Goldman Sachs has downgraded Deutsche Lufthansa to a sell rating, citing an estimated near $1 billion hit to the carrier from its fuel-hedging programme and a consequential collapse in 2026 profitability, according to a note issued on Friday. The same note kept British Airways owner IAG on a buy stance while lowering its earnings outlook for both airlines.
The investment bank's base case projects Lufthansa's earnings before interest and tax (EBIT) for 2026 at 1.59 billion, which is 24% below the Bloomberg consensus of 2.09 billion and represents a 19% decline versus the bank's 2025 estimate. For IAG, Goldman Sachs models 2026 EBIT at 4.45 billion, a figure that stands 13% under consensus.
Goldman Sachs attributes the anticipated loss to a product basis mismatch in Lufthansa's hedges. The airline predominantly hedged crude oil and gasoil, while the price premium for jet fuel - the so-called jet fuel crack spread - has surged to multi-decade highs. Jet fuel is trading near $1,800 per tonne, compared with an average of roughly $800 per tonne across 2024-25.
"We model ~$1bn of product basis loss on LHAs fuel hedges, given LHA mainly hedges crude and gasoil while the price spread between jetfuel and crude/gasoil has increased significantly," Goldman Sachs analysts wrote. "This impact will mainly be felt in Q2 and Q3."
The bank's cash-flow workstream points to significantly weaker free cash generation at Lufthansa than company guidance. Goldman projects annual free cash flow of 200-300 million in 2026-27, compared with the company's guidance of about 900 million. Under those projections, the dividend - which yields roughly 4% against a projected 3% free cash flow yield - would not be fully covered by expected cash flow.
Goldman Sachs trimmed its price target for Lufthansa to 6.60 from 7.10, implying about 11% downside from prevailing levels at the time of the note. The bank notes Lufthansa trades at 8 times its 2026-27 earnings, above the carrier's 2015-19 average multiple of 5.5 times.
In contrast, IAG benefits from a stronger cash conversion profile under Goldman Sachs' modelling, with a 9% free cash flow to revenue margin in 2025 compared with Lufthansa's 0.4%. That gap, the bank said, leaves the German airline materially more exposed to demand shocks. Goldman lowered IAG's price target to 440 pence from 470 pence, while indicating an implied upside of 28% and that the stock is trading at 6.5 times 2026 earnings versus a 2015-19 average of 7 times.
Goldman Sachs underscored the sensitivity of both carriers to fuel costs and unit revenues under its forecasts and noted a key assumption underpinning their analysis: the global economy avoids recession. The bank quantified the impact of a higher fuel bill, saying a 10% increase in the absolute fuel cost would trim IAG's EBIT by 14% and Lufthansa's by 36%. It also estimated that each 1% change in unit revenue alters both carriers' revenues by roughly 300 million.
On downside scenarios, the analysts cautioned about the inability of airlines to fully pass through higher fuel costs in a weaker demand environment. "In a weaker/recessionary economic scenario airlines would most likely not be able to pass on the higher fuel costs, reduce the network and see more significant profit declines," the analysts said.
Context and implications
- Goldman Sachs expects the bulk of the hedging loss to be realised in second and third quarters, pressuring near-term results.
- Under the bank's forecasts, Lufthansa's weaker free cash generation raises questions about dividend sustainability and leaves it more vulnerable to shocks.
- IAG's stronger free cash flow margin provides a buffer that supports a buy recommendation, even after downward revisions to its price target and earnings.