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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 (95)

  • The Original David says:

    Administration sounds like a dream! Shed all your liabilities and crack on…

    They’d better keep their B747-8i fleet though – that’s the only reason I use Lufthansa.

  • Sam G says:

    They owe me a couple of K so I really hope it gets sorted out. Have lodged a chargeback and a couple of complaints to try secure the refund ASAP in the meantime

  • Nick G says:

    This sounds whacky. So I can have a company, pay or not pay my bills, enter administration, then decide if I’ll pay my creditors or not depending on how I feel.

    I don’t see any reason how a business can fail these days…just expect the tax payer to pick up your debts eh? If one thing I’ve learnt in Covid 19 is that certain companies have zero morals. Seems very little risk in letting a large company go to the wall these day’s

    • Doug M says:

      Have a google of US airlines chapter 11.

    • Lady London says:

      Yup. whacky. It only works if you’ve got government or the banks by the b*lls.

      The rest of you, as Anne Robinson would say on The Weakest Link, get nothing.

    • Rob says:

      That’s how US Chapter 11 works and seemingly how this works too. Can’t be done in the UK.

  • Mr B says:

    Rhys, maybe you can write the articles from now on? They are much more balanced than Rob’s anti BA, sensationalist clap-trap. So Lufthansa are either looking to take a bail out AND make 10,000 redundant, OR enter administration and screw all their customers owed a refund? So far BA are only looking to do one of these, and look at some of the ridiculously one sided articles published here.

    • Patrick C says:

      Don’t worry BA will do both as well.
      It has the same situation and the whole “voucher operation” is keeping it above board. At least LH is honest that it has to refund those tickets.

    • Doug M says:

      Insane!!! comment Mr B. I enjoy both, It took me a while to warm to Rhys’s style, definitely an age thing, but I enjoy the contrast. Bias is OK in opinion pieces, so long as there’s no outright misinformation it’s all good.

      • Rhys says:

        We aren’t more biased to BA than any other airline – they just have more skin in the UK market & therefore get more coverage.

        Lufthansa needs to make people redundant either way. It is reducing its fleet by 100 aircraft.

        • Doug M says:

          Well you would say that wouldn’t you 😉

          • Rhys says:

            I would but it is also true 🙂 BA gets criticism even from international blogs so I’m not sure we’re out of step with the overwhelming consensus. On the other hand, when it gets things right (such as Club Suite and DO&CO catering) we are are very positive about them.

          • Lady London says:

            +1 I think Rob treads a fine balance by letting BA get a good kicking when due.

          • Doug M says:

            I’m here almost every day reading HfP, so I obviously think you’re doing something right. BA need some bashing, and as a UK site it’s inevitably the airline most covered. Always have a slight suspicion that Virgin are treated with kid gloves, but as I’ve said before, many that like VS have completely bought into the branding and are not always objective in VS failings.

  • Alex W says:

    If everyone gets bailed out the insurance companies will be laughing. They’ll have taken a load of premiums without having to make any payouts.

  • Sussex bantam says:

    The administration description misses one crucial point – the creditors get to vote on the restructuring plan. If they don’t agree then the company is liquidated anyway.

    It’s a stay of execution – it isn’t a one way ticket to cancel your debts

    • The Original David says:

      Do all the customers expecting refunds get to vote on the proposals, since they’ll be unsecured creditors? Sounds like a logistical nightmare…

      • Sussex bantam says:

        Yes , I would imagine so. Although of course the votes are weighted by the amount owed so customers as a bloc would be important – not so much as individuals

  • Czechoslovakia says:

    Always preferred LH group for my travels. I’ve got £6k in forward bookings, and around £1k in outstanding refunds overdue. But do the management seriously think they can abandon their pension liabilities leaving the German taxpayer to pick up the tab; not pay any outstanding bills; effectively keep all monies from forward bookings leaving the card companies and others billions in the red; dispose of a load of staff – And then just restart under the name of Lufthansa v2.0? I doubt many would prepared to book with them again. Those who have no choice, fair enough… But for me it’s almost enough to consider flying BA through LHR in future. Shocking.

    • Doug M says:

      German gov should have considered all of this when making it near impossible for other airlines to get a piece of the German pie.

      • czechoslovakia says:

        Certainly the German Govt. has backed themselves into a corner on this one, and LH Group profited (or not, so it seems) from all the favouritism shown their way over the years. I do think LH Management has made some very poor choices in the recent past though – Lufthansa Italia, Euro/Germanwings, BMI, abandoning DUS, and effectively subsidising Air Dolomiti and Adria Airways for example. All the strikes were poorly handled too.

    • Lady London says:

      If LH did all of those things as soon as possible it would make a lot of sense. This is a chance to become a commercial operation without getting (from govt) or giving (to employees) excess protection that there’s no room for in today’s world.

      I would be astounded and impressed if Carsten Spohr takes it that way asap. I wish him luck.

      The German government is going to end up with costs here on all cases. A sound look at those costs, which would ideally be redundancies (huge and a long tail, but this is the chance of a lifetime for LH plus soft startup loan for new entity.

      They can have Board members but along the lines of private equity – startup investor reps rather than Transport regulator or Employment regulator members.
      .

      • Czechoslovakia says:

        If I put my “captain of industry” hat on, I couldn’t agree with you more. Take it off again as a mere passenger (or guest!), If I’m £6k out of pocket due to the administration, assume the loss of my 350k m&m miles and 25k PPB points, I’m a very unhappy bunny indeed. I assume that’s a drop in the ocean compared with others. Sure, they’ll be able to dump the legacies of pension liabilities, staff, bad contracts… But at what cost to the goodwill of the business, I wonder? Certainly they’ll no longer be best mates with the government. The unions will undoubtedly have something to say. And a lot of premium passengers will be most displeased, taking their business elsewhere on principal. Short term, sure, wind it up now. Question is, how long are people’s memories!

        • Lady London says:

          They will get away with it because short term LH is a monopoly. Doing what Carsten Spohr is considering will put LH and therefore Germany to into a position where they can compete worldwide in future. Look at Deutsche Post’s acquisitions elsewhere.

          I would like to say sorry about your Miles and privileges @czechoslovakia but sadly I think LH won’t have the b*lls to do what’s best for Germany and fold. So unfortunately I think you will be all right @czechoslovakia.

          • mr_jetlag says:

            Historically Germany has never treated Czechoslovakia very kindly!

          • Czechoslovakia says:

            Oh, I’m not overly bothered about the points in the grand scheme of things. Having £6k effectively stolen would annoy me much more. I could even tolerate that to an extent if it contributed to creating a proper competitive world class airline. But even if they did, I’m afraid they’d be back to their old ways pretty soon! There really isn’t any serious competition.

  • Adam says:

    As a technical point, I don’t think the reference to receivership in the UK is particularly helpful given that it hasn’t been generally available for 15+ years. Administration is a better comparison but of course there is no legal prohibition on airlines continuing to trade through administration (just a lot of practical barriers that make it very unlikely hence the mooted reforms to administration in the context of airlines).

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