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Lufthansa rescue package: Counting chickens before they hatch

Martina Roters
6 minutes

The Lufthansa rescue is now in place and has cleared the first political hurdles: the WSF and the EU Commission. But it is not yet all cut and dried. Because the rescue package still has further important hurdles to take. WingMag takes a look at the details:

How the situation had come to a head

To recapitulate:

The memorable quote by Lufthansa CEO Carsten Spohr from April 9 puts the whole drama into a nutshell:

So in total, we lose one million EUR of our liquidity reserve every hour – day and night, week after week and most likely also month after month.

Carsten Spohr

What can the crane expect from the federal eagle to ward off the bankruptcy vulture?

The nine-billion Lufthansa rescue package consists of three parts:

A loan

The KFW (Credit Institute for Reconstruction), four-fifths in the hand of the German Federal Government and one-fifth in that of the German Federal States), together with private banks (whose share is to be 600 million), will grant the “Deutsche Lufthansa AG” a total loan amounting to three billion. The term is three years.

A 20 percent equity stake

The State Economic Stabilization Fund, WSF for short, (which was founded during the coronavirus crisis to secure companies and jobs) is acquiring Lufthansa shares for around 300 million EUR, thereby securing a 20 per cent equity stake. As the existing shareholders are excluded from subscription rights, this results in a dilution of capital to their disadvantage. A convertible bond with a value of five percent plus one share is also planned. However, the conversion into ordinary shares can take place under two conditions only, and grants the Federal Government a blocking minority:

Silent partnership

For the Lufthansa rescue, the WSF will furthermore contribute EUR 5.7 billion to the assets of Deutsche Lufthansa AG, 4.7 billion of which will be classified as equity. The interest rate is fixed at four percent for the first two years and then rises to 9.5 percent by 2027.

Lufthansa Rescue
Image by Bernd Rehbein on Pixabay

What must Lufthansa provide in return?

Two seats on the supervisory board for the WSF

These places which go to the WSF must be filled by “independent experts”, who are to stay out of the current business operations. This was the outcome of the negotiations. Especially in SPD circles, this outcome is criticized; the state would be making a bad deal if it did not tie the Lufthansa rescue to job guarantees. In the other political camp, the decision is applauded because it increases the prospects for restructuring, because “the state as an entrepreneur is the less efficient one”.

No dividend payment

The money from the rescue package may not be distributed to shareholders as dividends. Dividends are only in prospect again when the rescue funds have been paid back.

Management salary waiver

The top management are also expected to make sacrifices. We are talking about one fifth of the previous remuneration. Bonus payments are also excluded for the duration of the aid package.

Tax havens

These were certainly Federal Finance Minister Altmaier’s bête noir: now the group had to disclose which subsidiaries were based in so-called “non-cooperative countries and territories”, an EU blacklist. In Lufthansa’s case: Panama, Guam, the Cayman Islands and the Virgin Islands.

Ecological aspect of renewing the fleet

In contrast to France, where Macron had wrested more far-reaching sustainability concessions from Air France, the ecological component of the Lufthansa rescue is limited to the renewal of the fleet with more fuel-efficient aircraft – actually nothing that an economically thinking airline would not have already thought of.

Surrender of take-off and landing rights in Frankfurt and Munich

The industry calls it “grandfather rights”. Because unlike in the USA, where these rights are repeatedly renegotiated in exchange for millions of dollars in bids, slots are allocated centrally by the Airport Coordination Germany, which decides which airline receives how many take-off and landing rights on the basis of an EU regulation. And the only possibility remains a transfer or an exchange.

Lufthansa must relinquish starting and landing rights in Frankfurt and Munich to the competitors. A total of 24 slots – three starts and three landings per aircraft and day. This is the compromise negotiated with the EU Commission.

Who is to get this? New European competitors. The dreaded competition from Ryanair and easyJet would probably only come into play if the contract bidding process is not successful. What is more, only those competitors who do not themselves receive substantial coronavirus rescue payments are eligible. This applies to Ryanair and easyJet, which could be allocated slots in Munich/Frankfurt.

Lufthansa Rescue
Image by Henry Fokuhl on Pixabay

Pay negotiation summit – so far no rescue summit

Back to Germany: On 10 June, representatives of the professional association of German airline pilots Association Cockpit (VC), representatives of the Independent Flight Attendant Organisation (UFO) and representatives of the trade union Verdi met with Lufthansa management for a collective bargaining summit.

The number of surplus employees brought into the discussion was 26,000 (equivalent to 22,000 full-time positions, half of them in Germany). This corresponds to a surplus of 100 aircraft.

VC President Markus Wahl had offered a salary waiver package totalling EUR 350 million “with maximum salary losses of up to 45 percent”. Cockpit represents around 5000 members.

Daniel Flohr, Chairman of UFO, expressed his disappointment with the dialogue, because the Lufthansa management was apparently not prepared to accept a waiver of compulsory redundancies. He referred to the introduction of a mandatory 40-Euro minimum flight price in Austria.

In an information handout from Verdi to its members, it said that they were aware of the seriousness of Lufthansa’s situation, but also went on to say: “We will not negligently sacrifice your wage standards on the employer’s altar.” So negotiations must follow as soon as possible because a compromise deal must be wrapped up before June:

22. June: The shareholders must agree to the Lufthansa rescue package.

As long as the shareholders are not likewise on board, this is a case of counting chickens before they hatch. Lufthansa’s fate will therefore be decided conclusively at the Extraordinary General Meeting (Jun 25th). According to information from the Wall Street Journal, analysts rate the share differently – even after the government aid package was announced. At least, the share price has started to rise again for the time being.

If the shareholders do not swallow the bitter pill and do not approve the rescue package, it would be bad news for the customers, because in the event of insolvency on their own responsibility, the equivalent value of their tickets for flights not yet taken would not be secured.

On June 17, the major shareholder Heinz Hermann Thiele expressed his disapproval of the present compromise and called for renegotiations. As has become known, he has increased his share package to 15 percent, which, under favourable circumstances, gives him the opportunity to prevent the required two-thirds majority for the rescue package at the Annual General Meeting on his own.

Coverpicture by Dominic Wunderlich on Pixabay

by Martina Roters

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