It took longer than Air France but Lufthansa has finally finished negotiating its rescue package with the German government. It’s not that no one wanted to save the airline, but as explained earlier, Lufthansa’s management wanted to preserve their ability to manage the airline in the interest of its development and even threatened bankruptcy if the state interfered too much.

EUR 9 billion for Lufthansa

The Lufthansa Group, which of course includes Lufthansa but also Swiss, Brussels Airlines and Austrian, will therefore receive 9 billion euros. This is less than Air France-KLM (7 billion before aid from the Dutch government, which is slow in coming), but considering the size of the group, it is proportionally much less.

5.7 billion loan for Lufthansa

The money is provided by Germany’s Economic Stabilization Fund (WSF) and private banks. and unlike what happened with Air France-KLM (at least for the time being) it is also accompanied by the acquisition of a stake in the airline.

The WSF will make a “silent stake” of EUR 5.7 billion to Deutsche Lufthansa AG (Lufthansa Group). This contribution is unlimited in time, but Lufthansa can repay it at the end of each quarter by paying back all or part of it. It comes with interest rates of 4% until the end of 2021, rising to 9.5% in 2027.

This is similar to the shareholder loan granted by the French State to Air France-KLM, but for that to happen, the WSF would have to be a shareholder in Lufthansa, an airline that has been fully privatised since 1997. Moreover, if the principle of rescuing the airline was not debated in Germany, it was the interference in the affairs of a private business that bothered part of the political class more, proving that doubts about the efficiency of the State as shareholder are not only a French issue.

The State takes a 20% stake in Lufthansa

To this end, the State, through the WSF, will acquire a 20% stake in Lufthansa (300 million euros), which makes it a very large holding, as no current shareholder holds more than 10%. Should Lufthansa be taken over, the WSF reserves the right to increase its stake to 25% + 1 share, which would give it a blocking minority to influence the airline’s future policy. This also means that contrary to the initial demands, the state does not have this minority today.

If the loan is not repaid, it could, as in the case of Air France-KLM (although this is not explicitly foreseen for the Franco-Dutch group), be converted into capital up to 5% in 2024 and as much in 2026.

On the other hand the WSF engages to exit the airline’s capital in 2023 by selling its shares at the market price (and at a minimum price of €2.26 which corresponds to the price at which the shares were acquired + an annual interest rate of 12% on the capital invested) provided that the loan has been repaid

3 billion from private banks

All this is complemented by loans from various private banks to the tune of 3 billion with a 3-year maturity.

What is “silent stake”?

We were most interested in the term ‘silent stake’. In fact, with its entry into Lufthansa’s capital, the WSF will inherit two seats at the board. But it is committed not to exercise his voting rights unless the airline is bought out.

A victory for Lufthansa’s management?

In the end, Lufthansa’s managers seem to have got what they wanted: money and no state intervention. Recall the words of CEO Cartsen Spohr: “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“

Yes, he could not escape the presence of state administrators, but they will not have any influence on the votes and, as far as we know, no other commitment has been made (nor requested by the state).

One can only wonder about the high interest rates that accompany the loan, especially if Lufthansa does not repay quickly. This suggests that the plan for the airline, although there is of course a conversion of the loan into capital in the event of non-repayment, is to get the state out as soon as possible.

Indeed, the agreement explicitly provides for an automatic exit from the state in 2023 under certain conditions, including the repayment of the loan, which suggestsa full cash strategy for the German group in order to repay the loan as quickly as possible and, if necessary, buy back its own shares if no one came forward to buy them from the state.

What are the differences with Air France-KLM?

On the face of it, the two schemes may look similar but there are differences:

– The state is taking a stake in Lufthansa but this is not a surprise, it was a “technical” condition necessary for the loan and the taking of a minimum of guarantees. Already a shareholder in Air France-KLM, the French state had no such need.

– Interest rates are quite high, although it is not known what the situation is for Air France KLM.

– The absence of engagement (to date) with the government and the guarantee that the state-appointed directors will not interfere with the airline’s strategy.

– A strategy of exit of the State planned from the beginning (if the airline reimburses of course) whereas in the case of Air France-KLM, in view of the conditions of the deal, we are in a logic of a latent capital increase of the State.

– Besides the German government, Switzerland has already contributed to the rescue, Austria is making progress, while the Dutch government’s intentions for Air France-KLM have yet to materialise.

It is not known whether the threat to bankrupt the airline was a factor, but it seems that Carsten Spohr and the leadership team managed to twist the government’s arm in the right direction.

Of course this will be analysed in more detail as more information becomes available, as the news was only made public last night.

Beware, however, that the transaction is subject to approval by the European authorities in relation to competition regulations.

[Edit] After negotiations stalled over a slot issue that the EU wanted Lufthansa to drop, a deal was finally struck and accepted.

Photo : A380 Lufthansa by Vytautas Kielaitis via Shutterstock

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