Lufthansa Shareholders Give The Nod To Government Rescue Package, CFO Resigns Over Imposed Bonus Cap

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This week Lufthansa shareholders gave their approval to the rescue package negotiated between the company and the German government with restrictions imposed by the European Union.

It has been a real rollercoaster ride with Lufthansa and their financial situation in order to secure additional backing and now it’s reported that their CFO is going to leave his post over a dispute over a cap on bonuses.

Freezing bonuses was part of the agreement with the government as to securing the funding. Senior management would ‘only’ receive their base pay for some time to come which makes it extremely unattractive for a top manager to remain.

The most important part however (for now) is that the airline has secured the go ahead from their shareholder including and especially from German businessman Heinz Herrmann Thiele who owns 15.5% of Lufthansa. Thiele who was reportedly at odds with the governments proposals and the rescue deal overall held a series of talks in the days leading up to the final vote and ultimately voted for the measure.

You can find the official announcement from Lufthansa in their investor relations portal.

Today, the shareholders of Deutsche Lufthansa AG voted in favor of accepting the capital measures and the participation of the Economic Stabilisation Fund (WSF) of the Federal Republic of Germany in Deutsche Lufthansa AG. The corresponding proposal received the necessary majority at today’s Extraordinary General Meeting of the company.

The package provides for stabilization measures and loans of up to 9 billion euros. The WSF will make silent capital contributions of up to 5.7 billion euros to the assets of Deutsche Lufthansa AG. It will also establish a 20 percent stake in the share capital of Deutsche Lufthansa AG by way of a capital increase. This capital increase was approved at today’s Extraordinary General Meeting.

The shareholders also voted in favor of granting two conversion rights for parts of the silent capital contributions. These conversion rights are intended, on the one hand, to safeguard the Federal Government in case of a takeover of Lufthansa and, on the other hand, to secure the interest payments for the silent capital contribution. Both conversion rights can be transformed into a further five percent of the company’s share capital should these conditions be met. The package will be supplemented by a loan of up to 3 billion euros with the participation of KfW and private banks. …

As a result of the resolution of the Extraordinary General Meeting, the company’s liquidity is secured on a sustained basis. The companies of Lufthansa Group are working at full speed to get their operations up and running again. The airlines’ flight schedules will therefore be consistently expanded in the coming weeks. The flight schedule for the next few weeks will be published at the beginning of next week. The plan is to include 90 percent of all originally planned short-haul destinations and 70 percent of all long-haul destinations in the flight schedule again by September.

Around 30,000 shareholders attended the Extraordinary General Meeting. A total of 39.0 percent of the share capital was represented. Of these, 98 percent of the capital present voted to accept the company’s proposed resolution. This means that far more than the necessary two-thirds majority voted in favor of adoption.

The European Commission had already approved the stabilization package before the start of the Extraordinary General Meeting.

While 9 Billion Euro are a lot of money it’s really not all that much for a company that already owes customers several billion in outstanding refunds and as per their own admission loses one Million Euro per hour each day during this period of travel restrictions.

As it stands without any signs of improvements and restarting their business would still run out of money by the end of fall, give/take a little. As such I’m not sure what they mean when saying the company’s liquidity is secured on a sustained basis while still burning money on an ongoing basis like a furnace.

Lufthansa also faces another problem and that is management. The company announced almost in the same breath that their Chief Financial Officer and member of the executive board Thorsten Dirks will leave Lufthansa.

Thorsten Dirks will withdraw from the company’s Executive Board on the occasion of the successful conclusion of the governmental stabilization measure. He was most recently responsible for the areas Digitalization and Finance. Thorsten Dirks was appointed to the Executive Board in May 2017.

Karl-Ludwig Kley, Chairman of the Supervisory Board of Deutsche Lufthansa AG, thanks Thorsten Dirks for his work on the Executive Board: “After joining the Executive Board, Thorsten Dirks initially led Eurowings through a difficult phase, while at the same time placing important accents on IT and digitalization, and most recently taking over key areas of the finance department at short notice. Without exception, the topics he was confronted with were difficult and challenging. On behalf of the Supervisory Board and the Executive Board, I would like to express our deep gratitude for his work.”

The Executive Board division “Digitalization and Finance” will temporarily be assigned to the area of responsibility of CEO Carsten Spohr.

It comes at a strange time for a senior executive to leave the company during a time when all competent management experience is needed to bring the airline back on track. Especially since Dirks was only in the CFO position since April of this year – less than 3 months!

The Handelsblatt however reported that reason why Dirks’ contract with Lufthansa was dissolved is because he wasn’t willing to forego his bonus payments that he’s entitled to under the terms of his contract.

Not paying bonuses to their executives is a condition for Lufthansa to receive the government support package and this is going to represent a deep cut into the overall compensation of someone like Dirks (more than 50%).

According to the Lufthansa Remuneration report for 2019 these are the compensation figures for the entire board:

The base salary for Mr. Dirks is 860,000 EUR (pre-tax of course) and it’s no secret that compensation for German top executives is in the bottom range in comparison to their international counterparts. The CFO of Delta Air Lines earns three times as much (a bit over $6 Mio).

Considering the high taxation in Germany Mr. Dirks ends up with less than EUR 500k and this might be significant motivation to jump ship especially if there is another offer for a new position on the table or at least on the horizon. It’s still a lot of money but everyone has different financial obligations and if someone feels that the current employment isn’t paying adequately anymore then the logic consequence is to leave.

Conclusion

There was a lot of chatter about government involvement in Lufthansa and why Lufthansa management as well as Mr. Thiele was against this plan. We now have at least part of the answer. If senior executive management starts leaving their posts because of inadequate compensation then the company will need to find new suitable candidates for this position. It’s hard to imagine someone who would be able to commandeer a much higher salary in other industries would be willing to work at a fraction of it at Lufthansa, a company in distress. There is very little if any upside to this.

It remains to be seen how successful the rescue package and the affects of the conditions imposed on the company will ultimately prove to be. It doesn’t bode well though if the first order of business is to dissolve the contract of the CFO.

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