Introduction#
Goldman Sachs has downgraded Lufthansa's stock rating from "neutral" to "sell" due to an anticipated loss of approximately $1 billion on fuel hedges. This situation is expected to severely affect the airline's earnings in 2026, primarily driven by rising jet fuel prices amid ongoing conflicts in the Middle East.
Earnings Forecast#
The investment bank forecasts that Lufthansa's earnings before interest and tax (EBIT) for 2026 will be around €1.59 billion. This figure is 24% lower than the consensus estimate of €2.09 billion and represents a 19% decline from the previous year. In contrast, IAG, the owner of British Airways, is projected to have a stronger EBIT of €4.45 billion, which is also below consensus but reflects a more stable outlook.
Fuel Hedge Losses Explained#
The significant loss for Lufthansa stems from a mismatch in its fuel hedging strategy. The airline primarily hedged against crude oil and gasoil prices, while the price of jet fuel has surged, reaching around $1,800 per tonne. This is a stark contrast to the average price of approximately $800 for the 2024-25 period. Analysts estimate that this mismatch will lead to a loss of about $1 billion, predominantly impacting the airline's financial performance in the second and third quarters of the year.
Cash Flow and Dividend Concerns#
Lufthansa's projected free cash flow for 2026-27 is estimated to be between €200 million and €300 million annually, significantly lower than the company's guidance of around €900 million. This shortfall raises concerns about the sustainability of its dividend, which currently offers a yield of 4% but may not be fully covered by the expected cash flow.
Goldman Sachs has also adjusted its price target for Lufthansa's stock to €6.60, indicating an 11% downside potential. In comparison, IAG's stock is viewed more favorably, with a price target of 440 pence, suggesting a 28% upside. Both forecasts assume that there will be no recession, as economic downturns could further impact airline profitability.