Lufthansa and IAG share headline results for Q3

Two of the three big network airline groups in Europe, IAG and Lufthansa, have just shared some key headlines on their third quarter results.

Let's look at what they told us and see what can be concluded about which company is coping better with the crisis.

Operating losses

At the operating profit level and before exceptional items, both reported a €1.3 billion loss.

In the previous quarter, Lufthansa had lost €1.7 billion and IAG €1.4 billion, so in both cases it was an improvement on Q2, although less so in IAG’s case.

Lufthansa probably had better market conditions in the quarter, with its home countries mostly being less hard hit by the pandemic than IAG’s. Spain was particularly badly affected, whilst Germany was consistently the least impacted market during the period. The following chart shows the “case rate” - new cases during the last week per 100,000 population.

*Source: GridPoint analysis of data from the European Centre for Disease Prevention and Control*

Lufthansa should also have benefited from being a bit less exposed to the still moribund North Atlantic market than IAG and having a higher weight of the strongly performing Cargo segment.

So the fact that both reported virtually identical losses probably says something positive about cost performance at IAG. We’ll have to wait for the full results to come out before we can properly judge this though.

Liquidity and debt levels

In terms of liquidity, IAG reported €9.3 billion and Lufthansa slightly more at €10.1 billion, so not much to choose between them on that metric.

As I commented in this article, the main difference is how much of this liquidity has been provided or backed by governments, with IAG having obtained €1.3 billion from the UK and Spain and Lufthansa having been helped out with €9 billion from Germany, Switzerland, Austria and Belgium. That probably leaves IAG with a bit more room to manoeuvre on cost actions, since government money usually comes with strings attached. However, as we will see shortly, IAG has paid the price in the near term by needing to make a deeply discounted rights issue at the bottom of the market.

Lufthansa's net debt went up by €1.6 billion in the quarter, slightly worse than their operating loss, to leave them with net debt of €8.9 billion at the end of September.

IAG haven't provided an update on net debt levels. Cash was down about €1 billion from Q2, so my guess would be that net debt will end up €1-1.5 billion higher than the Q2 figure of €10.5 billion, so €11.5-12 billion. Since the end of September, IAG has raised €2.74 billion through the rights issue and so the pro-forma net debt level is probably around €9 billion, also right in line with Lufthansa.

Capacity in Q4

The only other statistic of note that we can compare was the guidance for capacity in the fourth quarter.

Lufthansa are guiding to "a maximum of 25%" of 2019 levels and IAG are saying "no more than 30%", so IAG are being a little more aggressive going into the winter.

Valuation

Despite the very similar levels of losses so far this year, IAG’s share price has been considerably harder hit by the pandemic than Lufthansa’s, declining by a whopping 84% since January.

IAG’s market capitalisation has fallen by less than 84%, due to the €2.74 billion in new equity raised from its shareholders. Today, the market capitalisations of the two companies are very similar, with IAG at €5.5 billion, some 16% ahead of Lufthansa's €4.7 billion.

Equity valuation is very sensitive to debt levels, so it is often useful to compare enterprise values - the value of the equity plus the value of the net debt. It essentially measures what the value of the company’s operating assets is. Or looked at another way, what the company would theoretically be worth if a benefactor suddenly paid off all the company's net debt.

Using a €9 billion estimate for IAG's current level of net debt leaves IAG just 6% ahead in terms of enterprise value, with both companies coming in at around €14 billion.

That is pretty much the same enterprise value as Ryanair, despite the assets of IAG and Lufthansa each being around double those of Ryanair. That shows how much more highly investors are valuing low-cost carrier assets in this environment.

Coming back to market capitalisation, the much lower debt levels of Ryanair (it has net debt close to zero) mean that its market capitalisation is 30% higher than IAG and Lufthansa put together.

The devil may be in the detail

Overall then, it is hard to make a pick between these two network airline groups on the basis of the headline figures that have been shared. Both have recorded similar losses and have similar net debt and liquidity levels. Both are valued about the same by the market.

I’m sure there will be many more interesting things to extract when we get the full results in the next week or two, in particular some more detail on progress from each company on getting their costs down to match the new revenue environment. As well as news on the pandemic and progress on restarting travel to the USA, that will be the key driver of what the shares are worth going forward.

For the moment though, it is easy to understand how the market is struggling to make a call on which of the two provides better value for shareholders. I’d say that IAG appears to be doing a bit better in the circumstances, but the circumstances matter for valuation too.

Lufthansa versus IAG, who did better in Q3?