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

Given the tougher earnings ahead in particular on non-fuel unit costs as new labour agreements roll through & recent strong compression in Airlines to broader consumers our preferred expression for travel exposure remains the HY Dufry 28's (DUFNSW; Ba2, BB+; S) that gives +50bps over LHA/IAG & trades in-line with AFFP.

• Cash lines were initially muted yesterday afternoon (seeing move wider this morning) on the earnings miss, leaving it still in-line with IAG.
• We don't have a firm view on the two needing to be spread. IAG is lower & crossover rated (Ba2 Pos CW, BBB- S) - Moody's is on review for upgrade with no issues on leverage but healthy FCF might see a dividend restart soon - that may come a tad before Moody's expected (in 2025) but regardless retained cash flow on BS likely to be the swing factor on pace of upgrades.

• As we mentioned yesterday, Air-France (NR, BB+, BBB-; S) looks like it is in for a tough earnings in 2 weeks - sizeable Capex on capacity expansion plans is expected to still see negative FCF this year. We don't have much visibility on S&P that's holding it in HY but we don't see deleveraging this year particularly if it still in the bidding for TAP's privatisation {TAP PL Equity}.
• Cash curve trades 50bp wide to IAG/LHA - for a co running 1.2x leverage & cash on hand of €10.5b those with a firm view on S&P rating trajectory here may see value.

Background on Dufry for those interested; https://marketnews.com/dufry-now-avolta-dufnsw-ba2...