© Reuters.

By Geoffrey Smith 

Investing.com — Germany’s biggest airline gave some food for thought to those playing the reopening trade on Thursday, revising down its own outlook and stressing that the fate of the sector this year rests in the hands of European politicians who are, so far, failing to get vaccines into people’s arms.

Deutsche Lufthansa (DE:) said expects a second straight operating loss in 2021, albeit a much smaller one than last year’s 5.5 billion euros. For the first quarter, CEO Carsten Spohr said he expects a drain of 300 million euros.

As so often in the past, the airline will have more planes than it needs this year: it will fly only 40% -50% of its pre-pandemic capacity this year, compared to an earlier estimate of up to 60%. Lufthansa reckons it needs to be flying over 50% of capacity to generate positive operating cash flow.

“Our business has recovered more slowly than we had initially hoped,” Spohr said.

The airline was also downbeat on the longer-term outlook it doesn’t expect traffic to return to pre-Covid levels until at least the middle of the decade. It had earlier expected business to be back to 2019 levels by 2024. As a result, it’s looking at retiring more of its older planes.

All this was published along with a record net loss of 6.7 billion euros ($8.0 billion) that the market had already priced in. Lufthansa stock fell 1.4%, making it the worst performer of the major European airlines on the day.

Strikingly, right at the top of Lufthansa’s news release was an appeal to the European Union to set up “internationally recognized, digital vaccination and test certificates “ to allow people to travel with confidence again, free from the fear of catching Covid-19 in an enclosed plane cabin.

Such schemes “must replace travel bans and quarantine” Spohr said. The interesting part about that is that Lufthansa’s largest shareholder, the German government, is arguably the biggest obstacle to such a scheme, having pushed back heavily at last week’s EU summit against appeals from countries such as Greece and Spain whose economies depend more on tourism.

The European Commission said on Monday it will soon start drafting a law establishing an EU-wide “Digital Green Pass”, but it is unlikely to satisfy Madrid or Athens unless the scheme is also expanded to include the U.K.

Euronews reported on Tuesday that the plan is likely to require at least three months of technical work and will have to satisfy concerns ranging from data privacy and discrimination to forgery. That timetable leaves very little time for slippage if the scheme is to be of any use to holidaymakers and those seeking seasonal work abroad.

So – does this mean that the enthusiasm for European airline stocks is misplaced? The Stoxx Total Market Airlines index is up over 60% since the Pfizer-BioNTech vaccine breakthrough, and the likes of International Airlines Group (LON:) and Wizz Air (LON:) both rose again on Thursday, invalidating any read-across for the broader sector. More importantly, data compiled by Investing.com suggests that the stocks are still protected by low absolute and relative valuations: European airlines trade at an average of 0.22 times sales. The comparable ratio for U.S. airlines is 1.

Even so, Lufthansa’s warning should be a reminder that the travel sector can’t recover until the virus is beaten, and that beating the virus depends on the EU drastically improving its record on vaccinations. The continent’s three most-vaccinated countries – the U.K., Norway and Serbia – are very different in profile and have little in common except their non-membership of the EU.   

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