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Summary

  • Lufthansa is outsourcing non-central flights to Germanwings.
  • Lufthansa plans an additional low cost carrier.
  • Profit alert might just be the shape of things to come.
  • Weak Transatlantic outlook.

Carsten Spohr is not just the new CEO of Lufthansa (OTCPK:DLAKY), he brings a new strategy too. When Lufthansa announced the profit alert mid-June, shareholders were shocked and the stock plummeted by 12% on the very same day. During Q1 of 2014 the company expected EBIT to be roughly $2 billion, as of today EBIT is estimated to be roughly $1 billion.

But this might just be the shape of things to come. There are lucid signs that the conventional Lufthansa product won't work anymore in modern Europe. Lufthansa tried very hard in the last decade to keep up their high standards - meaning not charging their passengers for their first checked bag, providing drinks and food during the flight and seat reservations. However, low fare airlines became increasingly popular in Europe.

Ryanair (NASDAQ:RYAAY), the most popular Lufthansa rivals doubled their expectations so far with their EBIT of roughly $750 million. easyjet (OTCQX:ESYJY), the other big player in the low cost business, will expand their capacity by 6.7%, being another threat to Lufthansa's European routes.

Paying attention to both Ryanair and easyjet, Lufthansa had to react last year. Finally, the decision have been made that the subsidiary company Germanwings will undertake all German and some European decentralized routes, while all other routes inbound or outbound Lufthansa's hubs in Frankfurt and Munich will still be performed by the main line.

This time around the process of outsourcing all decentralized routes to Germanwings will be completed. Nevertheless, the main line has another rival in their premium segment: The gulf airlines. Lufthansa representatives stated in many interviews that the gulf airlines were a major threat to European airlines with their strong support in their home countries and their low payroll costs. But a strong Emirates or Etihad only affect to routes to the Middle East.

The outlook facing the transatlantic routes - especially the routes to and from North America - isn't much promising either. Lufthansa's new CEO, Carsten Spohr, is planning to reduce capacity, as he believes that too much capacity on the Transatlantic market beats ticket prices down.

Another alarming sign is that even with Germanwings being the new low cost part of Lufthansa, the company is going to start another low cost carrier. Whereas Germanwings is to focus on the German market, the new low cost carrier is scheduled to focus on the European market.

However, according to the German web mag "Der Aktionär", shareholders reacted too nervously to the company's new strategy and to the profit alert in June. They expect the share to climb up again with a price target of $24. This might be the case in the long run and the outsourcing of decentralized inner-German and Pan-European routes might pay off in Q3 and Q4, but in respect to the above mentioned signs, I don't see the stock coming even close to that price target in the next few month.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Signs Which Show That Conventional Lufthansa Will Not Work