Lufthansa Management Weighs Insolvency Options, CEO Spohr Meets With Austrian Political Elite

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Lufthansa was in the news again in the last few days and of course it’s about money – not only government bailouts for airlines of the LH Group but also a possible insolvency in self administration (similar to Chapter 11 in the U.S.).

At the same time Lufthansa CEO met with Austrian Chancellor Sebastian Kurz and senior political leaders as Austrian Airlines is seeking 670 Mio Euro Bailout from the government.

So far only Switzerland has agreed to support their local carrier SWISS Air Lines while all others, Austrian / Brussels / Lufthansa have not reached a definitive agreement with their governments concerning a bailout.

The last couple of days have been turbulent to say the least. While Lufthansa is looking for 9 Billion Euro from the German government it’s CEO Carsten Spohr went on the offensive saying publicly that he doesn’t want any government involvement in strategic company decisions.

In their daily reporting about the matter the Frankfurter Allgemeine quotes Lufthansa Management and union representatives that involvement of the government is only welcome as a silent shareholder without doing any of the decision making. This simply ain’t going to happen and won’t have any backing in the broad coalition Angela Merkel has right now. Neither would the public support such a step to pump 9 billion into a company without getting any guarantees or control in return.

Spohr has therefore asked the responsible departments and auditors to weigh the options for an insolvency in near self administration called “Schutzschirmverfahren”, something that can be compared to a Chapter 11 filing in the U.S. as we’ve seen it numerous times in the past. It would be an extraordinary step to take for the German Airline though especially since it’s likely more due to pride than practicality. It’s more likely Spohr is trying a bluff here but that’s a very fine line with the danger of Merkel calling it. Trying to blackmail the government is never a great idea especially if you need 10 Billion or it’s game over.

There are two key developments however. For one Lufthansa pilots agreed to a pay cut of up to 45% over the next two years.

The other is more of a political matter as the German Ministry of Economics and the Ministry of Finance have come together to find common ground in the Lufthansa affair. According to FAZ the government demands a veto power which is likely play very badly with the CEO. Furthermore at least one seat on the board shall be reserved for a government appointed officer as well as a 25% stake to go directly to the state in exchange for a rescue package of up to EUR10.0 Billion.

It remains to be seen if Lufthansa senior management agrees to these conditions or if they seriously consider insolvency proceedings.

According to FINANZEN Spohr has already met with the Austrian Government including Chancellor Kurz who summed up that no Austrian financial aid will be forthcoming unless there are clear concessions by Lufthansa that include a binding promise to secure Austrian Airlines for the future, keep Austrian jobs and to maintain the Vienna hub including key routes. Austria has also demanded a return for their financial support in the form of shares or a general stakeholder.

As John wrote yesterday, Swiss has already secured a sizable CHF1.6 Billion from the Swiss government but also tied to conditions to prevent the LH Group profiting while SWISS might suffer losses. In the past SWISS has for long been a cash cow for the Lufthansa Group following the takeover of what was once the prestigious Swissair.

Conclusion

While nobody wants a state led company, let alone airline the demands the German government makes here are not unreasonable and at least in my opinion the conduct and arrogance of LH Management even in times of crisis is amazing.

It’s a welcome sign that the pilots appear to be reasonable for once and have offered a 45% pay cut after holding the company hostage with various strikes in the past. Other unions not so much as they already demand that Lufthansa won’t cut any jobs whatsoever should they receive taxpayer money. Such demands are totally unreasonable as the company has to downsize dramatically in the next 18-24 months and all this staff is simply neither needed nor is the company able to pay for their salaries under these conditions. This could be one (and pretty much the only) justification for the top management to consider filing for an insolvency as it would make things much easier to cut jobs without the unions yielding too much power. German labor law is still highly restrictive in this way though, for example it wouldn’t allow Lufthansa to simply void all their labor contracts per §613a of the German BGB that regulates the interim business during an insolvency.

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