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Lufthansa gets its €9 billion bailout – of which only €3 billion is a loan. What does IAG do?

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Lufthansa and the German Government finally agreed a €9 billion bailout on Monday, although there remains a risk that the European Commission blocks the deal or requires substantial changes.

In summary:

The German Government will take a 20% shareholding in Deutsche Lufthansa

It has an option to trigger an additional purchase of 5% + 1 share, creating a block for key votes, if there is any attempt to takeover the airline during the period that Government loans are still outstanding

Lufthansa A340

It can also trigger the additional purchase of 5% + 1 share in the event that the airline fails to make an interest or capital repayment on the money invested

The Government will take two seats on the supervisory board

The Government will not vote its shares at the Annual General Meeting

The Government has agreed to sell its shares by the end of 2023 if the company has repaid its investment and the share price has reached a certain threshold.

The investment will be structured as follows:

€300 million to acquire the shares

€5.7 billion in redeemable non-voting shares, of which €4.7 billion will carry a guaranteed 4% yield, rising in stages to 9.5% by 2027 (this does not have to be repaid, but it is clearly expensive and the airline will want to refinance it as soon as possible)

€3 billion as a three year direct loan provided by the state-run development bank KfW

The following restrictions will be in place until the Government is fully repaid:

The company cannot pay dividends

Management pay will be capped, albeit at an unspecified level

There is no mention of the requirement to continue with the planned purchase of Airbus aircraft, which was believed to be a sticking point in negotiations last week.  Lufthansa is likely to want to cancel or defer these orders given that the airline is currently planning to cut its fleet by 100 aircraft.  The linked article mentions cutting 70 aircraft but these number has since been increased.

But €9 billion isn’t enough …..

There is no point stopping at €9 billion, of course, if you can get more.  Lufthansa is also insisting that the Swiss, Austrian and Belgian Governments put their hands in their pockets.

Switzerland has already agreed CHF 1.3 billion of credit guarantees, which will allow Lufthansa to borrow the equivalent sum on exceptionally generous terms because the Swiss Government is guaranteeing its repayment.

Deals have not yet been reached with the Austrian and Belgian Governments.

European Union approval could be an issue

Once signed off by the various Lufthansa boards, the deal will require approval by the European Union.  This is by no means guaranteed, especially as Ryanair is highly likely to object.  There could be pressure to open up slots at Frankfurt or Munich, or to reform some of the complex deals which protect the airline from competition.

(Emirates, for example, has been very vocal in its opposition to a Government ban on flying to more than four cities in Germany.  It cannot fly to the new Berlin Airport unless it drops one of its existing routes to Frankfurt, Munich, Hamburg or Dusseldorf.)

Where does this leave IAG / British Airways?

Air France KLM has already secured a bailout of €10 billion.  Lufthansa is now at €10 billion, including the Swiss loan guarantee, and may end up at €11 billion when the Austrian and Belgian Governments have chipped in.

In context, the €1 billion taken by Iberia and Vueling from the Spanish Government and the £300 million taken by IAG from the UK Government looks like small change.

It is a difficult situation.  The UK and Spanish Governments would struggle to refuse IAG a similar €10 billion package to those offered to Air France KLM and Lufthansa.  British Airways cannot realistically take any funding from the UK Government whilst it is planning to cut pay for virtually all staff and to make massive redundancies.  Accepting Government money would also guarantee the survival of Virgin Atlantic since it would insist on a similar deal.

The risk for IAG is that it finds itself seriously weakened against its two major European competitors going forward, both of which now have bulging wallets.

The full Lufthansa press release is here.

Comments (47)

  • NigelthePensioner says:

    The EU IS Germany so blocking of this eye watering “loan” is unlikely to be challenged.
    At last Walsh may have tried to be too clever for his own good. The carnage he wants to inflict on BA, to preserve the shareholders’ dividend is not compatible with such a lofty financial bailout. Cake and eat it? Does he really think that everyone is as stupid as this? Of course it will mean the same for Virgin – technicality or no technicality.
    All of these billions of units of currency bailouts are long term fantasy loans. You cannot hope to pay these sums back in any meaningful time period, once a fleet is flying again, even at a respectable capacity. Just remind yourself how quickly FlyBe burnt through its much smaller cash advance, to appreciate how quickly money disappears when planes are flying.

    • Harry T says:

      Agree – who is going to seriously try and tell Germany what to do?

      Willie Walsh will use every opportunity to turn BA into Ryanair but it might not work this time. It’s a mistake to try and beat the LCCs at their own game too.

      • Jack says:

        The CJEU will, the same way they did in the last few weeks regarding the ECB. It’s a matter for the commission anyway which is made up of equal numbers from all member states

    • Frenske says:

      It is not a cheap loan. 188 million euro needs to be paid back every year and if they cannot refinance this in the coming years it’ll double up. It is not like they can splash money on buying up competitions who are unlikely very profitable in current climate.

      • BJ says:

        IIRC Lufty made a net profit of over €1B last year and almost double that the previous year. With cost-saving restructuring that is now underway they should have little difficulty making the repayments assuming the worst is behind us and the travel market steadily recovers.

        • J says:

          Indeed. Lufthansa have even less competition than BA and Germany is a bigger (and richer) market. Although rather like BA and the regions, LH can be pretty useless for people not in Munich/Frankfurt. From Berlin, BA offer more flights/connections for example.

          • Lady London says:

            +1
            I am going to be most interested in how EU legislators legslise this.

            The issue is they have to add into EU law something that will not create a precedent for any country to be able to use it to subsidise and protect their own national companies or industries in the future.

            I’m guessing they will either legislate to say that provided a national/cross-EU state of energency is in force then allow support. Or, they will add something about existing rules against this stand, but EU regulators are not obliged to enforce it under x circumstances.

        • AJA says:

          But will LH make 1bn profit this year or next year? And the interest on these new loans is in addition to existing debt. Of course the requirement of not paying dividends will help (but not for shareholders).

    • J says:

      “The EU IS Germany” – sounds like you haven’t spoken to many Germans about the EU 😀

  • DJ says:

    Let’s face it, borrowing at substantial levels is risky. Lufthansa will be haemorrhaging several million € every day during this crisis.

    1. The loan money simply gets them through a few months, but the business impact of the coronavirus is going to last years
    2. But they only have two years to repay billions in debt, all while the company is likely making a loss, almost guaranteeing the need to extend the loan, which pisses off shareholders who are seeing a negative return on their investment – and may walk.
    3. Even when the company starts to return to full capacity again, let’s say in about 5 years’ time, there’s so much debt and damage done that any profit is basically wiped out for years more.

    These loans don’t solve a problem, they simply kick it down the road a little bit. You certainly can’t say that any of this government borrowing is strengthening the business. If it borrows less, surely BA/IAG have the upper hand as they’re able to resolve the burden faster. It’ll probably still take the best part of a decade, but for Lufthansa and AF-KLM it’ll take a lot more.

    • Lady London says:

      I agree it can be 10 years before Lufthansa’s out of it but for the scale of support it’s reasonable. I think it’s quite cleverly structured and sure the Airbus orders may be “retimed” but defo not canned.

      With the recent information about Boeing 737max testing and federal approvals stil having been given for that aircraft plus other things that hint safety issue potential (hinted sabotage by workers at one plant) I am OK this time if Airbus gets help.

      We have been fortunate to live in peacetime, most of us here, and Airbus is kinda defence industry. We never know what’s around the corner.

      • Lady London says:

        PS I like the structure of the support and think it’s quite clever. The German government are getting what they can in security.

    • Lady London says:

      @DJ you are right about IAG they will be out of this long before LH, KL, AF would be.

      IAG is correct to take advantage of this opportunity to take their staff costs down to a massively lower level. It would be almost negligent if they didn’t.

      What I dont like is that legislation allows them to do this by sacking everyone and rehiring. If they say they they dont need 12,000 jobs then they should only be allowed to commence proceedings for this with that exact number of workers or no more than 5% or 10% more. That means they will have to justify their reasons for selecting those particular jobs/people for redundancy.

      The law allowing them to nominally “fire” everybody, so fire 2 or 3 times the number of people IAG declares it doesnt need any more, and then rehire for substantially the same fuctions at considerably reduced compensation and working conditions is bonkers.

      Yes let IAG lose 12,000 jobs. If the economic case can be made, and if they do the amount of bureaucracy they would have to do in France or Germany to fire employees. Plus IAG should pay the local authority and the government the amount of money that employee will cost government in support for each fired employee for 3-12 months. Plus decent redundancy payment to the employee. France/Germany do something similar. When that is done then make the employee redundant. Business conditions change so businesses must be able to divest employees but not easily load the social costs onto everyone else.

  • mr_jetlag says:

    Good. let’s see some of those 1000 euro companion fares again then, bankrolled by the German taxpayer this time. As for IAG, not only will they have their cake and eat it, they will demand the bakers be given a 60% pay cut.

  • Chris Heyes says:

    [email protected] I agree ING “will” have to go for a loan “like this” i think will have to be a Spanish loan though with a smaller amount filtering down.
    Other than that will be compromising with British Government regarding pay structure redundancies ect
    What will it mean for Virgin i think Virgin is stuffed!
    The Virgin we knew is gone forever with this deal yes they could apply for a similar deal on a smaller scale BUT would they want to (better to restructure than go for a similar deal to this
    Virgin’s only hope now is R Branson stepping into the negotiations which he might
    But that will still mean Virgin changing

    • BJ says:

      Another door closing on the Virgin lifeboat.
      https://www.bbc.co.uk/news/science-environment-52802520

      • Rhys says:

        Not an entirely unexpected outcome given that Virgin Orbit themselves said it had a 50/50 chance of success!

      • Kip says:

        What on earth has a test flight on an unrelated business go to do with Virgin Atlantic? Especially as Branson has already sold a large percentage of shares in that venture. Give it a rest about Virgin.

        • BJ says:

          It was reported here and elsewhere SRB was selling some of his interest in his space business to raise capital for Virgin Atlantic. If this is over and above that you refer to and it has yet to happen then obviously any setback will impact on the ability to raise cash by this means. I’ve said from the outset I expect Virgin will survive this in some shape or form and my view has not yet changed.

          • Rhys says:

            That was Virgin Galactic. Virgin Orbit is separate and privately owned (mostly by by Virgin Group).

        • Chrish says:

          [email protected] You obviously don’t understand business

  • Oli says:

    Wouldn’t it be more efficient to create a new airline with the €9bn? The business model is simple but i appreciate it would take a few years to get to the scale of a legacy carrier; and it would enable them to get rid of the high payroll/pension costs. I would not have thought Easyjet or Ryanair have started their business with much less than €9bn.

    • HAM76 says:

      It would be even more efficient if every member of the German parliament received free Lufthansa senator status (*G)… oh wait, that is already the case. Fortunately, the German parliament decided long ago that this won’t have any impact on their decisions.

      • Spaghetti Town says:

        as corrupt as the United States

      • Paul Pogba says:

        By all accounts Qantas invite all Senators and Representatives to its Chairmans Lounge status, it wouldn’t be that surprising if BA offered MPs it’s Premier card. Apart from flattering egos you make the elite lounges a networking opportunity.

        • Rhys says:

          I don’t think they offer MPs the Premier card – there are allegedly less than 500 of those in circulation – but I imagine they might get Gold status.

    • John says:

      It would also be more efficient if BA did a similar thing and a new airline was created out of its dregs.

  • FloriGuy says:

    Curiously enough BA’s shares went up 16% this morning.

    • bazza says:

      Thank god! haha they been down ~18% for the last week or two!

  • Nathan says:

    And there was I thinking that the EU had rules about this sort of thing? To a relatively uninformed remained, as I am, this smacks of state-sponsored protectionism of the highest order, quasi nationalisation perhaps, and was this not a fundamental principle of the project in the first place …

    • John says:

      The EU is all about protectionism and it bends its rules whenever convenient.

    • Anna says:

      A Remainer who didn’t know what they were voting for? 😜

      • J says:

        UK is now an international laughing stock – I don’t think many leavers voted for the chaos they’ve now got and such a poorly governed country.

        • Charlieface says:

          I’m entirely unconvinced the UK would necessarily have been better governed had we remained. Do not underestimate the British people’s ability to be rubbish at everything

    • Bazza says:

      protectionism is fine as long as it favours the EU, its when it favours someone else its a problem.

  • lcylocal says:

    I think the point about IAG is well made by Rob.

    The management of IAG may wish that the airline market wasn’t (in their view) being distorted by government support, but it is. With LH group but also around the world. Given that is the case BA may rationally need UK government support to maintain its position in the market in the medium term. That will probably in the longer term interests of its investors too, even if they have to take some dilution of their investment in the short term. You have to wonder though whether Walsh and co will be able to see beyond the strategy that has served them quite well so far, to re-assess whether the facts and the world have changed.

    On EU permission, I’m not sure that Emirates objections will be given particularly great weight given the role of the UAE government and that they are non-EU. I think the voices of easyJet, Ryanair and WizzAir might be be more persuasive though.

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