Why talks between Lufthansa and the German government are dragging on

While Air France-KLM has quickly concluded a financial support plan from the French government and the same is expected from the Dutch government in the near future, things seem to be dragging on at Lufthansa, whose discussions with the German government are slow to reach a conclusion.

Lufthansa in the storm but not more than others

According to its CEO, Carsten Spohr, Lufthansa has been losing 1 million euros per hour since the start of the COVID-19 crisis, which has seen it ground 99% of its fleet. These figures are similar to those seen at Air France-KLM. And one might even be tempted to say that these figures are a pleasant surprise.

When we talk about Lufthansa, we are talking about the Lufthansa Group, i.e. the airlines Lufthansa, Swiss, Austrian, Brussels Airlines and Eurowings. A fleet of 763 aircraft and 140,000 employees compared to, for example, 524 aircraft and 80,000 employees at Air-France KLM.

By way of comparison, the two groups had relatively similar cash levels at the beginning of the crisis, and even better for Air France-KLM.

One would have expected Lufthansa’s losses to be greater because of its size and the fixed costs that this entails, and therefore the risk that it would be financially drained more quickly than its competitor, but this was not the case. In our view, this is proof of its excellent management and/or the fact that the right measures were taken very quickly.

However, Lufthansa is not on a different footing from its competitor and even though its profitability has been infinitely better in recent years (we are talking about 10% as opposed to 2%), it is still reduced to finding the financial means to ensure its survival.

And as much as Air France KLM and the French government have very quickly completed their plan (one of the fastest in the industry), we can start to worry about the fact that nothing has happened yet on the German side.

9 billion plan under discussion

Today the Lufthansa Group is said to be in discussions with the German government for a 9 billion euro aid package. But contrary to what was done for Air France-KLM, we are not only talking about a loan, but also about a stake in the capital for the German state, which would then make a shareholder loan possible.

It is important to understand what is exceptional about this, as the German airline has been fully privatised since 1997 following a process that began in 1992. Surprising as it may seem from France the two largest European airline groups, IAG (British Airways, Iberia, etc.) and Lufthansa, have no public shareholders (Qatar holds 25% of IAG but this is in another logic…) whereas France was a 14.3% shareholder in Air France-KLM before the Dutch state joined it with 14.3%. in the midst of governance disputes, as it is not part of the Dutch culture to have an equity stake in the country’s businesses either.

More than money, we are talking about a real change of governance since the state would ask for 25.1% of the capital (the largest shareholder currently holds 10% of the shares), two seats on the supervisory committee and a blocking minority in return for its aid. There is also talk of interest at a staggering rate (9%) for the shareholder loan that would be granted after the equity investment.

Lufthansa wants to keep its destiny in hand

And this is where the problem lies. Carsten Spohr knows what made the Lufthansa Group a successful and growing business before COVID-19 and is thinking about the “next move”. In other words, he does not want this lifeline to turn into a ball and chain tomorrow.

“The Board of Directors of Deutsche Lufthansa AG is continuing negotiations with the aim of ensuring the future viability of the business for the benefit of its customers and employees. A not so cryptic statement that could be translated as “business must remain a professional matter”.

Didn’t he say at the end of April “Lufthansa has had the best three years in its business history. If it is to succeed in the future, it must continue to be able to shape its destiny in an entrepreneurial way“.

It is clear that Lufthansa does not like to be accountable to the state and to see the state influence the strategic choices of the business.

Lufthansa in bilateral negotiations with several states

Furthermore, the Lufthansa Group is not in discussion with a single state but with several. In the same way that the Dutch state will intervene alongside France for Air France-KLM, Switzerland, Belgium and Austria are also concerned, to a lesser extent than Germany, as Brussels Airlines, Swiss and Austrian are part of the Lufthansa Group.

Indeed, Swiss and Edelweiss (its subsidiary) have just obtained a loan of 1.5 billion euros, 85% of which is guaranteed by the Swiss Confederation, without any participation in the capital being envisaged. The state is not currently a shareholder in Swiss, which is 100% owned by the Lufthansa Group.

As for Brussels Airlines, Belgium offered financial aid (Lufthansa asked for 390 million euros), but this was also accompanied by a 25.1% stake in the capital of the Belgian airline (the state is not currently a shareholder in the airline, which is indirectly 100% owned by Lufthansa Group). No way for Lufthansa, which declined the State’s aid and will therefore restructure Brussels Airlines alone and certainly in a more abrupt manner.

In Austria, Austrian has requested aid of around EUR 700 million.

It is easy to understand the position of the group, which is already resistant to the presence of a state in its capital and would find it difficult to juggle with the demands of two or three states. When you see what happens between France and the Netherlands, one can only agree with it.

Moreover, Carsten Spohr himself said at the end of April that it was out of the question for him to be dictated to by politicians to favour this or that hub more, which is easy to understand.

An aversion to state interference in business that even made him say that he would rather go bankrupt than let the German state influence business decisions.

Lufthansa in bankruptcy: fact or fiction?

Lufthansa, yesterday dominant, tomorrow bankrupt, who would have imagined that? And yet the option has been publicly mentioned by the management.

However, this would not mean the disappearance of the airline, as German law provides a mechanism for a business to manage its insolvency by sheltering it from creditors with the possibility of converting debt into equity. A mechanism reserved for financially sound businesses that have experienced particular one-off difficulties, which therefore applies perfectly to the airline. Furthermore, under this regime, the procedure can be self-administered, i.e. the current management would remain in place.

Bluff ? Spohr has a very clear entrepreneurial vision of what it takes for the airline to succeed and his track record speaks for itself so there’s no need to swear. But let’s assume, as the latest rumours suggest, that it was mainly to put pressure on the German government to limit its demands.

Towards a deal with the government in the coming days.

The latest news is that a deal with the government for 10 billion euros is expected to be announced in the next few days.

It remains to be seen whether the threat of bankruptcy has borne fruit and whether Lufthansa has succeeded in negotiating more favourable terms than expected regarding the state’s ability to interfere, interest rates or some other disturbing detail. Or if, on the contrary, the government did not give in, even if it meant that the management went to the end of its ideas and went into “self-bankruptcy”.