What does Lufthansa’s profit warning mean for airline stocks?

German airline Lufthansa issued a profit warning this morning. And it’s not the only airline finding things tough. But are there any bargains in the sector?


Lufthansa shares are down, but easyJet is starting to look interesting.
(Image credit: 2018 Getty Images)

German airline Lufthansa (Frankfurt: LHA) warned on profits this morning, after it reported falling sales at its budget carrier brand, Eurowings and rising fuel costs. The share price fell by more than 10%.

In effect, competition between short-haul operators in Europe, combined with a less forgiving oil price backdrop, has made life a lot tougher for the airline, which now expects profit growth for the year to come in at 5.5%-6.5%, versus previous expectations for 6.5% to 8%.

It's hardly the only travel group to find the going tough right now tour operators TUI and Thomas Cook have both warned on profits this year. We've also seen the collapse of airlines including Monarch and Flybmi.

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Budget carrier easyJet has seen its share price fall hard in the last year or so down by about 45% while rival Ryanair and British Airways owner International Consolidated Airlines have each lost around a third of their value.

Are there any bargains in the sector yet? On a dividend of more than 5% and a forward price/earnings ratio of around ten, budget carrier easyJet (LSE: EZJ) which was recently kicked out of the FTSE 100 and now trades within the FTSE 250 is starting to look interesting.

But given the current brutal competition and significant overcapacity in the sector, combined with the potential for more Brexit over-reaction panics later in the year, I'm not convinced that either it or its slightly pricier rival Ryanair are "buys" quite yet.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.