EU TRANSPORTATION: Lufthansa; 1Q results
(LHAGR: Baa3/BBB-/BBB-)
It seems after a series of guidance cuts last year, it will play it safe and not issue any this year. US airlines are doing this but unlike Lufty they are actually facing tough domestic conditions. Q1 earnings were otherwise as-expected for the macro/peer read-through: firm metrics for demand and mostly firm on yields. Yet Lufty's non-fuel unit costs rose faster than to keep a lid on profit growth. Guidance is for more cost inflation in Q2. Said alternatively if supportive macro backdrop falls away, Lufty will be left with similar woes to last year (lowest EBIT margin in the sector). It says efficiency takes time, and is guiding to more stability in 2H costs (including from delivery of newer aircraft). Positively, very strong profit performance did come from the cargo and maintenance arms (both of them combined to nearly match airline earnings last year).
The retail denominated credit curve has traded with no regard for fundamentals for some time now - 1Q is unlikely to change that. On the non-retail 29s and 3.75% 28s we are not sure how it can justify trading inside IAG. Air France 28/29s may see more positive earnings momentum (based on its guidance) than Lufty this year as well (earnings tomorrow).
- 1Q revenue €8.1b (+10%), adj. EBIT -€722 (+15%) on a -8.9% margin (+260bps) (1Q loss normal seasonal swing for airlines)
- The EBIT growth may look impressive but keep in mind it had a €350m impact from strikes last year. Even including the +€80m headwind it is citing on Easter timing this year, that still net implies earnings fell y/y.
- Capacity was increased by +5%, while RPK was +3% dropping load factor by -1ppt to 78.7%.
- Yields were up +0.4% which alongside decreased compensation payments (for flight delays and cancellations) helped push unit revenues +2.7%
- unit revenues were weak in Europe (-7%) but it blames this on Easter timing.
- APAC was +3%, Americas very firm +6% and AMEA a weaker -3%.
- Unit costs ex. fuel still moved a faster +3.1% or +16% y/y in raw terms
- Cargo EBIT was at €62m on a 7.4% margin: China/Asian e-commerce strength and also the build-up of inventory in the US ahead of tariffs driving the strength.
- Lufthansa Technik, the maintenance services arm, also saw EBIT rise to impressive €161m on a 8% margin on continuing high demand.
- Net leverage 1.7x (vs. 1.8x last yr).
- Was already 80% hedged on fuel for this year, that is little changed (at 81%) - this is high vs. peers and will work against it given ~15-20% fall in spot YTD.
- FY25 outlook reaffirmed for capacity increase of +4%, adj. EBIT to "significantly increase vs. '24" (€1.65b), net capex of €2.7-3.3b (€2.7b in FY24) and FCF to be stable (€0.84b in FY24).
- Projects fuel bill of €7.3b this year, only -6.4% y/y - but keep in mind that is net of capacity increase.
Trading conditions
- 2Q fine, some signs of softening demand in 3Q US bookings in lower fare classes
- This is hardly news - US airlines were already reporting this for March
- It notes more softness in European originated bookings into US vs. still seeing strength in US origin bookings (again not news -> tourist demand into US weakening).
- Expects higher costs in Q2 to continue before levelling off in 2H as turnaround program impacts start to show
- All figures will exclude acquired ITA airways that will add 10-12% capacity to the group.
- On Tariffs; notes Boeing asymmetrically exposed on higher export level and no-way it will pay +20% on aircrafts.
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Historical bullets
USDCAD TECHS: Bullish Outlook
- RES 4: 1.4700 Round number resistance
- RES 3: 1.4641 76.4% retracement of the Feb 3 - 14 bear leg
- RES 2: 1.4452/4543 High Mar 13 / 4 and a bull trigger
- RES 1: 1.4402 High Mar 20
- PRICE: 1.4292 @ 16:50 GMT Mar 28
- SUP 1: 1.4235 Low Mar 26 and a key near-term support
- SUP 2: 1.4151/4107 Low Feb 14 / 50.0% of Sep 25 - Feb 3 bull run
- SUP 3: 1.4011 Low Dec 5 ‘24
- SUP 4: 1.3944 61.8% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
USDCAD traded through support at 1.4242 on Wednesday but has recovered. A return lower and clearance of this level would undermine the bull theme and instead highlight potential for a test of 1.4151, the Feb 14 low and a bear trigger. Moving average studies continue to highlight a dominant uptrend. A reversal higher would refocus attention on the bull trigger at 1.4543, the Mar 4 high. First resistance is 1.4402, the Mar 20 high.
US FISCAL: Debt Limit "Extraordinary Measures" Pick Up, But Cash Dipping Pre-Tax
Treasury data shows that there were $207B of "extraordinary measures" available to circumvent hitting the debt limit as of Wednesday Mar 26.
- That's the most since Jan 27th and up from $163B a week earlier, from a total $376B available.
- However, Treasury cash in the TGA fell to $316B as of the 26th (and was down to $280B on Thursday), meaning there were a combined $523B of resources available to avert the debt limit, the lowest since the impasse began in January (and half of the starting amount of just over $1T).
- The next couple of weeks will be very important for Treasury, as they represent the biggest tax take of the year. The Congressional Budget Office reported this week that per its estimates "if the debt limit [$36.1T] remains unchanged, the government's ability to borrow using extraordinary measures will probably be exhausted in August or September 2025." Treasury wrote to Congress this month that they would be able to provide an update on the x-date in the first half of May, after the conclusion of tax season.
AUDUSD TECHS: Remains Above Support
- RES 4: 0.6429 High Dec 12 ‘24
- RES 3: 0.6414 38.2% retracement of the Sep 30 ‘24 - Feb 3 bear leg
- RES 2: 0.6409 High Feb 21 and a bull trigger
- RES 1: 0.6391 High Mar 17 / 18
- PRICE: 0.6291 @ 16:46 GMT Mar 28
- SUP 1: 0.6258 Low Mar 21
- SUP 2: 0.6187 Low Feb 4
- SUP 3: 0.6171/6088 Low Feb 4 / 3 and a key support
- SUP 4: 0.6045 1.500 proj of the Sep 30 - Nov 6 - 7 price swing
AUDUSD is unchanged. A short-term bull theme is intact and the latest move down appears corrective. Key short-term support to watch is 0.6187, the Mar 4 low. Clearance of this level would reinstate a bear threat. First support is at 0.6258, the Mar 21 low. A stronger recovery would refocus attention on 0.6409, the Feb 21 high. Clearance of this hurdle would strengthen the bull cycle and resume the uptrend that started Feb 3.
