FRANKFURT—The German government is in the final stages of negotiating a support package for Lufthansa that would give the airline access to around €9 billion ($9.9 billion) in new liquidity, coming just in time to avoid a possible insolvency process.

Lufthansa confirmed in a regulatory filing that the negotiations are advanced, but not yet concluded. 

As part of the COVID-19 rescue package, Lufthansa will get access to €3 billion in financing from state development bank KfW and an additional silent participation worth €5 billion.

Importantly, the federal government will return as the largest shareholder in the airline more than 20 years after it was fully privatized. The government’s economic stabilization fund Wirtschaftsstabilisierungsfond (WSF) will buy a 20% stake in the airline as part of a capital increase at the nominal share value of €2.56, well below the May 21 stock price of €8.36. In addition, the WSF will subscribe to a convertible bond equivalent to 5% plus one share in the group that it can turn into further shares to prevent a hostile takeover of the company.

The agreement was contested politically and is coming at the eleventh hour. The group had around €4 billion in liquidity at the end of April but was burning through around €800 million per month. The liquidity included €1.8 billion in ticket revenues for canceled flights that it could be forced to pay back to passengers if they do not agree to rebookings. At the current cash-burn rate, and assuming passengers will largely opt for refunds, Lufthansa has less than two months of liquidity left. 

The agreement with the government—should it be approved by the WSF and Lufthansa’s board of directors—has to also win a two-thirds majority at an extraordinary shareholder meeting, which can be called for the week beginning June 22 at the earliest.

The rescue comes with some strings attached. Lufthansa cannot pay any dividends to shareholders for the foreseeable future. Senior management pay will be capped at an as yet unknown amount. Two new members on the board of directors will be named in coordination with the federal government. 

The Social Democrats, part of the coalition government in Berlin, had pushed for stronger influence on company matters including upcoming cost-cutting and restructuring measures as well as environmental guidelines. Conservative parties the CDU and the CSU wanted to give management as much freedom as possible. The compromise appears to be one that all sides can live with.

The agreement, if upheld, paves the way for further financial aid in Austria, Belgium and Switzerland where Lufthansa’s other airline subsidiaries Austrian, Brussels, Swiss and Edelweiss operate. Austria and Belgium have held back on aid commitments pending the Berlin deal while Switzerland has passed a €1.8 billion package but is understood to have held back payouts so far. Austrian requested €767 million in government assistance. 

All three national governments request assurances that their financial support remains solely dedicated to their home carriers and is not used elsewhere. They also want commitments about the future status and size of the three airlines.

Austrian and Brussels Airlines in particular are in a process of significant downsizing ahead of their restarts after the COVID-19 lockdown.

Lufthansa, too, is engaged with its unions in cost-cutting measures and hopes to be able to agree to broad part-time arrangements to avoid layoffs. The airline plans to operate around 14% of its normal capacity at the end of June, up from below 1% in April and May. CEO Carsten Spohr hopes that demand will return to up to 70% of normal levels by the summer of 2021.