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Why Lufthansa May Refuse State Aid | One Mile at a Time

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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.

In this post:

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.

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