Lufthansa As A Bet On Russia Opening Up Its Skies To European Airlines

2025-02-26 10:59:23 ET

Summary

• Lufthansa faces a decade of significant challenges from COVID, the Ukraine war, and EU environmental policies, leading to a substantial drop in stock price.
• Potential EU policy reversals and a future EU-Russia rapprochement that could open up Russia's skies to EU airlines have the potential to improve Lufthansa's financial performance and market access.
• Risks include, geopolitical uncertainties, uncertainty over EU environmental policies, and a weak European economy, but the current low P/E ratio limits downside potential.
• Despite near-term challenges, Lufthansa's dividend yield near 5% and potential long-term recovery make it a potentially lucrative investment.

Investment thesis: Lufthansa ( DLAKY ) has had a tough decade so far. The COVID crisis was a major financial hit for most airlines. Then came the Ukraine war, which left all EU airlines without access to Russia's airspace, due to Russia's counter-sanctions. Access to Russian airspace is crucial for European-Asian air travel and transport and Asian airlines that are not faced with a ban on using Russia's airspace are increasingly benefiting. On top of it, EU environmental policies are also hurting its domestic airline industry. These factors helped to bring Lufthansa's stock price down from its all-time high in 2017-2018 to about a fifth of that price, with most of the decline coming since the COVID crisis. There are some reasons to be optimistic going forward, including a growing realization domestically in the EU that some environmental policies may need to be reviewed to ensure economic stability....

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