Lufthansa insists a €9 billion Government bailout must have no strings, considers administration instead

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Lufthansa has said that it may enter administration despite the offer of a 9 billion bailout package from the German Government, since it believes that the offer is not attractive enough.

According to Suddeutsche Zeitung, Lufthansa management is not particularly happy with the conditions attached to the bailout.  It insists that the money should be handed over without any conditions and will place the carrier into receivership if the Government does not agree.

The airline is currently operating at 1% of capacity and burning through approximately 1 million per hour by its own admission.  The airline still has approximately 4.4 billion in reserves which would last it around 180 days at current spend rate.  According to the Citi analyst report we quoted last weekend, however, this gives a false image of security.  The airline has more than €4.4 billion of refunds and other debts already due and is technically insolvent.  Lufthansa CEO Carsten Spohr admits that the airline will not survive without state aid.

Lufthansa insists a €9 billion Government bailout must have no strings

A sticking point: the bailout terms

At present, the German federal government is stipulating that any bailout should include a 25.1% stake in the airline and two positions on the supervisory board.

In return, Lufthansa would receive 9 billion in equity capital and loans. €5.5 billion would be provided as non-voting capital carrying an eye-watering 9% interest rate.  This is unlikely to require repayment although the interest rate has been designed to ‘encourage’ it.  A further €3.5 billion in loans would be provided by state bank KFW with potential contributions from the Belgian, Austrian and Swiss authorities.

Whilst Lufthansa says it requires a bailout, it is reluctant to give the Government a voice and become a pawn in political discussions.

The Supervisory Board is currently made up equally of Lufthansa management and employee representatives.  Lufthansa management is concerned that the two government representatives would destabilise this balance.  The employee and Government representatives could form a majority and block difficult business decisions around redundancy and restructuring.  The airline has already said there will be 10,000 job losses in the short term.

In an interview with German newspaper Die Zeit, CEO Carsten Spohr expanded on the airline’s reluctance to give away two seats on the supervisory board:

“If the Federal Republic of Germany wanted to exert too much influence on operational business tasks, perhaps the Austrian government would demand the same, and then possibly Switzerland, Belgium, Bavaria or Hessen as well. It’s very difficult to control a corporation like that.”

Many are also sceptical that the European Commission would approve of the German Government having such a level of control, although the Finnish Government still owns a majority of Finnair and the French and Dutch Governments control around a third of Air France KLM.

Management also believes that the high interest rate on the loan would increase cash outflows sharply and reduce investment opportunities.  It is also allegedly higher than the interest rate on the loan provided by the Government to bail out German airline Condor earlier this month.

A better alternative – administration?

Whilst a lack of progress is being made on the bailout front, Lufthansa management are allegedly looking at whether going into administration may be the better option.

Under German law, a so-called ‘Schutzschirmverfahren’ or protective shield procedure would enable the current management to continue to operate the company under the oversight of administrators.  This is a similar process to Chapter 11 in the United States which, unlike receivership in the UK, allows a company to continue to trade.

The process shields the company from creditors for three months and enables the company to attempt to re-structure.  It is the same process that was used by Condor after its parent Thomas Cook entered administration last year.

Particularly appealing is the ability for Lufthansa to ditch its pension obligations and hand it over to the Pension Insurance Association which administers the pensions of insolvent companies. It would also be able to re-negotiate existing contracts and leases, including its fuel hedging and aircraft procurement deals.

The cost to passengers could be high.  Lufthansa is liable for several billion Euros of passenger tickets that require refunding, all of which would be voided via this administration procedure. Passengers would instead have to rely on travel insurance or credit card chargebacks.

Where next with Lufthansa?

With the management of Air France KLM now rolling around in €10 billion of bailout cash on considerably softer terms than Lufthansa is being offered, this could go either way.  It seems unlikely that the current management team would be allowed to bankrupt the airline purely to protect their own salaries and bonuses and continue their expansion plans.  At the same time, the Government is unlikely to want to pump in cash which, without controls, is likely to end up being used to buy up struggling airlines in other countries rather than supporting German national interest.  Talks continue …..

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Comments

  1. Catalan says:

    Lufthansa, Europe’s only 5 star airline!

  2. Andy S says:

    You’ve got to love the airlines. Pocketing million of profits while reducing levels of service and comfort over the years, Seeing executives get multi million pay deals and making shareholders loads of money. Then when things go wrong, they want to set the terms on which they want governments help.

    How many small business’s or self employed would love a situation where they keep all their profits in good times but know they will be bailed out by someone on their terms when things aren’t so good.

    • cashisking says:

      “making shareholders loads of money”

      Not sure the current shareholders would agree with that, seeing over half their value wiped out! Ask Warren Buffett…

      • The Original David says:

        Q: How do you become a millionaire?
        A: Take a billion dollars, and buy an airline.
        etc.

      • Andy S says:

        I would think there aren’t many shareholders in many companies who are overjoyed at the moment. Although if you thought about it only a few months ago, (how do you stop something you can’t see and has a week head start before you are even aware of it) things didn’t look good and maybe you should have sold out or reduced your position.

        The reference was to the pre COVID times where airline shareholders certainly did make a lot of money ie BA £1.37 after financial crisis to £7.26 high last year

    • callum says:

      Well yes, that is how the world works…

      If you were struggling with debt and about to sign an IVA or bankruptcy, would you accept the government showing up, forcing you to let them pay off your debt and then deciding that they will now have a say in all your financial decisions for the rest of your life and a (further) cut of all future earnings?

      Lufthansa has no right to demand a bail out on their terms, they ABSOLUTELY have a right to turn down a bailout they don’t like the look of.

  3. Lady London says:

    I wonder which investment banks are representing the government, and representing Lufthansa here.

    I think the offered package is quite clever. Not enough money though. If there can’t dump girl contracts, aircraft leases and employee numbers and contract conditions quickly then I could see LH needing 2,5 times that money and still with legacy problems in 2-3 years

    Wondering exactly how many Supervisory Board seats are currently held on each side, of employees vs Lufthansa…..so what % of the Board would then be govt.

    If Chapter 11 would give LH the power to destroy employer/union contracts and jobs this would be an astoundingly efficient early step forward. I am not sure this is possible though, plus 3 months appears a bit short I think they would need 1 year

    • Lady London says:

      “girl contracts –>> fuel contracts

      • Lady London says:

        Oi Rhys ! If you deleted my politically incorrect comment here then you should delete Nick_C’s one above as well 🙂

        • Nick_C says:

          Missed your comment LL!

          If my lack of political correctness offends anyone then I apologise. (Although in my defence I did change one of the words!)

        • Rhys says:

          Sorry, didn’t catch the ones above.

    • Rhys says:

      Supervisory board is 50/50 employees/Lufthansa (10 each).

  4. Anon says:

    So this will affect Swiss Air, Brussels, Austrian etc.? Or are there any options where they can trade independently?

    • SwissAir died a long time ago!

    • Lady London says:

      It would affect those other countries’ airlines very positively. They too might get the chance to right-size and right-pay their workforces.

      This would be a positive thing for Europe. We are competing with other locations in the world for investment now. Sadly this means many legacy contracts of ex-government companies, government employees and formerly generous multinationals no longer make economicbsense. Wages have to lower to pay shareholders.

      I do believe that all previous commitments should be honoured up to today and generous notice given as well as support by government to those made redundant along the lines of The Netherlands, France, Germany. But to keep feeding the population in Europe I hate it, but workers’ contracts going forward have to reflect world economic reality.

      • Lady London says:

        * and government wages (esp the govt pensions, which are unfunded in the UK) need to be brought down because taxpayer worker base can’t finance it any more it’s just got too big.

        Then the government can work on transaction taxes and other fees to try to get a % of internationally mobile capital and earnings for the UK. There is enough margin in internationally mobile wealth earning for the UK to be able to take some more and still be a good bargain for earners of wealth but basing it on domicile will never work and trying to do it on corporate taxation on profits is never going to.be fully successful.

        Time we dealt with Amazon, Google, Apple etc. accordingly.

        • Nick_C says:

          UK Local Government Pension Schemes are funded, but I agree that most public sector pension schemes are not funded.

        • Chrish says:

          Yep quite correct and a “Maximum” & Minimum wage structure & a penalty for any “Funds” taken out of the UK by any means
          Also a limit how many flights that can be taken per year

        • Chrish says:

          1973, Wow best years cheap house( bought) cheap hols
          best was around then (not sure exactly) four day week loved it, asked if i could continue with 4 day week after (blasted Unions stopped me) my supposedly fellow workers objected to me only working 4 days complained to union when they was working 5. Gr
          That’s when i developed my work ethic of always refusing overtime, which i maintained until i retired at 50 (22 years ago) last job was 19 years 8 months they asked me stop another 4 months for a gold watch gave me great pleasure to say no that’s after my 50th Birthday (retirement day)
          Never looked back had a brill life (up to now 22 years of fun)
          Do i do miles cause i do (BA) i’m i bothered what class i use no
          Although next year will be last long haul flight (was meant to be this Sept

  5. Justin says:

    Any thoughts on LH miles? What would happen to them in administration?

    • John says:

      They are treated as money in Germany, I believe you pay tax on any you get from work flying etc so holders might have a claim

    • HAM76 says:

      When airberlin went through the same process two years ago, miles were valued at 0.36 cent. That won’t help, though. The frequent flyer program of Lufthansa is a separat company named Miles & More GmbH which is unlikely to have any money left when it isn’t paid by Lufthansa. You can’t claim against Lufthansa, only against Miles & More.

      I got nothing for my 230,000 topbonus miles. In the end they offered 10% off vouchers from high street retailers in exchange for miles. I don’t expect anything from Lufthansa, either.

      • Justin says:

        What are the best non-flying options for using / transferring from Miles and More? I just moved Virgin Miles to Hilton, but don’t think you can do that with Miles and More.

        • HAM76 says:

          I’m not aware of any partner that allows you to basically transfer miles. You can book hotel stays, buy stuff or get a voucher (1,875 miles for a £5 Heathrow Rewards voucher, for example). Any of these options would only make sense to minimize losses if LH goes bankrupt. But they might come to an agreement with the government and survive.

  6. Doug M says:

    What is the actual status of the advisory board at Lufthansa, I can’t understand it. It seems to be made up of LH employees, and directors from other businesses, not LH management. There is a separate Executive board. Are the non employee members of the supervisory board more like non-execs? Why else would they all be from other businesses, Henkel, Bayern Munich, Boston Consulting and E.ON for example. It certainly doesn’t seem to have LH management or executives on it.

    • Lady London says:

      It’s standard.German company structure. The lower board is more an operating Board. The Supervisory Board is closer to non-Execs but also has incestuous elements.

      The difference to many countries is that Employees get seats by law. One if the many reasons it’s very, very hard to break down legacy employee contracts in Germany particularly if you’ve got Unions – they have decision-making power for strategic decisions due to employee representative seats.

      • Lady London says:

        Netherlands used to have similar Board structures when I worked for a Dutch bank, with similar issues.

      • Doug M says:

        So can the executive board ignore the wishes of the supervisory board? The structure seems very odd. The supervisory board has no LH executive people on it, only employees and people from other companies.

        • raikje says:

          The supervisory board is made up of representatives of the shareholders and the employees (split 50/50 in large companies). They appoint the management board, and also sign off on major decisions – a supervisory function! 🙂 So no, the executive board can’t ignore them. This is standard in Germany, and very confusing to people used to UK/US systems… It means you could never have a single person being both Chairman and CEO, because those roles sit on entirely separate boards.

          • Doug M says:

            Thank you. I think where I’m confused is that the article is seemingly quite wrong, and the supervisory board has no LH management whatsoever? It also leaves me quite confused as the the role of the CEO Spohr, why is he concerned with the make up of the supervisory board if he is working at its behest, isn’t it a little like trying to pick and choose your boss. If the supervisory board are calling the tune how does Spohr get to turn down something on the basis that he doesn’t like the additional appointments to the supervisory board. It seems very round robin and lacking as to clarity of who is in charge of big decisions.

  7. Sunguy says:

    Booking the * Alliance trip to HNL last week, I did wonder about the idea of booking with Lufthansa et al. I choose not to, but the only non-Lufty website I could get to price up was Air Canada – which at least at a glance seems in a better state to weather this storm….so, I booked with them.

    However, the main transatlantic flights are with Lufty – so, lets see whether they still exist and hope that as booked on AC flight codeshares, AC will fulfill their end of the bargain and get me to HNL should Lufthansa decide to decimate their services! (Heck, this might even be helpful – maybe, just maybe, I will get flights direct from LHR on AC direct to Vancouver – that would be a bonus – seeing as how Im not chasing status!).

    Fingers crossed!

  8. Does this illustrate the ‘agency’ problem for shareholders ?

    The shareholders would likely suffer more under Schutzschirmverfahren as the existing creditors would want significant debt for equity. Obviously sympathy fairly limited for shareholders in a company that’s effectively insolvent

    For the management team however you can see the attraction. More ‘anglo’ style capitalism than Saxon. The german taxpayer looks screwed either way.

  9. Fred Bloggs says:

    Beggars can’t be choosers.

  10. TimM says:

    >>More ‘anglo’ style capitalism than Saxon.

    As the Professor of Money and Banking at Loughborough told me, 11 years before the banking crisis, even the largest businesses must be allowed to fail, otherwise capitalism does not work. He added that you should always have a (flexible) first class ticket to South America, just in case, and did not understand why students travelled economy. He oversaw the great expansion of the IMF and was personally responsible for selling off the gold new members had to pledge. “Funny thing was most of it was sold back to the countries that gave it us”.

    I assume he is now in South America, somewhere.

    Airlines, even flag carriers, must be allowed to fail or else be taken into public ownership.

    There was no state support for coal, steel, textiles or ship building, even when the EU considered them the most efficient in Europe and of strategic importance to the bloc.

    Bailing out the banks, the airlines and now “our top research universities” reflects the backgrounds of our disastrous political elite, on all sides of the political equation.

    Let them fail. There will be green shoots on the other side.

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