Why Lufthansa May Refuse State Aid, File For Bankruptcy Protection Instead

Filed Under: Lufthansa

Like most airlines, Lufthansa is struggling — the airline is losing one million Euros per hour, and the airline also has a grim outlook on when demand for air travel will recover.

Lufthansa is currently negotiating with Germany for state aid, though there’s a chance they may actually turn it down, as reported by the Sueddeutsche Zeitung. This is despite the fact that Lufthansa Group’s CEO has made it clear that the airline can’t survive without state aid.

Lufthansa’s negotiations for state aid

Lufthansa and the German government are currently negotiating over what a state aid package would look like. Apparently Germany is willing to offer up to nine billion Euros in aid, though the issue is that the company and government can’t agree on terms.

While terms of the negotiations aren’t public, sources suggest that as part of the nine billion Euros in aid:

  • The German government would take at least a 25% stake in the airline
  • The German government would have at least two seats on the company’s supervisory board
  • The funding would come in the form of a capital increase and loans, though the government has proposed a 9% interest rate for some of the loans

Apparently the airline and government have strong disagreements about the terms of this aid — Lufthansa doesn’t want the government to have a say in how the company is run, and the company also refuses to accept the high interest loans.

One of the biggest concerns is that the board currently has 20 seats, split evenly between management representatives and employee group representatives. The fear is that if the government also got two seats, they’d always side with employees, making it impossible for Lufthansa to make tough business decisions that might include layoffs, etc.

Essentially, Lufthansa Group management doesn’t want Lufthansa to be run like other state-owned airlines.

Could Lufthansa file for bankruptcy protection instead?

While it’s far from certain that this will happen, apparently Lufthansa is considering the possibility of going through a protective shield procedure, essentially the German equivalent of bankruptcy protection.

Management would continue to run the company, but an administrator would be appointed to help the company with a turnaround. This would also give the company the ability to reduce pension obligations, etc.

Lufthansa management seems to think that the outcome of this might not be worse than what the government is proposing, given the challenges the company would face with the government’s proposal.

Bottom line

We’ll have to see how this situation plays out between Lufthansa and the government. My guess is that the two parties will be able to meet somewhere in the middle, and that Lufthansa won’t go through a protective shield procedure.

I’m no fan of Lufthansa Group management (to put it mildly), but I see where they’re coming from here. If the government takes a major stake in the airline and has seats on the board, it will make it virtually impossible for the company to make any tough decisions in the future.

Then again, given the anti-competitive approach that Lufthansa has taken for so many years, I’m not sure I have all that much sympathy.

  1. @ Ben — I hope Germany continues to stands up to LH. Companies should never receive free handouts. “Bailouts have consequences.”

  2. Given how successfully the German Government is manning their seats at Deutsche Bahn, I have No doubt it’s worth the 9% consulting fee. šŸ˜‰

  3. We both need LH and BA so it all fairness whether we like them or not. So hopefully they will do a bankruptsy and the unions will not have so much power and a better LH will be there to serve us to their impressive network of destinations.

  4. And then with Austria, Switzerland and Belgium also injecting cash in Austrian, Swiss and Brussels Airlines respectively, they will want to make sure the German government does not have a predominant role when it will come (and come it will) to restructuring and shutting down certain operations in certain locations…

  5. @Ben,

    How would bankruptcy affect all the vouchers being issued for cancelled flights in lieu of the refund the passengers are due?

  6. It’s just negotiation tactics from both sides.
    9% interest rate leaves a lot of space for further adjustments, 2 seats on the supervisory board could become just 1 as a compromise.

  7. @Martin
    There won’t be a bankruptcy, just lean back, relax, enjoy the staged ‘negotiations’ over the next few days and Lufthansa will get their will like always. German politicians have no backbone and will crave in to Lufthansa’s demands.

  8. If a company needs money, well they have to agree to the terms given or go into bankruptcy and ideally have new management. When you are in trouble, you usually aren’t in a strong negotiating position.

  9. @Ben:
    Iā€™m no fan of Lufthansa Group management (to put it mildly) …….
    YOU got my % sympathy on that, just for those few words, you should win an editor price!
    Trouble is, those f*ckers ALWAYS get away with E V E R Y T H I N G, one day . . . if there is any kind of justice on this planet . . . it will strike them ALL very hard 1 day āš”ļøāš”ļøāš”ļø

  10. @ John
    Please educate me. I would be disturbed and stop flying LH but I am not aware of this and can find no corroboration.

  11. On paper the Bankruptcy protection seems like a good idea but what Lufthansa needs is cash by handing themselves over to administrators they’ll successfully reduce costs but they’ll still be at a large cash shortage. ā‚¬9 billion will allow Lufthansa to survive but it seems all the German government needs to do to get Lufthansa to agree to their assistance is to stay away from the painful decisions Lufthansa will be forced to make. The German government are taking a surprisingly Italian stance towards this issue.

  12. @Donato – he’s a troll that has called CV19 a “hoax” in another thread – hopefully an IP ban coming soon for him. Ignore the lies.

  13. @ John. There is no plane nor school or bridge named after Hitler in all Germany so you better start educating yourself before shaming LH. Some people just can’t let go….

  14. @Scudder
    It will be a world-leading first-class 5-Star-bankruptcy! Something the world has never seen before.

  15. It is typical of collectivists like UA-NYC who like to boss other people around to appeal to the authorities to ban or otherwise get rid of those they don’t like. See all of communist history for examples. Also, don’t forget that the Nazis were socialists.

    Joey, have you ever been in a Khmer Rouge prison?

  16. “Joey, have you ever been in a Khmer Rouge prison?”

    reminds me of the scene in “The Big Lebowski”…

  17. All Lufthansa planes are named after cities not people so it’s impossible to have one named after Hitler

  18. LH is my favourite airline and I like to see it back as a reliable airline.Their long haul flights to N. America is the best. Service is superb. The govt. should cut them slacks Emmanuel.

  19. If Lufthansa even tip toes towards bankruptcy, what would be the influencing factors on the weaker airlines in the EU, e.g., Iberia? If a powerhouse like Lufthansa even mentions the possibility of going Bk, how can that impact other European carriers?

    As EU reg #261 has failed to support refunds for passengers, whether Lufthansa goes Bk or not, it is incumbent to bring in the U.S. Senate now to protect refunds for American flyers; to prevent the dismissal of U.S. consumer laws and DOT/FAA policies re refunds.

  20. @John….. LH aircraft named … Hitler etc. What are you smoking John? …wow must be potent suff !!

  21. @M.E. SINGER
    “the weaker airlines in the EU, e.g., Iberia”

    This comment is mystifying. Iberia is wholly-owned by IAG (along with British Airways, Aer Lingus, etc), which is sitting on one of the biggest cash piles of any legacy carrier, anywhere in the world.

    Almost uniquely, IAG hasn’t asked for any government assistance.

    Why would you think Iberia is a prime example of a weaker airline?

  22. @ John – haven’t got any more school work to get on with before mummy lets you out to play?

  23. Been flying from Canada to Munich on Lufthansa for many years, I never take Air Canada, too unreliable, and always had great service, I do hope they survive.

  24. @John – if you think that’s bad, wait till you discover who created the world’s largest car brand, VW..

  25. If the 2nd largest aviation company in the world and very profitable during the last past years also can’t stand the heat and survive; it’s stubborness and severe lack of negotiation skills! All sides included! And consequences to employers, shareholders and whole Europe are unforgivable and unforgettable. –> Yankee cavalry comes to “rescue”!

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