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Lufthansa: German Taxpayer Will Save The Day

May 06, 2020 12:41 PM ETDeutsche Lufthansa AG (DLAKF)


  • With only €4.3 billion in cash reserves at the end of March, Lufthansa was not prepared for the current crisis.
  • The airline is in dire need of cash and it will likely strike a €10 billion deal with the German government.
  • However, the terms of that deal will slow down the company’s growth in the long-term.
  • We expect the stock to trade sidelines for years and see no real catalyst that could push it considerably higher in the next 12 to 18 months.
  • No position.

Two weeks ago Lufthansa (OTCQX:DLAKF) reported its preliminary results for Q1 and stated that in March alone revenues were down 47% to €1.4B. With 99% of its fleet on the ground, the German carrier faces an unprecedented situation that has never happened to it in the past. The global pandemic that has swept throughout Europe in the last two months, forced the air traffic to go down to unprecedentedly low levels in the region. Currently, Lufthansa faces a liquidity crisis, as every hour it loses around €1 million and at the current burn rate, it will not have any resources to stay afloat if it stays non-operational for any longer. With only €4.3 billion in cash reserves at the end of March, Lufthansa was not prepared for such a severe situation and without state aid, it will not be able to weather the current storm.

Various reports suggest that the German government will bail out the company and provide €10 billion in state aid, but in exchange, it wants to receive a 25% stake in the airline. Such terms, on the one hand, will save the company from bankruptcy, but on the other hand, will expose Lufthansa to political headwinds and increase the already high debt burden. Even though the company trades at a P/E of ~4x, it's not undervalued. And while it's more than likely that German taxpayers will save the company from going broke, the government's equity stake will slow down the growth in the long run. Considering this, we decided not to short Lufthansa, as it'll be foolish to bet against the state, but at the same time, we didn't acquire its shares, as the future looks bleak despite the upcoming relief package.

Brave New World

Problems at Lufthansa started long before COVID-19, as the airline has been

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