Flying in the right direction

31 Oct 2013 By Olaf Storbeck

Lufthansa is undoubtedly facing many challenges. For years, the German airline has been losing hundreds of millions of euros annually on short-haul flights. And aggressive competitors like Emirates and Etihad are attacking the still lucrative intercontinental market.

But Europe’s largest airline is by no means in as bad shape as its stock-market valuation suggests. On 2014 EBITDA multiples, Germany’s flagship carrier is trading on a 34 percent discount to its European rivals, Reuters Starmine data shows. Even loss-making Air France-KLM is valued at a higher multiple than Lufthansa, which was operationally profitable even in the darkest days of the 2009 recession.

That is too sceptical. Lufthansa not only boasts a strong track record of profit; it is preparing well for the future. An ambitious restructuring programme, kicked off last year, aims to lift operating profit from 800 million euros in 2011 to 2.3 billion euros in 2015. It seems to be on track. Last year, one-time costs of 160 million euros produced a 618 million euro lift in underlying operating profit. Lufthansa has confirmed it will meet its 2013 target of additional savings of 740 million euros, in part because job cuts are coming faster than expected.

Lufthansa’s revamped no-frills subsidiary, Germanwings, which will operate all short-haul flights that do not feed its hubs in Frankfurt and Munich, has started well. This year, for the first time in half a decade, the airline’s European traffic is not losing money.

The snag is that Lufthansa’s progress is not yet showing up clearly in the financial statement. The airline expects to report an operating profit of 600 to 700 million euros in 2013, up from 524 million euros in the previous year. But the 2012 number was boosted by 325 million euros in positive one-offs – an accounting change and the hiving-off of a loss-making subsidiary – while this year’s exceptional items are negative – 200 million euros for restructuring and 100 million for a cabin redesign. Foreign-exchange movements are also hurting.

Shareholders who look through the short-term haze will discover the contours of a leaner, more profitable company.


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