MIAMI – The Lufthansa Group is considering bankruptcy under its own management amid reports of an alleged agreement for multi-billion state aid.
The German government said this morning that as of yet there has not been an agreement on state aid. According to a report by the German Press Agency, the talks are not expected to end by the end of the week either, noting that with a company of this size, such aid must be used wisely.
On a different front, the Swiss Lufthansa subsidiary Swiss, has apparently made progress, which, according to media reports, can expect state-guaranteed loans of €1.4b.
Today, due to a report by Business Insider about an alleged agreement in the works, the previously agitated Lufthansa share price jumped by 12%.
In the report, the news outlet states that the Federal Republic is to pump around €9b into the troubled group, more than double its current market value. The news of the said agreement was also reported by Bloomberg.
In a nutshell, the agreement would entail the government receiving a blocking minority and one or two supervisory board mandates at Lufthansa as a new shareholder. Amid all the uncertainty, Lufthansa’s stock gave up its price gains once more during the day, even falling at times into the red.
A Hail Mary protective shield procedure
Filing for administration is a protective shield procedure much like what Condor Flugdienst (DE) did, in a move that could become an alternative if the group were to be threatened with uncompetitive conditions due to high lending rates, for example.
Condor is set to receive €550m in loans from the German government and the state of Hesse. As part of this agreement, the company is to be placed under the supervision of an administrator and could undertake the reorganization under the previous management.
According to aero.de, by implementing such procedure, Lufthansa has an opportunity to settle numerous obligations towards suppliers and other creditors. Pension costs and unfavorable collective agreements are also up for discussion.
In the meantime, the Group is running out of time to implement such a procedure. Lufthansa airlines currently only fly around 1 percent of the usual program because of government restrictions.
The carrier’s fixed costs amount despite its short-time work scheme, bleeding around €1m in cash every hour out of its €4b cash reserves. Interest and unfavorable kerosene contracts are also a burden due to the fall in oil prices.
Government influence on Lufthansa affairs
In an interview with the weekly newspaper “Die Zeit”, Lufthansa CEO Carsten Spohr warned against excessive influence by the state on his company.
The aero.de report rightly notes that it is a complicated matter to control a company when several governments want to influence operational business tasks.
Lufthansa’s CEO drilled the point by stating that aviation was always political, but that it should never be a politically prescribed question, whether flying from Munich or Zurich to Osaka.
The CEO advocated for a vote of confidence in the decisions his management are about to take. The airline has had the three best years in its corporate history. “If it is to be successful in the future, it must continue to be able to shape its fate in an entrepreneurial manner.”
DSW general manager Marc Tüngler has stated that the CEO received backing from the shareholders’ association DSW. As a result, it contends that Lufthansa needs capital but no political influence.
Reports also surfaced stating that Spohr said he would rather lead the company into insolvency in the form of a protective shield procedure than let the politicians talk him into it. According to aero.de, a company spokesman denied that such a statement was made.
Cabin crew union UFO hopes that government actions on Lufthansa will provide better protection of workers’ rights and strategic advantages for German air traffic. The union questions the domestic German flight connections and current coordination with other European airlines.
A depleted fleet and redundant workforce after the crisis
On March 6, Lufthansa grounded aircraft and canceled flights for the months of March and June to reduce the dire financial consequences brought by the COVID-19 outbreak. At the time, just 7,100 domestic and Italy-bound flights the airline canceled amounted to 25% of its capacity.
To bear the cost of the loss of traffic, in addition to the capacity cuts, the Lufthansa Group announced further cost-cutting measures in the areas of personnel, materials and project budgets. Moreover, the airline decided to ground 150 of its 770 aircraft.
Then, on April 7, the Lufthansa Group’s Executive Board of Directors agreed on the first restructuring package, following the heavy disruption caused by the COVID-19 pandemic.
The main theme of that package was a significant withdrawal of aircraft in its fleet, with the Group saying that it would “be implemented in a socially responsible manner, among other things, through collective employment models.”
Last week, Lufthansa reported a first quarterly operating loss of €1.2b and announced even higher sums for Q2. After the crisis, Lufthansa will probably have a fleet that is 100 aircraft smaller. According to aero.de, this results in a calculated redundancy of 10,000 employees.