Lufthansa and the European Commission have reached a compromise on the terms of the German state aid-package, the airline has confirmed on May 30. The agreement opens the door to final approval from the supervisory board and shareholders, which was upheld on May 27.
The stumbling block was the condition from the European Commission that Lufthansa would surrender 36 slots and twelve aircraft at its Frankfurt and Munich hubs to competitors for fair competition. The airline’s management opposed these terms as giving up slots would hurt Lufthansa’s network options at both airports and cost jobs. The management was backed by ten unions, who in an open letter to the EC on May 29 requested to approve unconditional aid.
In a compromise with Brussels, the executive board now accepts to give up 24 slots or the equivalent of eight aircraft: three take-off and three landing slots per day or four aircraft per airport. Slots will be available to new competitors for 1,5 years in a bidding process. These European airlines must not have received any ‘substantial’ state aid themselves. If no new entrants apply for the slots they will be available to existing operators at both airports.
The initital state aid package between Lufthansa and the Wirtschaftsstabilisierungsfonds (WSF) or Economic Stabilization Fund (ESF) was announced on May 25. This will give the government a silent share of 20 percent, 23 years after it sold its last shares in the company. In total, Lufthansa will bolster its financial position by some EUR 9 billion.
The German airline was optimistic it could weather the Covid-19 crisis when it announced its FY19-results on March 19. “We can survive this, our position is stronger”, CEO Carsten Spohr said. But the airline lost EUR 1 million per hour as the crisis deepened and Lufthansa was forced to keep almost its entire fleet grounded. It had EUR 5.1 billion in net cash and 10 billion in unencumbered assets but the former was shrinking quickly. Despite a traditional strong credit rating, Lufthansa had difficulty accessing funds on the capital markets.
That’s when the German federal government came into the rescue. A number of scenarios have been studied, including filing for voluntary administration like Avianca has done to restructure and re-size the Group. A partial government bailout was a more likely scenario, but this opened up a political debate about whether the state would need to have a say on the supervisory board. The Christian-Democrats within chancellor Angela Merkel’s CDU and Bavaria’s CSU sister party opposed the idea while the Social-Democratic SPD demanded state aid was to be conditional.
WSF will make silent participation
The compromise is that WSF will make silent participation of up to EUR 5.7 billion in the assets of Deutsche Lufthansa AG. Of this, 4.7 billion will be in the form of equity. Remuneration on the silent participations is 4 percent for this year and 2021, rising to 9.5 percent in 2027. The silent participation is unlimited and can be reviewed each quarter.
WSF will also inject capital into Lufthansa to build up a 20 percent share for EUR 2.56 per share, resulting in a total cash injection of EUR 300 million. If a third party seeks to buy Lufthansa, WSF can increase its share to 25 percent plus one share.
If Lufthansa fails to pay the remuneration to WSF, the fund has two options to purchase a bigger stake. In the first option WSF has the right to convert an additional 5 percent of the share capital but only from 2024 onwards. In the second option, WSF could increase its share if a take-over bid fails to materialize. The economic fund could also sell its shares from 2024 again.
Also part of the deal is a EUR 3 billion credit facility provided by KfW Bankengruppe and other private banks with a term of three years, but this is still subject to regulatory approval.
The German government will have two seats on the supervisory board, of which one will be a member of the audit committee.
EC demanded slot reductions
The package needed approval from Lufthansa’s management board and supervisory board. More importantly, the European Commission had to confirm that the aid complies with the EU’s competition rules. Earlier in the week, pilot union Cockpit warned Brussels not to impose any slot reductions at the two hubs as this could endanger jobs. Keeping all slots at Frankfurt and Munich is “of the utmost importance to offer an attractive network and remain competitive.” It would “deteriorate Lufthansa’s position and contravene attempts to stabilize the airline when it restarts again.”
No details about the restructuring
The Lufthansa-statement doesn’t include anything on a detail that caused a last-minute delay: the condition by WSF that the airline will have to take delivery of some 82 Airbus A320neo’s and 30 A350-900s still on order.
Finance secretary Olaf Scholz said state aid is conditional on Lufthansa’s need to reduce its carbon footprint by renewing its fleet. This is an indication that the purchase of new aircraft is indeed included in the agreement.
As reported in April, the fleet will be reduced by early-retiring some 70 airliners small (A320ceo’s) and large (Boeing 747-400s, Airbus A340-300s, and A380s). If Lufthansa Group is forced to take delivery of aircraft it has on order it will most certainly try to defer as many as possible to later dates.
Nor has Lufthansa given additional details on the extent of the restructuring plan at the network airline and low-cost subsidiary Eurowings. As Carsten Spohr said on April 7, Lufthansa Group will come out of the Covid-crisis a much smaller airline group. Potentially some 10.000 out of 140.000 jobs could be made redundant, although Secretary of Economic Affairs Peter Altmaier said on German TV on Monday night that securing jobs has been one of the major reasons behind the state aid package. Spohr said in April that Lufthansa will seek all options like flexible contracts to keep as many staff as possible.
Union Cockpit said: “It’s important and justifiably that the position of the employees and the economic stability of the company are of equal importance.” Last month, cockpit crew agreed to a pay cut of up to 45 percent over the next three years.
Finance secretary Scholz said the government only intends to sell its stake again when it can at a profit.
SWISS has already received state aid
Lufthansa subsidiaries SWISS and Edelweiss have already received state aid from the Swiss government in the form of CHF 1.27 billion guaranteed loans on the condition that no funding can be transferred to the parent company. Brussels Airlines is still in negotiations about a package with the Belgian government, while Austrian is in the same situation. Brussels Airlines has announced a reduction of its 54-strong fleet by 30 percent and staff by 25 percent. Austrian will retire 20 of its 80 aircraft and reduce its 7.000 staff, which has accepted to reduce salaries by EUR 200 million.
The agreement will now go to the Supervisory Board. The board had discussed the package on May 27 but decided to postpone the Annual General Meeting to get shareholders’ approval as it needed to further study the conditions set out by the European Commission: “The Supervisory Board has taken note of the conditions currently indicated by the EU Commission. They would lead to a weakening of the hub function at Lufthansa’s home airports in Frankfurt and Munich. The resulting economic impact on the company and on the planned repayment of the stabilization measures, as well as possible alternative scenarios, must be analyzed intensively”, it said on the 27th.