Down by 65%, is the Lufthansa share price a bargain?

Lufthansa (LHA) share price has struggled in the past few years, making it one of the worst-performing airline companies. After peaking at €20.74 in 2018, the stock has retreated by 65%, giving it a market cap of over €8.8 billion.

Competition and low returns

Lufthansa Group is one of the biggest airlines in the world. It operates in three segments: Network Airlines, Eurowings, and aviation services. For example, its aviation services segment is broad and includes segments like catering and logistics.

Lufthansa, like other airlines, has emerged from the Covid-19 pandemic at a fast pace as demand for aviation jumped. The most recent results revealed that its total revenue in the first nine months of the year rose by 18% to €26.6 billion. Traffic revenue rose by 19% to €22.5 billion.

Lufthansa also became highly profitable as its net profit surged from €484 million in 2022 to €1.6 billion in 2023. Its margins expanded widely, with the EBIT margin moving from 3.8% to 8.3%. The company's load capacity rose while the management worked to scale down its debt. However, its free cash flow crashed by 50% to €1.66 billion.

Lufthansa Group has also made several headlines recently. It has placed its first order with Boeing in years as it seeks to modernise its fleet. 40 of these planes will be Airbus A220-300s and 40 Boeing 737-8 MAX. It also left the option for increasing these orders. Lufthansa is need of modernising since the average age of its aircraft fleet has risen to 13.1 years.

One of the biggest challenges facing Lufthansa and other full-service airlines is that competition is rising. Most of this competition is coming from Middle East companies like Emirates, Qatar, and Etihad. Saudia and Asian airlines like Singapore Airlines, Cathay, and Japan Airlines. While this competition has always been there, it is now intensifying.

Regionally, the company is also competing with budget airlines like Ryanair, EasyJet, and Wizz Air. The challenge of this competition is that it will ultimately hit its profit margins. Further, the firm faces a major challenge on its Pratt & Whitney issue, which is expected to see at least 20 planes grounded this year.

From the onset, I am not a fan of airline stocks because the industry tends to have so many unknowns. Most investors who have allocated capital to these companies have lost money. Turning to the weekly chart, we see that the LHA stock price has retreated sharply after peaking at €11.13 in March 6th last year.

It has retreated below the 50-week and 100-week Exponential Moving Averages (EMA), a bearish sign. It also dropped below the key support level at €9.21, the highest swing on March 1st 2021. The shares remain above the ascending purple trendline. Therefore, the outlook for the stock is bearish as traders target the key support at €6, which is along the ascending line.