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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)

  • Nagoya Dreaming says:

    I have poorly paid family that paid £2.5k with LH to travel back to Japan. It took them 3 years to save up. They paid by debit card not being knowledgeable about S75 and chargeback. LH promised them a refund which never came. It will take them another 3 years to scrape together the money again. LH is never to be trusted again in a small corner of Brighton.

    • Harry T says:

      I think in the UK you can still ask for a chargeback on a debit card? It’s section 75 that you lose out on when using a debit card instead of a credit card. Not as robust but maybe worth a shot?

    • Rhys says:

      Did they chase the refund? It is a legal entitlement, but it does require you to be persistent at many airlines.

      • Nagoya Dreaming says:

        They had the email to confirm they’d get refund a month ago. It is unthinkable that a company promise would be made and not kept if you’re brought up in a Japanese culture. Public shame is a very a profound failure and to be avoided at all costs.

        I passed on the HFP today and they’re going to try a chargeback which feels like dumping LH’s problems into the card company rather than taking responsibility for your own failure.

        Now I’m curious to know how Japan Airlines has responded to the situation.

        • Lady London says:

          You must persist by calling them and obviously go for credit card angle too.

          No idea what Japan Airlines is doing. But if they have problems, as you know in Japan there are many ways of inaction or delaying action without being so impolite as to say “No.”

          • Nagoya Dreaming says:

            After 2 years of working in Tokyo in a Japanese subsidiary of a Uk Company I can heartily comprehend the multitude of ways to say Yes but mean no.

  • Doug M says:

    Do Germans typically buy airline tickets on credit cards? From experience it is the most cash centric EU member, and outside of big international chains Amex use in Germany seems near non-existent. Even Visa/Mastercard seem unwelcome in many places, and I wonder if LH have a much lower exposure to S75 than most European airlines.

    • Harry T says:

      Good point! I’ve only been to Berlin but outside of hotels and supermarkets, card use seemed low.

      • AndyGWP says:

        Interesting. We went to Berlin for 4 nights at Christmas, and I was able to pay pretty much everywhere on card (including at the German markets) – I don’t recall any spends over 10 euros where card wasn’t taken (I’m sure there may have been, but it didn’t stand out as a city that was anti-card) 🙂

        • Genghis says:

          Card use has increased a lot. I was in Frankfurt just before lockdown and card use almost ubiquitous.

    • mark2 says:

      Has Germany got an equivalent of s75?

      • RussellH says:

        No. Nor any other EEA country, AFAIK. I read a few years ago that the EC actually wanted S75 revoked here, as being anti-competitive.
        While a strong supporter of the EU, I felt that the commission should have been looking at putting an EU wide S75 equivalent in place.
        [I pointed out here on HfP around 10 days ago that German friends were appalled when I told them about S75 here. They insisted that it was utterly wrong for the banks to be liable - an attitude that I found very surprising.]

        • John says:

          But you have to agree that the credit card company being liable to rebook you for your £30000 trip around the world or replace your £30K kitchen or car is a bit over the top, especially if you only paid 1p on the credit card?

          • Lady London says:

            Little people don’t get much else in the UK these days

            Speaking seriously we’ve had pretty decent consumer law since, I think, the Sake of Goods Act (1974).

          • Anna says:

            They do chase the retailer for the money at the other end, though I don’t know how this works if the retailer has gone bust.

    • TGLoyalty says:

      One reason I like curve being a Debit card.

    • Lady London says:

      Used to be relatively frequent for a Mercedes to be bought with cash in Germany. I know that I’m Australia if you did this they wouldn’t take the money and it would probably have aroused money laundering suspicions if it did that (one info from work near Sindelfingen, Mercedes mfg in Germany and the other info from a Brit who had worked for a Mercedes dealership in Oz but both some years ago,).

      • RussellH says:

        I imagine you would get funny looks here too in any franchised car dealership.
        Maybe not from Reduced for Quick Sale cars next door to the scrap yard though!

        • CV3V says:

          Yes, i know a company owner who went to pay for a new Land Rover with cash, salesman advised he would have to comply with money laundering regs and report it. The cash never came out of his pocket, and he didnt buy the car that day.

      • Doug M says:

        When it was suggested the €500 note was dumped as it was used mostly by drug dealers and money launderers it was Germany that insisted it remain. Card use has increased I agree, but as recently as last year when on acycling tour following the Altmuhl, the smaller places just don’t want cards, they want cash.

    • RussellH says:

      S75 is a UK thing, so only UK card companies will be exposed to it.

      Since most Germans will still not hold a credit card (apart from the national aversion to debt, I believe that there are no fee-free cards in Germany, which must put off the average consumer.

      We were in a huge shoe shop in Germany at the end of last December and they insisted that their card terminals could take neither credit cards, nor Visa debit cards. Since we were close to the Dutch border, and the staff had seen that my partner’s cards were all UK, I assumed that they were referring to non-German Visa debit cards. They were not! They said that they were getting new terminals in January which would accept my German V-Pay card, which I have only had for around 8 years.

      • HAM76 says:

        There are free credit cards in Germany: Amex, Barclaycard, DKB, Hanseatic Bank all have credit cards that are independent of your main bank account. Many banks such as ING or Consorsbank give you a free credit card in addition to the national girocard to use in ATMs when you open a checking account. Paypal has a free MasterCard debit card. And of course, we have Revolut, N26, and similar fintechs here, too.

        • Lady London says:

          Which cards are the best in Germany @HAM76? Does the PostSparkasse have anything useful?

          • RussellH says:

            Looking at https://top-10.online/bankkonten/postbank-girokonto-kostenlos-eroeffnen-beste-bank-deutschland/, I would hazard that the answer is probably no.

            BTW PostSparkasse is an Austrian bank.

          • HAM76 says:

            My first reply didn’t seem to make it… It really depends on your needs. Many people here will just use whatever comes with their banking account. Some of them are free, such as the one from Postbank. The banking account, though, is only free if your salary of 3,000€ or above is paid into this account each month. These credit cards do not have an extras, no insurances, no cash back and no miles.

            There are credit cards that give you miles or points, but they are paid-for or only free to certain groups. The Lufthansa credit card is free to Senators. The BahnCard credit card is free to holders of a BahnCard 50 First, and so forth. Of course, Amex Platinum is available here, too. Similar package to the UK version with minor differences.

          • Bagoly says:

            We have an account at Sparkasse.
            They are threatening to close it because we are “currency trading”.
            Translated means that most of the outflows go to CurrencyFair / Revolut.
            i.e. they want to charge us their outrageous spreads and will not facilitate us avoiding them!

        • RussellH says:

          I have a DKB current a/c which comes with a free Visa credit card. The credit limit is €100,– (not a typo.) Weirdly from a UK point of view, it is tied up with a savings a/c, which used to pay a reasonable rate of interest when I opened the a/c, so that your credit card acts as a free to use debit card on your savings a/c, but with a €100 ‘overdraft’ buffer..
          [This is actually essential for most a/c holders who will be resident in Germany, as DKB do not have any cash machines AFAIK, certainly not at their office in Dresden], meaning that they would pay ~ €5 for cash machine use.
          Again, IIRC, all DKB’s other credit cards, including Hilton and Lufthansa, do have an annual fee.

  • Catalan says:

    Lufthansa, Europe’s only 5 star airline!

  • 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.

  • 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).

  • Anon says:

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

    • Save East Coast Rewards says:

      SwissAir died a long time ago!

      • Anon says:

        Apologies – meant Swiss International Air Lines AG 🙂

    • 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

  • 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

      • guesswho2000 says:

        My understanding is that LH have been trying hard to prove otherwise, hence why transfers into LH have been suspended…

      • Ken says:

        A claim as an unsecured creditor right at the bottom of a very long queue

      • Don says:

        LH pay the tax

    • 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.

  • 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.

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