Lufthansa downgraded to “market perform” amid weak yield outlook

Bernstein downgraded Lufthansa to "market perform" from "outperform," maintaining a €7.50 price target, citing limited upside and a weaker yield outlook compared to European peers. The downgrade is attributed to Lufthansa's slow operational turnaround, including excess staff, fleet complexity, and aircraft delivery delays, which are projected to result in Q2 revenue and adjusted EBIT below consensus and a negative long-term return on invested capital spread. Bernstein favors competitors like Air France-KLM and IAG due to more favorable market dynamics, noting that a positive reassessment for Lufthansa would require significant operational and cost transformation.

Analysis

Bernstein has downgraded Lufthansa (LHAG) to “market perform,” maintaining a €7.50 price target that suggests only a 3% upside from its current price. The downgrade is underpinned by a combination of structural inefficiencies and a comparatively weak yield outlook. Operationally, Lufthansa’s turnaround is lagging; despite a smaller fleet and lower available seat kilometers, the airline employs more staff than in 2019, indicating poor labor productivity. This is compounded by high fleet complexity and aircraft delivery delays that hinder cost improvements. Financially, this operational drag is expected to result in Q2 revenue of €10.53 billion and adjusted EBIT of €794 million, which are 0.9% and 5.7% below consensus, respectively. From a long-term valuation perspective, the outlook is concerning, with a projected 2029 return on invested capital (ROIC) of 8.1% falling short of its 10.7% weighted average cost of capital (WACC), implying a negative spread of -2.7% and potential value destruction. In contrast, peers such as Air France-KLM and IAG are better positioned due to stronger premium demand, favorable post-Olympics comparables, and operation in more supply-constrained markets, leading Bernstein to see stronger value propositions elsewhere in the sector.

Key Decisions for Investors

• Given the downgrade to 'market perform' based on a projected negative spread between its future ROIC (8.1%) and cost of capital (10.7%), investors should view Lufthansa with caution due to risks of long-term value destruction and limited upside.
• Investors should closely monitor key operational metrics, specifically progress on fleet simplification and labor productivity improvements, as Bernstein has identified these as prerequisites for any positive reassessment.
• With Bernstein forecasting Q2 revenue and EBIT below consensus, and holding a more constructive view on peers like Air France-KLM and IAG, investors seeking European airline exposure should consider the relative strength and more favorable yield dynamics of these competitors.