Lufthansa (LHAGR; Baa3/BBB-/BBB-) 2Q Final Results

It's hard to see value in Lufty when the IAG29s (Baa3/BBB- Pos) still trades +30bps north - latter brings earnings on Friday. Lufty is struggling in its flagship carrier but unit costs are holding flat for the group (guidance sees it up on the year though) and other airlines higher margins are supporting bottom line. Benefit of diversification should command a premium on the curve - if that is worth 100bps to Air-France is a tougher question and one we will need to circle back on. AFFP has been brought back in a tad since earnings while Finnair taken wider - if that dynamic continues we will see FOY29s as value again (despite rough FY guidance). We would not rule out more Lufty supply this year.

Reminder pre-lim results came on the 12th and led to a +7-20bp sell-off and linked here.

• Capacity (ASK) was up +11% but revenue was only €10b (+7%) dragged on by the industry wide lower yields (-4% for it). It left RASK down -5%.
• Unit costs (CASK) actually held flat (-0.1%) but the falling yields was enough to drag EBIT down to €686m (-37%), group now operating at a 6.9% margin (-470bps). It's done an interesting graph to show how capacity increases are impacting yields by geography; NA has held up the best while Europe and APAC are struggling.
• It's also split out the flagship Lufthansa Airlines (over 50% of group revenue but 35% of EBIT). The performance between the two is stark; Lufthansa running a 4.7% EBIT margin (-730bps) while other airlines run 10.3% (-310bps). It's not caused by yields either (RASK was -6% for other vs. -5% for Lufty) but by costs (CASK -4.5% vs. +3%).
• Above goes some way to show benefits of diversification out of single carrier; this benefits Lufty and IAG in particular and is a limitation with credits like Air-France (budget Transavia is small) and Finnair. Despite low-cost doing well, worth keeping in mind for EasyJet and Ryanair as well.
• Swiss Airlines (17% of group) is running a 15% EBIT margin, Eurowings (8%) a 6% margin, Austrian Airlines (7%) a 9% margin and Brussels Airlines (4%) a 3% margin.
• It's saying late delivery of new planes is costing it "annual 3-digit million" in earnings. It also says €100m impact from strikes. Sounds small vs. numbers Air-France may face on Olympics impact.
• Outside airlines Technik (the airline maintenance/repair services arm; 20% of revenues this qtr) and Lufty Cargo (8%) did well. Technik up +18% and running a 10.8% margin (+100bps), Cargo up +8% and running a 4.5% margin ( -70bps).
• Launching a "comprehensive turnaround program" for the flagship Lufthansa airlines. Lot of high level words, only tangible we see is reducing long-haul fleet by decommissioning some models across Airbus and Boeing.
• Net debt down from €8.4b to €8.1b leaving it levered 2x. It will be getting support from seasonal FCF this half, liquidity is not an issue. Please see our comments from other day on BS/ratings.
• On fuel it is 82% hedged for this year at 911, spot; {JET1NECC Index}.
• Q3 Guidance; it says bookings up to October are up +10%yoy. Capacity will be 96% of 2019 and sees yields dragging RASK down LSD yoy. Unit costs expected to rise LSD leaving 3Q EBIT below last year's €1.5b dragged on by Flagship Lufthansa airlines.
• FY guidance; capacity 92% of 2019, RASK down LSD to MSD while CASK rises LSD - excluding strike impacts. Net it leaves the FY guidance we got earlier this month; EBIT of €1.4-1.8b and FCF "well below €1b".
• We wouldn't rule out supply - its only issued once (€750m 2030) but has had over €1b (including schulds) roll-off this year.