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Sunday, January 29, 2023

Goldman advises low-cost airline shares – sell recommendation for Lufthansa

The US investment bank Goldman Sachs advises investors who want to invest in airlines, very strongly to low-cost airlines.

While analyst Patrick Creuset downgraded two stocks of large network airlines in a study published on Tuesday with Lufthansa and IAG , he made a fresh buy recommendation for the papers from easyJet . For Ryanair , his purchase vote stands.
The expert argues that low-cost airlines were probably more profitable in a time after the corona crisis than they were before the pandemic. He referred to a better cost base, which is paired with a rapid recovery in the number of passengers with generally lower capacities. If the travel restrictions fall, he expects a quick recovery, especially in the short-haul segment, from which Ryanair & Co should benefit particularly strongly.

In the case of the established airlines, however, it leaves its mark on the fact that large amounts of cash were “burned” in the pandemic in 2021 as well. IAG is operationally somewhat better positioned than Lufthansa, which is why the analyst only downgraded the parent holding of British Airways and the Spanish Iberia to “neutral”. He is now advising to sell the Lufthansa shares with a price target of just EUR 8.10, which is 23 percent below the price, which has already recovered significantly from the Corona low.
“With a view to the next wave of competition from low-cost airlines, Lufthansa has become even less competitive,” concluded Creuset. Unlike the competition, the German industry representative made only limited progress in reducing costs. The expert also complains that Lufthansa is comparatively heavily dependent on business travelers. Among these, he expects a rethink with a structural reduction in travel activity. In addition, the airline is facing difficult negotiations with the unions.

In his study, the expert also referred to the balance sheet, which suffered a lot in the pandemic and which probably still needs to be strengthened. In 2022, the airline’s net debt is likely to rise to twelve to 13 billion euros, almost doubling compared to 2019, according to his thesis. A free cash flow estimated at 0.5 million euros annually by 2024/2025 will probably only allow the smallest progress in reducing this debt burden. “It would take twelve years at this rate,” said the expert.

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For Lufthansa shares classified as “Sell”, Goldman Sachs expects unattractive potential returns at the current price level and in comparison to the other companies from the same industry observed by the bank. “Neutral” suggests an average return for investors , while “Buy” suggests high potential, according to the bank.
The Lufthansa share is currently 2.16 percent to 10.58 euros.


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