and Eurowings, Deutsche Lufthansa AG Group owns several aviation-related companies, such as Lufthansa Technik and LSG Sky Chefs, as part of the Lufthansa Group. In total, the group has over 700 aircraft, making it one of the largest airline fleets in the world.

In 2020, the German government offered a €9 billion bailout to support the airline through COVID-19-induced economic issues, and the market capitalization is 7.24 billion euros.

Founders and Board of Directors

Kurt Weigelt

• Supervisory board chairman 1953–60 & honorary president
• Active in the banking industry — board member of Deutsche Bank
• Busy with the liquidation of the old Lufthansa after World War II

Kurt Knipfer

• Supervisory board member
• Government official —– head of aviation, Federal Ministry of Transport

Executive Team

Carsten Spohr, Chairman & Chief Executive Officer (May 2014 – present) :

Industrial engineer gained his pilot license and then joined Lufthansa in 1994, initially served as a personal assistant, then took on numerous positions. Now he manages the segment Network Airlines, Eurowings and Aviation Services.

Remco Steenbergen, Chief Financial Officer (2021 – present):

MBA, registered accountant. Forty years of working experience as an accountant before joining Lufthansa in 2021. Now He is responsible for the Finance Division, which includes Controlling and Risk Management, Corporate Finance, Accounting, Balance Sheets, Taxes, Purchasing as well as Mergers & Acquisitions and Investor Relations.

Detlef Kayser, Chief Operations Officer (2019 – present):

Aerospace engineer previously worked in McKinsey in a variety of positions. Now he is responsible for all operational processes as well as fleet and infrastructure management in Lufthansa and for the group-wide restructuring program “ReNew”  which was introduced due to the pandemic in 2020.

Michael Niggemann — Chief HR & Legal Officer (2020 – present):        Lawyer, Before joining Deutsche Lufthansa in 2007, he was an in-house counsel at HOCHTIEF AG. After going with Lufthansa, he held several management positions within the Legal Department.

Christina Foerster — Chief Customer Officer (2020 – present):

MBA started her career as a consultant in BCG Group then switched to Lufthansa in 2002 as Project Manager Corporate, then she was positioned in General Manager Product Development, CEO at the Belgium Group Airline, etc. Now she was responsible for the business areas Customer, IT and Corporate.

Harry Hohmeister — Chief Commercial Officer (2013 – present):

In commercial air transport, he spent most of his professional career with the Lufthansa Group, which he joined in 1985. Now he coordinates network planning, revenue management, dispatch, and sales for all passenger airlines in the Lufthansa Group.

 Notes： At its meeting on 2 March 2022, the Supervisory Board of Deutsche   Lufthansa AG decided to renew the contracts with Christina Foerster and Michael Niggemann ahead of schedule for five more years until 31 December 2027.

Risk Factors

Projection on the risk in 2022 –  Ukraine Crisis

1. Affect the insurance coverage of airlines worldwide
2. Crude oil price skyrocket
3. Increasing living and energy costs negatively impact consumer confidence and demands for flight.

Potential Risk in the next few years:

Fuel Price Movements

Severe fluctuations in fuel prices can have a significant effect on earnings. A change in the fuel price of +10% (–10%) at year-end 2022 would increase (decrease) the anticipated earnings of the Lufthansa Group by EUR 261m (EUR –361m) after hedging.

Rating Downgrade

The credit rating of Lufthansa was lowered to a non-investment grade in 2020. That’s tougher for the company to finance itself, which reduces the capacity for borrowing capital and increases financing costs.

Cyber

Cyberattacks have increased worldwide since the coronavirus crisis. Hackers are becoming increasingly professional, more international, and more numerous.  At the same time, the digitalization of business processes in the Lufthansa Group is increasing, meaning that the potential effects of cyberattacks may continue to escalate.

Business Segments  

-Network Airlines

Lufthansa German Airlines, SWISS, Austrian Airlines, and Brussels Airlines

Multi-hub strategy:  provide customers with a premium, high-quality product and service, a comprehensive route network, and the highest level of travel flexibility.

–Eurowings

Eurowings is positioned as Europe’s value carrier for private and business travel, focusing on European point-to-point traffic, enabling its customers low-cost and flexible flying with innovative services.

-Logistics

Lufthansa Cargo AG operates worldwide air freight and logistics services.

-MRO

Lufthansa Technik: leading individual provider of MRO for civil, and commercial aircraft.

   MRO: Maintenance, Repair, and Overhaul

–Catering

LSG Sky Chefs: a global food specialist with the highest hygiene and quality standards for airlines, the home delivery market, and retail.

Product Positioning 

• Multi-airline business model

Lufthansa Group’s traffic system is being transformed into a multi-traffic system consisting of hubs, point-to-point traffic, and intermodal offerings.

• Focus increasingly on sustainability and social responsibility

—Invest in fuel-efficient aircraft

—Applies the principles “reduce – recycle – reuse – replace” in its product and service development.

• Set up the “ReNew” restructuring program to react to the crisis-related market collapse.

 Pain Point

• Lufthansa would probably be in a price war with Ryanair in short-haul and long-haul with United Airlines to seize market share. More takeover and merger events could help the company to occupy more market share.
• Tough time for Lufthansa to go through the post-pandemic period, where their profitability is at the bottom level over those airline companies worldwide.

Competitive Analysis Globally

Source Investor-relations

Asia: China Southern(Fleet size: 644) , ANA Holdings(214)

Europe: Ryan Air(511), Air France(212)

US: United Airlines(839), Delta Airline(877)

Implication:

1. Lufthansa has the lowest EBIT among those airline companies, indicating that the profitability in the post-pandemic period is weak.
2. Combining the two measurements – Current ratio and cash on hand could show the liquidity problem of each company.  The inaugural revolving credit facility of EUR 2.0bn safeguards their ability to pay off debt obligations quickly and is less likely to face financial hardships.

3. The D/E Ratio of U.S. airline companies is significantly larger, implying that they borrow large sums of debt to finance their activities, which is a bit risky for long-term debt obligations.

Current Balance Sheet     

• Decrease in inventory and long-term investments in the past two years.
• Long-term debt almost doubled compared to the pre-pandemic period. Lufthansa will face the potential risk of bankruptcy if it doesn’t have enough cash to pay for the debt.
• Negative retained earnings in the past two years implied Lufthansa’s struggle of making profits.

Capitalization Requirements

Source investopedia

• Lufthansa has held an increasing cash amount since the pandemic broke out in 2020. In comparison, between 2019 and 2021, Lufthansa held 1.75 x more cash.
• Lufthansa had much lower revenue but still a lot of fixed costs and debt. As a result, the action of holding more cash is reasonable and could help Lufthansa to avoid some potential risks regarding liquidity.

Source Investopedia

• Lufthansa had an exceptionally high debt-to-equity ratio when Covid-19 broke out in 2020. The D/E ratio remains higher than the pre-pandemic period in 2021 and 2022 because of the depreciation in the company’s equity and negative retained earnings, which is related to the company’s profits.
• It would be risky for Lufthansa to pay back the debts, but fortunately, its cash holding is increasing.
• The airline industry usually has a higher D/E ratio, but Lufthansa has a relatively lower D/E ratio than its competitors, implying that it faces less risk of potential insolvency.
• 75% of the capital is financed by debt, which is lower than its competitors but still indicates that Lufthansa relies heavily on debt financing.

Source investopedia

• Breakeven Load Factor (BLF) is the average percentage of seats that must be filled on an average flight at current average fares for the airline’s passenger revenue to break even with the airline’s operating expenses.
• The original calculated BLF is greater than one, which is impossible. Since Lufthansa also has revenues from traffic, subtracting other revenues could lower the average operating expense that passengers need to cover.
• The BLF after adjustments is 0.82, and we observe a decreasing trend of BLF and an increasing trend of the actual load factor, indicating that Lufthansa is recovering from the impact of the pandemic.
• Compared to 2019, the actual load factor decreases with a decrease in revenue.
• The BLF projection shows that the BLF is always higher than the actual load factor, indicating that Lufthansa fails to cover its operating expenses. Thus, Lufthansa continues to have negative net income in the past five quarters.
• If Lufthansa continues to perform this way, they are at high risk of loss and potential insolvency.

Source Investopedia

Discounted Cash Flow Projection

• Negative EBIT in the post-covid period (past five quarters) suggests that Lufthansa has not yet recovered from the impact of Covid-19.
• Using the free cash flow approach will get a negative terminal value, which may fail to represent the actual future performance of Lufthansa. Thus, the terminal value is calculated based on the average EV/EBIT exit multiple.
• Projecting the cash flow for the next five quarters, the estimated value per share is €4.45, which is lower than the current market price. It implies that Lufthansa’s stock price may continue to decrease after Covid-19.
• Investors should consider other factors not directly reflected in the DCF model, affecting the valuation result. For example, people’s strong desire to travel after the end of the lockdown may lead to a surge in demand for air tickets, thus the drastic revenue growth at the beginning of 2021. However, the revenue growth rate will slow down when people gradually return to normal life in the post-pandemic period. For example, the revenue growth rate turns negative at the beginning of 2022.

Cash Flow Statement

Source Investopedia

• Cash from operating and net income experienced sharp decreases in 2020, while cash from investing and financing experienced increases. The Covid-19 pandemic strongly impacted Lufthansa’s cash flow.
• Lufthansa issued more long-term debt and invested less in capital expenditures during the pandemic. However, the high debt in 2020 and 2021 may make the company financially unstable. Also, decreasing investments in capital assets could limit the company’s growth potential in the long term.
• Lufthansa is recovering from the shock of Covid-19 in operating activities with an increase in net income. However, if the net income continues to be negative, Lufthansa could not make profits and will be at risk of bankruptcy.

Industry Average Valuation Multiples

Source Investopedia

• The above graph presents the trend of valuation multiples in the past six years, including pre and post-pandemic periods.
• Some multiples like TEV/LTM EBITDA and TEV/LTM EBIT are steady valuation metrics before 2020 but become no longer meaningful during the pandemic because of the negative EBITDA and EBIT.
• For unprofitable companies, it’s better to look at EV/Revenue and P/B ratio.
• With EV/Revenue smaller than 1, Lufthansa may be undervalued and worth investing before Covid-19. However, with increases in EV/Revenue and the exceptionally high EV/EBITDA ratio in the post pandemic period, the company may be overvalued.

Stock Price Since IPO

Source investopedia

• Lufthansa has been publicly traded on all German stock exchanges since 1966.
• The earliest recorded date of Lufthansa’s IPO is Dec.16, 1996, with a price of 10.65 EUR per IPO share volume of 761200。
• Lufthansa reached its highest stock price on Dec.17th, 2017, at 31.055 EUR and the lowest stock price on Nov.21st, 2021, at 5.416 EUR

1. Air France

Source yahoo finance

By downloading the data from yahoo finance and visualizing the data in excel, the graph above represents the overall stock price movements of Air France since 2000. They reached their highest stock price on May.27th, 2007, with a price of 38.3 EUR.  We can see that the impact of the pandemic on its stock price is still relatively large. In early 2020, the company experienced a severe stock price decline, and at that time nearly touched its all-time stock price lowest point. It’s also not hard to see that Air France’s stock price recently reached its own new all-time low. So I designed the following Python algorithm to measure the share price offering from the end of June to the beginning of July 2022.

Algorithm：

The logic behind this method is by using Investing.com as a database, to obtain recent stock price information based on the name of the company and the country of origin. In this particular case, found the recent stock price of Air France from all historical stock prices provided on the site.

Below is the results from Python:

2. AIR    

Overview:

Source yahoo finance

By downloading the data from yahoo finance and visualizing the data in excel, the graph above represents AIR’s overall stock price movements since 1980. The company also experienced a severe stock price drop in 2020 due to the pandemic, but surprisingly, it continued to show an upward trend after that. I used the same python algorithm above to measure the share price offer from the end of June to the beginning of July 2022 AIR, and below is the result.

3. Ryan Air

Overview:

By downloading the data from yahoo finance and visualizing the data in excel, the graph above represents the overall stock price movements of Ryan Air since 1997. The company experienced a severe stock price drop in 2020 due to the pandemic; they started to bounce back in early 2021 but starting this year, they experienced a drop in stock price again. I used the same python algorithm above to measure the share price offer from the end of June to the beginning of July 2022 of RyanAir, and below is the result.

4. Lufthansa 

Overview:

Source yahoo finance

By looking at the data from yahoo finance and the visualized data, the graph above represents Lufthansa’s overall stock price movements since 1996. Their stock price has generally fallen since the pandemic and hit an all-time low this year. I used the same python algorithm above to measure the share price offer from the end of June to the beginning of July 2022 of Lufthansa, and below is the result.

Size of Company – DAX Performance Index 

Overview: source yahoo finance

• Stock prices have generally fallen since the pandemic
• Slightly decrease since this year
• Not in the Top30 Component

Source yahoo finance
Exchange Index- Euro Next Performance

Source yahoo finance

• Stock prices have generally fallen since the pandemic
• Not in the Top30 Component

Source yahoo finance

Market Research 

Who are the target customers of the company?

Four categories: passenger airlines, logistic business, MRO, and Catering.

Network Airlines:  offer premium products and services to customers of Lufthansa German Airlines, SWISS, Austrian Airlines, and Brussels Airlines. Commercial joint ventures exist between Europe and North America, All Nippon Airways (ANA), Europe and Japan, and Singapore and China, respectively.

It carried a total of 39.2 million passengers in 2021.

lufthansagroup.com
In the summer of 2021, demand for flights to European holiday destinations and long-haul tourist destinations rose strongly with only limited or no travel restrictions in place. It later increased in North America after announcing the relaxation of travel restrictions to the USA.

Eurowings: is positioned as a value carrier focused exclusively on European point-to-point traffic. Includes the flight operations of Eurowings and Eurowings Europe, as well as the equity investment in SunExpress, a joint venture with Turkish Airlines.

Operating performance improved significantly throughout 2021 as the recovery in demand was observed in nearly all European regions, to which Eurowings responded flexibly and quickly with the corresponding increases in capacity.

Source lufthansagroup.com

Logistics business: The route network covers around 300 destinations in more than 100 countries, using freighter aircraft and cargo capacity from passenger aircraft operated by Lufthansa.

MRO business: Lufthansa Technik is the world’s leading independent provider of maintenance, repair, and overhaul services (MRO) for civilian commercial aircraft and serves more than 800 customers worldwide.

Catering business: The LSG group offers a comprehensive range of products, concepts, and services related to in-flight service to airline carriers.

How do they acquire Targeted Companies？

Among 208 deals during the past few decades, Lufthansa acquired targeted companies using a mix of cash and stock. There are 67 of them disclosed transaction values; the maximum one was on Sep 3, 2009, Lufthansa acquired Austrian Airlines AG.

Source Investopedia

What type of marketing does the company do to increase its brand recognition?

• Quick response to COVID-19 Pandemic

The Lufthansa Group has responded quickly and comprehensively to set up the “ReNew” restructuring program to react to the crisis-related market collapse and the changed financial situation. Liquidity outflow was successfully reduced, fixed costs were concentrated in the short term by over 30%, and around two-thirds reduced capital expenditures compared with the initial planning.

• Introduced new catering concepts: 

In the first six months of 2021, Lufthansa German Airlines, SWISS, and Austrian Airlines introduced a new catering concept. Economy Class passengers for the airlines’ short- and medium-haul routes are offered a customized and high-quality range of food products for purchase. Lufthansa German Airlines introduced a new, innovative cabin in the new Airbus A320 family aircraft in September 2021, improving passengers’ travel comfort.

• Focus on sustainability:

Sustainability aspects play an increasingly important role for the Lufthansa Group. For example, it has invested in modern and fuel-efficient aircraft and engine technologies to reduce carbon emissions from flight operations. Sustainable products and services are also being developed or refined to provide customers with climate-optimized travel. The Group aims to reduce carbon emissions by 50% by 2030 and be carbon-neutral by 2050.

• Developed digital service for healthy traveling

Via the health data solution “myHealth Docs,” passengers can check whether they have all the necessary entry documents and check-in efficiently online, significantly reducing waiting times at the airport.

Brand Positioning 

Awards:

Lufthansa German Airlines received several awards at the World Travel Awards in 2021. It was named Europe’s leading airline in Economy Class, serving Asia, and for its in-flight magazine. The airline also received the Hospitality Award for the best economy snack and the German Design Award for the best packaging design. Eurowings has been given three “German Customer Awards 2020/21” The airline took first place in customer satisfaction, customer service, and value for money.

SWOT Analysis

Strength:

• Lufthansa group contains some strong brands

SWISS and Austrian command strong loyalty in their home markets, Lufthansa’s brand, and those of its principal subsidiaries. The Lufthansa Group positions itself among the largest airlines in the world and assumes the role of the leading European airline group. Joint ventures/alliances cover a large proportion of Lufthansa’s network capacity.

• Fleet modernization:

As a consequence of the renewal fleet, modernization and simplification of the fleet structure help cut emissions, increase fuel efficiency, reduce maintenance and staff costs, and so directly improve earnings. Lufthansa has developed a strong position in its joint venture agreements with United Airlines, Air Canada, and All Nippon Airways. When approved by competition authorities, such arrangements allow the participants to coordinate schedules and prices and typically provide significant unit cost enhancements. This helps to resist growing competition from Gulf carriers on Asia Pacific routes.

• Strong Balance sheet

In 2021: return to profitability: Secured 2.7 billion of sustainable cost reduction, stopped cash outflow, repaid German stabilization, and initiated a comprehensive portfolio review.

• Gradually recovered from the COVID-19 Pandemic.

In 2022: At the beginning of the year, demand for air travel was significantly impacted by the spread of the Omicron variant; however, towards the middle of the first quarter, the development of demand decoupled from the development of infection figures; accordingly, capacity was also significantly expanded at the end of the quarter. Powerful booking momentum since March, Network almost fully restored, Premium recovers more strongly than non-premium. Compared with the previous year, traffic revenue at Lufthansa Group airlines rose in the first quarter of 2022 by EUR 2,291m.

Source Investopedia

Weakness:

• Flight Operation risk:

The airlines in the Lufthansa Group are exposed to potential flight and technical operating risks. It might be unable to carry out regular flight operations for technical or external reasons. Accidents and the possibility of damage to people and property; it is divided into environmental factors (for example, weather or bird strike), technical factors (for example, engine failure), organizational factors (such as contradictory instructions), and the human element.

• Labor Dispute

During the past week, Lufthansa canceled almost all its flights from two hub airports as ground staff staged a walkout. Six hundred and seventy-eight flights had been scrapped from Frankfurt Airport and a further 345 at its Munich hub on Wednesday ahead of the vacation season in parts of the country this weekend. About 134,000 passengers are affected. The labor dispute is the latest in a series across the aviation industry. It is across Europe more broadly and has led to significant travel delays and cancellations.

Source Investopedia

Opportunity:

• “ReNew” restructuring program:

They are intended to create the conditions for a return to a positive operating result. Even once the Pandemic is over, the aim is to increase structural profitability by continuously reducing unit costs, simplifying processes and structures, and improving productivity.

• Partnerships with other airlines are essential to strengthen the market

presence; the Lufthansa Group airlines are based in economically solid regions and are therefore attractive as partners for airlines within Europe and elsewhere.

Threats:

• COVID-19:

Passenger Airlines in the Lufthansa Group suffered considerably from the spread of the Omicron variant, particularly at the start of the first quarter of 2022. Required intensive work on the implementation of restructuring programs. Strikes, inclement weather, and a rise in Covid-19 cases have also strained the system. With an increasing demand for travel during summer, Lufthansa is scrapping 2,000 flights from its summer schedule as airlines around Europe grapple with staffing shortages. Effects of Seasonality: revenue in the first and fourth quarters are generally lower since people travel less; the easing of pandemic-related travel restrictions currently outweighs the impact.

• Ukraine War:

The loss of markets in Ukraine and Russia and the necessary adjustments to flight routes to Asia. The impact of the Ukraine war on the global economy – especially on consumer confidence and energy prices – is expected to influence the Group’s economic recovery strongly.