Lufthansa: bonus plan is a navigational error by the board

Shares in Lufthansa fell sharply during the pandemic years. They dropped further in response to this year’s energy price surge. Does the rally since September accurately point to brighter horizons ahead? Not really.

Germany’s national flag carrier raised its forecast for 2022 adjusted ebit by half a billion euros to €1.5bn earlier this month. Citing “strong demand” for air travel, it said earnings performed above expectations in October and November.

This optimism has rubbed off on Lufthansa’s supervisory board. Reports this week said that it was planning to give executive board members bonus payments of up to €5mn for 2021 and 2022.

This is a bad look even though the German government has sold shares acquired in Lufthansa during a rescue whose cost the airline has now repaid. The bailout is fresh in German memories. And prospects are weaker than directors imagine.

Lufthansa has some advantages. Its geographic split makes it a likely beneficiary of a reopening of travel in Asia. The balance sheet is stronger. Net debt, at under two times forward ebitda, is under control. Free cash flow of €410mn in the third quarter of 2022 was up from €43mn a year before.

However, Lufthansa’s large cargo operations are vulnerable to a decline in air freight rates in 2023. Cargo accounted for 30 per cent of adjusted ebit in the third quarter. In typical years, that proportion has not been more than a tenth.

Another issue is whether Lufthansa can revisit the profitability of even four years ago when its operating margin topped 7 per cent. Analysts anticipate not much more than 4-5 per cent in the next two years. Though jet fuel has fallen with the crude oil price since the summer, staff costs remain high.

Intra-European flight bookings are sluggish, around 19 per cent below equivalent 2019 levels, according to Bank of America. European flights account for the bulk of Lufthansa’s top line. That suggests strong updraughts are needed to lift the carrier’s shares. These trade in line with peers at 12.6 times forward earnings, according to S&P Global.