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Deutsche Lufthansa: time for investors to bet on a bright summer season?


Despite reduced disposable income, there seems to be no stopping the upwards trend of passenger demand for leisure flights. Experts in the airline sector, talking to independent research house Third Bridge, are predicting a bright summer season for Deutsche Lufthansa [GER:LHAX] as COVID-related restrictions ease in China, making it a prime market for this airline to capitalise on.

“As the world of travel shifts again, Lufthansa is focusing on leisure travel, which is experiencing a faster recovery than business travel,” explained Olly Anibaba, an analyst with Third Bridge. “But our experts warn that the airline’s reputation as a high-end business carrier could be compromised if it neglects this recovering market.”

Shares in Deutsche Lufthansa have delivered some excellent value for investors over the last six months, having been bid up consistently from around the EUR 7 mark in November. The stock hit EUR 10 in early March and we then saw a brief surge up to nearly EUR 11. Profit taking has since driven the shares down to approximately EUR 9.50.

Shares have also appreciated considerably from a year ago, when they traded at less than EUR 6. Looking at the five year picture, however, Lufthansa stock was up at EUR 12.31 just before the pandemic.

The airline has travelled a long way since it was rescued during the pandemic by the German government. Berlin cleaned up here, however – the Economic Stabilisation Fund spent EUR 300m on Deutsche Lufthansa shares as part of a massive EUR 9bn rescue package to keep the airline afloat. Since the end of the pandemic the German government has gradually reduced its stake and announced in September it had sold out completely: it banked a staggering EUR 760m profit.

Deutsche Lufthansa repaid all its bail out money ahead of schedule in November 2022.

Challenge from low cost carriers

Lufthansa is facing a challenge from low-cost carriers, who dominate short-haul routes in Europe. Experts suggest that Lufthansa’s Eurowings subsidiary is its best weapon against this competition. Lufthansa is also focusing on intercontinental flights and downsizing its fleet in short-haul European routes for more efficiency.

Lufthansa’s 2023 margin outlook is positive thanks to strong passenger demand, especially in Asia and the US. The airline is also benefiting from a favorable US exchange rate. Though fuel prices remain high, the airline can pass on these costs to passengers because of its pricing power.

Lufthansa’s new strategy involves using smaller, more efficient planes like the Dreamliner. This will give the airline more flexibility to expand into new routes and increase its network. “Our experts believe this move will pay off in the long run,” said Anibaba at Third Bridge.

On the downside, Lufthansa faces the potential threat of airport chaos and pilot strikes this summer, both of which could disrupt its operations and damage its reputation. There are also ongoing concerns about the potential impact of air traffic control strikes, especially in France. EasyJet [LON:EZ] has already said that strikes in France could seriously damage its ability to support services across the continent this summer.

On the upside the airline sector has now moved past the staff shortages which were plaguing it last summer.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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