Lufthansa Proves to Be Cheapest Airline in Europe

By Jann Bettinga

Aug. 15 (Bloomberg) -- Deutsche Lufthansa AG, Europe's second-largest airline, is the cheapest carrier and has its earnings best protected against the price of oil and other threats. Investors are giving it little credit for this.

The Cologne, Germany-based company has dropped 17 percent this year as higher oil prices and a slowing global economy drove some airlines into bankruptcy. Relative to estimated annual earnings, Lufthansa shares are cheaper than those of larger Air France-KLM Group.

The carrier is shielding earnings from rising fuel prices with cost cuts, hedges and fare surcharges. Lufthansa is adding flights to Asia and benefiting from its takeover of faster- growing Swiss International Air Lines Ltd.

``Lufthansa is very well positioned compared to other European airlines,'' said Jan Ehrhardt, a fund manager at Dr Jens Ehrhardt Kapital AG in Pullach, Germany, who oversees 1.2 billion euros ($1.77 billion), including 2.07 million Lufthansa shares. ``The stock is clearly cheap in relative terms. It's the oil price that's hurting all airlines.''

Lufthansa is valued at 8.5 times this year's estimated earnings, making it less expensive than Air France, which trades at a price-to-earnings ratio of 9.1.

The German carrier will probably earn 51 percent more than Paris-based Air France this fiscal year, according to four analysts surveyed by Bloomberg. London-based British Airways Plc, Europe's third-biggest carrier, and Dublin-based Ryanair Holdings Plc, the region's largest discounter, are expected to post losses.

Hiring Freeze

Lufthansa is stepping up cost-cutting and said July 30 it plans to save 250 million euros this year, as much as 150 million euros more than previously targeted, by expanding a hiring freeze and curbing information-technology spending. The company has hedged 85 percent of its fuel needs for 2008, compared with a roughly 80 percent hedging rate at British Airways.

``They're better hedged than many other carriers,'' said Michael Bahlmann, an analyst at MM Warburg in Hamburg, who recommends buying the stock. ``That helps protect the airline at least in part against this year's dramatic surge in oil prices.''

The stock may rebound 9.6 percent to 16.69 euros in the next year, the average projection of 25 analysts surveyed by Bloomberg. Nineteen analysts advise buying, while nine say to hold and six recommend selling. The carrier has slumped 25 percent in the past 12 months, compared with a 13 percent drop in Germany's benchmark DAX Index.

Lufthansa rose as much as 28 cents, or 1.9 percent, to 15.27 euros in Frankfurt electronic trading and was 1.6 percent higher as of 9:58 a.m. local time.

Profit Projections

Lufthansa will probably post net income of 838.5 million euros this year, the average estimate of four analysts surveyed by Bloomberg. That tops estimates for profit of 554.1 million euros for Air France and a net loss of 56.5 million euros at Ryanair for their years ending next March. British Airways may have a loss of 16.3 million pounds ($30.2 million), analyst estimates show.

The cost savings and fuel surcharges, which Lufthansa raised four times this year, are designed to help the airline meet a goal of matching last year's record operating profit of 1.38 billion euros. Part of this will come from Basel, Switzerland- based Swiss International, which was integrated in July 2007.

Earnings may be hurt by a sustained rise in jet-fuel prices, a prolonged decline in the world economy and the costs of labor strikes, which forced the airline to cancel hundreds of flights in the past month, Lufthansa said in a statement July 30.

Toll of Carriers

A 55 percent jump in crude oil prices in the past year combined with a slowing global economy have forced at least 25 carriers to stop flying or file for bankruptcy protection this year, according to the International Air Transport Association.

``Lufthansa is the best in class, but that's not enough to buy the shares,'' said Stefan Bauknecht, a Frankfurt-based fund manager at DWS Investments, which oversees 255 billion euros in assets. ``The sector is very unattractive. The shares are very strongly tied to the oil price.''

Oil, which has declined 23 percent from a record $147.27 a barrel on July 11, remains 57 percent above the average 2007 price of $72.36.

Lufthansa plans to boost capacity by more than 6 percent this year as its passenger traffic outstrips industrywide growth rates in Europe. Air France projects a 2 percent increase in seating for its winter and summer schedules, while British Airways said it plans a reduction of as much as 5 percent this winter.

Avoiding Turbulence

Customers from the financial industry account for only about 13 percent of Lufthansa's corporate passengers, limiting the effects of the subprime mortgage meltdown, which has prompted the world's biggest banks to eliminate more than 100,000 jobs.

Lufthansa was chosen as Europe's best airline in passenger surveys conducted by Skytrax, a London-based research company for the industry. The carrier is a member of the Star Alliance, the world's biggest airline cross-marketing group.

``It's a good network they have going,'' said Alan Forrester, a 65-year-old retiree from Noosa Heads, Australia, before boarding a Lufthansa flight from Frankfurt to Salzburg, Austria, this week. ``Price is OK.''

The airline has attracted more travelers by adding routes to cities including Calgary and Nanjing, China, confronting Air France on long-haul routes. It's also selling seats on European flights for as little as 99 euros to challenge low-fare carriers including Ryanair.

``Some airlines are struggling to survive,'' Ehrhardt said. ``That's not something Lufthansa is facing.''

To contact the reporter on this story: Jann Bettinga in Frankfurt at jbettinga@bloomberg.net