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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.

Lufthansa A340

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)

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  • Peter K says:

    Wow. I accept that airlines have been thrown into this situation at no fault of their own, but beggars and choosers comes to mind.

    • Doug M says:

      The very fact that other airlines were not in such an immediate mess suggests it’s very much the fault of the airlines that were. No fault of their own is behind kind.

  • Chabuddy geezy says:

    I agree for RBS but is Lloyds a husk of its former self? Surely taking over HBOS helped it continue to dominate the UK market.

    • Baji Nahid says:

      and what a shambles since that takeover lol

    • Rob says:

      Let’s have a quick look shall we.

      All-time high Lloyds share price (adjusted for splits etc): 662p
      Price today: 30p

      It is even down 40% since 2010 which you would assume would have been the nadir. The price today is within 10% of its lowest ever.

  • Colin MacKinnon says:

    Loved the RBS saga – got paid £1100 each to move two virtually dormant accounts away, and then got a £500 per account top-up this month because the original bribe had been increased!

    And I still pay no business banking fees on my main RBS accounts.

    And get their FreeAgent software….. free!

    I am a happy customer 🙂

  • Optimus Prime says:

    So… Rob, what are going to do with your Lufty Miles !?!?

    • Rob says:

      I need 122k per year for 4 x one-ways in Business to the Middle East.

      Not sure about the rest 🙂 About time I gave Lufty First another outing though ….

      • Max says:

        There is one amazing sweetspot with Lufthansa, it’s their 3+ region award.

  • J says:

    Lufthansa like BA hate competition.

  • Marc says:

    Well now they have another excuse not to refund my money for canceled flights.

  • AJA says:

    This is an interesting development. I did think they would just take the bailout but I did also wonder what the EU would do if Ryanair objected.

    I wonder if the Lufthansa board realises that it will just be overburdened with debt (and potentially forced to acquire Airbus aircraft it doesn’t want).

    I can’t see the airline going into liquidation, I suspect they are hoping the deal will be sweetened in some way as i can’t see the German government letting it go to the wall either.

    It seems BA is right not to want to take more cash from the government than absolutely necessary.

  • Lady London says:

    Defeat snatched from the jaws of victory.

    TBH Lufthansa giving up 12 slots across MUC and FRAwould have got them off very, very lightly.

    Could it be, that the Supervisory Board Members simply don’t want to share their washroom with 2 representatives of the German government?

    I am normally very anti-protection and anti- distortion of trade, but I thought the German government had supported Lufthansa cleverly without being excessive based on what everyone else is getting inside the EU and outside.

    PS If Ryanair is so vociferously against it, why didn’t they come out of their kennel to bark at the KLM/AFand AZ bailouts? I think they should be ignored. And alongside every other LCC, given a chance to bid for the 12 slots to be given away by Lufthansa.

    • Nick says:

      You say ‘12 slots’ but Rob says ‘slots for 12 aircraft’ – these aren’t quite the same thing. Who’s right? Could make the difference in the argument here…

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