Lufthansa (LHAGR; Baa3, BBB-, BBB-; S) {LHA GY Equity} Prelim 1Q Results

Lufthansa disappointment may be first of many for Airlines that are facing rising staff costs & geopolitical disruptions. Equities have sold off this year while spreads have posted an impressive rally. Air-France is up next with Q1 results. We prefer cleaner play on air-traffic recovery through Dufry/Avolta (airport heavy retailer) that trades wide to IG Airlines.

• We wouldn't ignore the -33% FCF cut vs. original guidance (-29% miss vs. analyst consensus) that Lufthansa has issued this afternoon.
• Equities are muted but its coming off a -17% fall YTD (Air-France -33%) - moves which cash has traded through with strong compression YTD; LHA 29s -45bps & IAGLN 29's -70bps vs. €IG's -27bp rally.
• We would be cautious at these levels with capacity constraints (on supplier issues) having mixed effects, negotiated wages kicking in & geopolitical disruptions continuing.
• Air France (Nr, BB+, BBB-; S) comes with Q1 results in 2 weeks - its not expected to be pleasant; consensus looking for Adj. Net Income of -€390m & similar magnitude EBIT loss. Again drag from non-fuel costs and flight disruptions expected.
• Air France didn't give much FY24 guidance when it reported Q4 results in late Feb (which missed on similar themes to above/Lufthansa today) - FCF is not expected to be positive this year, it is targeting capacity expansion & Capex is sizeable still. This is priced - it trades +20-30bps wide of IAGLN/LHA.