Ukraine Uncertainty and Cost Pressures Weigh Heavily on Lufthansa

No-moat Lufthansa narrowed its full-year 2021 adjusted EBIT loss to EUR 1.8 billion, from EUR 5.2 billion a year ago, as traffic recovered and the benefits of the cost-reduction programme filters through. The group expects a strong recovery in 2022 but failed to provide financial guidance due to the uncertainty stemming from the war in Ukraine. Russian airspace has been closed to European airlines, which will affect the group’s Asian destinations as it needs to reroute, leading to higher costs. Roughly 20%-25% of precoronavirus revenue was generated from Asian destinations, but we believe the impact will be more on the recovery than current sales as Asian markets still remain restricted due to COVID-19 measures. The group flew 40% of 2019 capacity in 2021 and expects to fly around 70% in 2022 with summer capacity reaching 85% of pre-COVID-19 levels. The industry faces cost pressures from higher airport charges and sharply rising fuel costs. Lufthansa has hedged 63% of its 2022 at 30% below the current spot price of $110, which will mitigate some of the pressures.