A Year Of Expansion Ahead For Lufthansa

| About: Deutsche Lufthansa (DLAKF)

Summary

Lufthansa expects to save 14% on fuel prices.

High travel demand on LH's routes.

Healthy capacity increase with new and more efficient contracts.

More competitive against Gulf airlines due to new and fully implemented business class.

2016 is likely to become a very successful year for Lufthansa (OTCQX:DLAKF) and its subsidies Eurowings, Swiss and Austrian Airlines due to several reasons.

According to Reuters, Lufthansa expects to save 14% on fuel costs in 2016 as fuel prices are still falling. The airlines estimates it will spend €4.9 billion in comparison to €5.7 billion in 2015. Although UBS has recently downgraded Air France-KLM's (OTC:AFRAF) stock as it expects the airline to give up its profits due to a lower fuel price by issuing cheaper tickets, it yet remains to be seen if Lufthansa reduces its ticket prices on one or all of its brands.

It might be useful to note that Eurowings/Germanwings is already a low cost brand that is set to grow in 2016 - while the Germanwings brand will merge into the Eurowings brand.

Many investors get nervous when they hear the two words "capacity growth," yet this will likely to be a smart step for Lufthansa. According to Reuters, travel demand on the company's routes was very high in 2015 resulting in a record of 107.7 million passengers. This is quite a surprise considering the many days of strike that hit the company hard. But it also shows that there still is upside potential!

In a recent press release, the company reported it was going to add "more than 4,000 new jobs" which will of course not only increase the capacity of the Lufthansa main brand but also of Swiss, Austrian and Eurowings. Furthermore, Eurowings will become Europe's second long haul, low fare airline (after Norwegian). Therefore, the company is also set to hire pilots and first officers for Sun Express - a joint venture of Lufthansa and Turkish that is destined to operate Eurowings widebodies.

This increase in capacity is not only likely to lead to an even higher number of transported passengers in 2016, but also to higher profits since high travel demand allows capacity growth.

This strong demand may also be the cause of an ameliorated cabin product in Lufthansa's mainline. In 2016, the new business class with its V-layouted flat beds is fully implemented and according to Forbes' Gary Walther, the product experience is just "über." And even in the economy class, the customer experience is "none of the grating hurly-burly that he's experienced on US carriers." In 2015, Lufthansa has even implemented a Premium Economy - a slight advantage it has in comparison to some Gulf carriers that do not feature this class.

But it is not only the improved cabin product that is likely to make this "significant step up in [Lufthansa's] capacity" successful as CAPA calls it, it is also the new and more efficient aircraft that will be added to its fleet. Lufthansa will be the first airline to receive the first A320neo and will receive a total of 101 neo jets of the 320s family (61 A320neo and 40 A321neo) which will be divided to the different brands. The A320neo is said to be more efficient than the conventional A320ceo by 15% according to Airbus. Swiss is going to modernize its regional fleet by becoming Bombardier's first customer of the CSeries.

And with an improved cabin product on its mainline and more efficient aircraft come more efficient contracts. Contracts have been a huge issue for the company in 2015 (especially the policy of early retirement). Lufthansa stated that the new contracts will include a "significant part-time element" and will generate a higher flexibility for the company when it comes to labor. Furthermore, the new contracts will reduce costs for the newly hired personnel.

On the other hand, albeit the cabin product might be more competitive to the Gulf airlines (Emirates, Etihad, Qatar), they still negatively influence the company's performance as Lufthansa recently stated.

To conclude, the planned increase in capacity for 2016 shouldn't make investors nervous since a strong travel demand, an improved cabin product, an efficient cost basis, and a more efficient fleet will let the airline benefit from this expansion. The Germany-based Independent Research GmbH holds an upside potential of the stock by well above 5% for 2016 to be possible.

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