Germany prepares to take stake in Lufthansa in bailout

Deutsche Lufthansa AG, locked in tense negotiations over terms of a multibillion-euro state bailout, is considering court protection as a last resort should the sides fail to reach an agreement, according to people familiar with the matter.

The so-called Schutzschirm protection would shield Europe’s biggest airline from creditors for three months while it works out a management-led restructuring plan. The specter of a court-supervised proceeding comes as talks with Germany intensify over terms of a rescue that could exceed 8 billion euros ($8.7 billion), the people said.

One option being discussed could include giving the government seats on the board and the power to block strategic decisions, a person said, terms Lufthansa is loath to accept because they may dent the firm’s competitiveness.

New Crisis

While talks are continuing and German leaders have promised not to allow Lufthansa to fail, the possibility of creditor protection—unthinkable before the coronavirus hit—harkens back to the global financial crisis a decade ago. Then, financial institutions and U.S. automakers like General Motors were restructured under government oversight using Chapter 11 bankruptcy protection.

The airline’s management team fears that the terms on offer would limit Lufthansa’s ability to compete in Europe against low cost carriers like Ryanair Holdings Plc, and internationally against U.S. and Asian carriers that won’t be as indebted in the wake of the crisis, the people said.

Lufthansa has been wrangling with the government over a package that could amount to more than double the company’s market value of 4 billion euros, said one of the people, who asked not to be named because the talks are private.

Consensus Sought

A spokesperson for Lufthansa said the company was examining all options, while a government official said Germany is seeking a consensus.

Entering into Schutzschirm, or protective shield in German, must be approved by a court, and must be requested before the company is actually unable to pay its bills. The move would give the airline flexibility to part with more than 160 outstanding plane orders on the books of Boeing Co. and Airbus SE, with the impact potentially rippling through the European planemaker’s factories in France, Germany and the U.K.

The shares, which rose as much as 12% earlier, were little changed as of 12:35 p.m. in Frankfurt.

Haggling

German Chancellor Angela Merkel’s government has been haggling for weeks over the planned lifeline as Lufthansa loses 1 million euros an hour after travel restrictions decimated the global industry. Lufthansa Chief Executive Officer Carsten Spohr warned on Friday the carrier could face a liquidity crunch in a few weeks and would need state aid.

A bailout would follow an even bigger package for European rival Air France-KLM, which was unveiled Friday by French and Dutch finance ministers and came after weeks of talks between the airline, banks and the governments. France and the Netherlands pledged as much as 11 billion euros in loans and guarantees that the carrier had said were crucial to its survival. Lufthansa and Air France-KLM are the region’s two biggest carriers by passenger traffic and considered by the states as too important to fail.

German Economics Minister Peter Altmaier has favored a silent participation and a loan package to help Lufthansa through the crisis, but the Social Democrats, Germany’s junior coalition partner, have demanded far-reaching control over the day-to-day running of the company in return for a multibillion rescue package.

Political Control

While the Social Democrats seek a veto right with the stake and government representation on the supervisory board, Merkel’s party block wants to lower the active stake to below 25% to avoid making the German carrier too political. German government officials came close to hammering out an accord with Lufthansa on Monday, but discussions about the state taking a stake and the limiting of political control are still ongoing, one person said.

Companies like Lufthansa should “have the opportunity to get back on their own two feet and turn a profit,” Altmaier said on local radio Monday.

Other Countries

The company also operates so-called national flag carriers in Austria, Belgium and Switzerland, which could also be involved in the bailout. The willingness of France and Germany to shore up their ailing champions comes after the International Air Transport Association repeatedly warned the health crisis could bankrupt half the world’s airlines, with the hit to European carriers expected to reach $89 billion in lost sales.

In an ominous sign for airline employees in the region, Scandinavia’s main airline SAS AB is cutting as many as 5,000 jobs or about 40% of its workforce, becoming the first major European carrier to permanently slash staff numbers following the outbreak of the virus.