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Lufthansa’s board refuses to accept €9 billion Government bailout – what next?

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The saga of the Lufthansa bailout took another twist this afternoon.

The Supervisory Board of Deutsche Lufthansa met to consider the terms of the €9 billion bailout which the main board had agreed on Monday.  It refused to accept it.

On the face of it, this is crazy.  The current market capitalisation of the airline is under €4.5 billion, and yet an offer to inject €9 billion in return for just 20% of the business has been rejected.

It’s not as if the €9 billion had to be repaid either.  Only €3 billion was in the form of a loan.  The rest of the investment carried heavy interest payments, to encourage the airline to pay it back, but there was no obligation to do so.

The proposed structure was:

€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 

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

Lufthansa's board rejects €9 billion Government bailout

The issue isn’t about control either.  The Government had agreed not to vote its 20% shareholding at the Annual General Meeting, and to have no involvement in day to day decision making unless the company was facing a takeover.  If it was facing a takeover, the Government had promised to block it.

So far, so good.

Why did Lufthansa’s Supervisory Board reject the deal?

The problem appears to be that the Supervisory Board has a more realistic (or pessimistic, take your pick) view of what the European Commission will want in concessions in order to approve the deal.

Ryanair has already made it clear that it will be fighting to have the deal blocked, and even if it failed it is likely to lead to stiffer conditions than may otherwise have been requested.

If you have worked in UK banking over the last decade you will know what Lloyds Bank and Royal Bank of Scotland had to agree after being bailed out by the UK Government.  It has left both businesses as husks of their former selves.  This was the intention, of course, because the European Commission does not want state-backed companies acting as price-setters.

The European Commission wants slot divestments at Frankfurt and Munich to allow increased competition.  With few competing German airlines left (LGW, Thomas Cook Aviation, Germania, Air Berlin etc having all gone) it is likely that these slots would have been taken by foreign airlines.  It is also possible that the German Government would have been forced to give up its restrictions on non-EU carriers serving the country.

Lufthansa's board rejects €9 billion Government bailout

But would Lufthansa slot divestments have been so bad?

According to Reuters, the Commission was only requesting enough slot divestments to put 12 of Lufthansa’s 300 aircraft across Frankfurt (pictured above) and Munich out of commission.

This doesn’t sound right.  Given that Lufthansa has already announced that it is retiring 100 aircraft, this makes no sense.  A shrunken fleet will force the airline to give up a large number of slots simply because it will no longer have the aircraft to fly them.

It isn’t clear what happens next.  The Supervisory Board seems to have accepted that insolvency is the only alternative to this deal.  Does Germany expect the European Commission to roll over and withdraw its demands to release slots if threatened with insolvency?

The German pilot’s union probably didn’t help matters when it warned that budget airlines (with, de facto, consumer-friendly lower fares) would pick up the slots and threaten the cosy working conditions of Lufthansa pilots.

What else could happen?  Could the German Government reduce its aid package to reduce the scale of slot divestments?  Will Lufthansa try to raise additional funds externally, although the Supervisory Board seems to accept this is impossible?  Could the management follow the Virgin Atlantic model of considering administration in order to build a debt-free ‘new Lufthansa’ from the ashes?  We will keep an eye out for you.

You can read more on Reuters here.

Comments (22)

  • David Cohen says:

    Der Spiegel has a slightly different take in that it’s just a postponement of the decision, rather than an outright rejection. Although it’s interesting that even they say that the main management board (as opposed to the supervisory board) were extremely annoyed “Verärgerung … groß”

  • Dominic Barrington says:

    I’ve been getting more and more unhappy/angry with how BA has been dealing with the pandemic. I am utterly unimpressed that the F&B side of in-flight service in premium cabins shows no signs of returning to anything appropriately near normal (despite so many of their rivals doing so), and their lack of anything meaningful for status extension is pitiful. Let alone how they are treating their staff.

    So I had just begun seriously considering moving to M&M and putting my flying on a combo of LH/LX (I’m speaking a British expat in the USA who travels mainly to the UK and Israel when outside the US). Is that idea now looking misplaced??

    • Lady London says:

      I wouldn’t rush to make a decision on that yet @Dominic. If your profile and preferences/needs are in favour of LH First Class, yes, noting LX seems very popular out of ZRH also to Tel Aviv. Otherwise could be worth hanging on to see what Delta AF KL do if you’ve really gone off BA. Also how important US.domestic is to you and which airline is good for that. I wouldnt jump yet.

  • Spk says:

    Not sure one can sympathise with LH.
    VS was never going to be profitable in the long run as BA has a monopoly over the popular LHR slots. But no such issues for LH. They even have a monopoly in Belgium, Austria and Swiss!
    There has to be slot limits in every airport.

    • Oh! Matron! says:

      Which brings me on to the topic of Swiss: If LH go under, will it be forced to divest Swiss, Brussels Airlines, etc? Will look a bit embarrassing if the national airlines of two countries go into administration again within the last 15 years (Sabena / Swiss)

      As a side note: I still have an air sickness bag from Sabena!

  • Riccatti says:

    Just after reading the headline: I had a feeling that buyout gives “too much control” from the position of existing stakeholders.

    They clearly balance, as banks have done, on getting the money vs having no outsiders who meddle with their compensation. All else is secondary.

    That’s why a clear taking control of the entity in return for its debts makes the full sense.

    • Chrisasaurus says:

      But after reading the article or the one the other day before this vote:

      “The issue isn’t about control either. The Government had agreed not to vote its 20% shareholding at the Annual General Meeting, and to have no involvement in day to day decision making unless the company was facing a takeover. “

      • Riccatti says:

        It is still about control — even if Government would not vote on compensation specifically — the managers of company with a large stake from the state/supported by the state will receive more scrutiny.

        Plus there will always be someone in a government dept who would read their submissions and ask questions… unlike the institutional investors.