FRANKFURT—Lufthansa has deemed the proposed conditions of a German government bailout package unacceptable and is now considering entering a “protective umbrella” restructuring, according to industry sources.
Lufthansa representatives and senior government officials met April 27 to discuss how the federal government could support the country’s largest airline.
The state secretaries outlined a plan for the government to take a stake of at least 25% in the company and assume two positions on the supervisory board. A combination of a capital increase and loan guarantees would give Lufthansa access to around €9 billion ($9.8 billion) in fresh financing. Lufthansa declined to comment on the issue.
However, sources close to the negotiations said management considers the proposal to be completely unacceptable. A large minority stake and the two seats on the board would effectively make it impossible for the airline to push through painful restructuring measures such as shutting down Germanwings or cutting jobs if the two government representatives joined forces with union representatives on the board. The body has 20 members, ten of which are representing workers.
Also, the proposed state-backed loan is understood to be offered only at a 9% interest rate. It alone would increase Lufthansa’s annual financing burden by around €500 million and make it harder for the airline to stay competitive. Industry sources also doubt that the European Commission would allow such strong intervention by the government.
Lufthansa is currently only flying 1% of the usual passenger volume with almost of all of its fleet grounded. The airline is losing around €1 million per hour and has around €4.4 billion in liquidity left. Chairman and CEO Carsten Spohr said earlier this month that additional sources of financing besides government funding are not available to the group.
Senior executives at the airline believe it can operate around 50% of a normal schedule in the upcoming winter timetable at best, rising to around 70-75% next summer and somewhat higher in the 2021/22 winter season. Spohr said that he does not expect the airline to return to pre-crisis passenger volumes in the foreseeable future.
Company sources said Lufthansa and the government still have some weeks to resolve their differences but have to reach an agreement by the end of May.
In parallel, Lufthansa is exploring whether it should file for the protective umbrella restructuring scheme, company sources said. The scheme is a special variant of Germany’s insolvency law which is designed to help fundamentally sound companies that are in trouble because of unexpected circumstances. Lufthansa’s management has been watching its rival Condor, which filed for the restructuring process last year following the collapse of its parent Thomas Cook, carefully.
Condor was able to shed high pension liabilities and cut other legacy costs while continuing to operate normally with the help of €380 million in loan guarantees backed by the government and its home state of Hesse. Both extended another €550 million loan earlier this week to refinance the initial credit and help the airline survive the COVID-19 crisis.
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