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

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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 …..

Comments (94)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • 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!

  • ken says:

    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.

  • Fred Bloggs says:

    Beggars can’t be choosers.

  • 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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