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Guidance Lowered

17 June 2019 by jbchevrel

Deutsche Lufthansa AG (LHAGR) has lowered its full-year guidance last night and made a provision for tax risk. Its shares plunged by c13% intraday, which was the worst selloff in 3y and in credit, the 5y CDS widened by 6.5bp, making it the worst performing name in the iTraxx Main s31 index. Currently rated BBB/Baa3, it is now more clearly the ‘wider’ half of the Main s31. The guidance revision was due to pricing deterioration in Europe, mainly caused by 1/ overcapacities 2/ low-costers’ fierce competition. The European short-haul market is the most impacted by the low-costers, with the long-haul market performing better. Across brands, Network Airlines are expected to get EBIT margin 7-9% (from 7.5-9.5%) Eurowings -4%/-6% (from c0%). Net net, LHAGR EBIT margin is guided 5.5-6.5% (from 6.5-8.0%). Adding to that guidance revision, LHAGR will also make a provision for a tax risk of €340M in its H1-19 accounts, because the Supreme Tax Court changed the case law established in prior years. The capital markets day on next Monday (Jun 24) will surely be interesting to watch for more color.