Lufthansa CEO Calls For Level-Playing Field In COVID-19 State Aid

Lufthansa does want to hold on to its portfolio of airlines across Europe but it fired a warning shot at the governments of its so-called home countries that attaching a string of too strict conditions to bailouts will impede the group’s ability to compete with counterparts in the U.S., China and the Persian Gulf. “If we want to compete globally against the three major airline groups in the USA, China and the Gulf Region, then we will only be able to do so as a European airline group,”  Lufthansa group chairman and CEO Carsten Spohr told shareholders at the company’s first-ever virtual annual general meeting this morning.

To maintain the German aviation group’s competitive position in the post-pandemic era, Spohr called on European politicians—more specifically in Germany, Switzerland, Austria and Belgium where the group fully owns and controls four network carriers: Lufthansa, SWISS, Austrian Airlines and Brussels Airlines—to ensure that state aid does not lead to an imbalance in international competition. “Especially when competitors in the USA or China are now funding themselves healthy with state support. It is all the more important now that international competition not be distorted by differing types and scopes of state aid,” he said. “We cannot allow ourselves to become heavily indebted as that would paralyze us for years. We must already develop a plan today for how we can repay the government loans and investments as quickly as possible.”

He readily admitted that Lufthansa needs state aid, even though the group’s liquidity is currently still above €4 billion ($4.37 billion). But with most of its fleet grounded and carrying just 3,000 passengers a day, compared with 350,000 pre-COVID-19, liquidity will continue to decrease significantly over the next few weeks. The company currently is burning €1 million ($1.1 million) its liquidity reserves per hour in operations. “We will not make it alone. We are going to need help,” Spohr said.

“The question is whether we can avoid bankruptcies with the support of the governments of our four home countries,” he noted. The group launched negotiations with the governments of Germany, Switzerland, Austria, and Belgium on the terms of a bailout of the countries’ respective carriers, but talks are moving at a snail’s pace. So far, only the Swiss government has pledged support. The deal, which still needs approval from the Swiss parliament, will see the two Swiss airlines of the Lufthansa group, SWISS and Edelweiss, receive state-backed loans totaling 1.5 billion Swiss francs ($1.54 billion). A consortium of Swiss banks will grant the loans at market conditions for a term of up to five years. The Swiss state guarantees 85% of the loans and they are secured by SWISS and Edelweiss shares held by Lufthansa. The funds may only be used at SWISS and Edelweiss. No intra-group dividend payments must be made for the period during which the credit facility is drawn down.

Talks in Lufthansa’s other three home countries are proving to be more challenging. “The level of complexity surrounding all of these measures is extremely high,” Spohr said. “At the moment we are not only discussing the levels of the necessary amounts, but are also negotiating the conditions and timelines as to when this help can be made available.” Spohr is expected to meet Belgian Prime Minister Sophie Wilmès Wilmes on Wednesday to discuss a €290 million ($316.8 million) rescue package. Both exchanged letters in recent weeks, with Spohr insisting the proceeds would not flow to the German group’s flagship carrier; the Belgian taxpayers’ money would be used for the Belgian airline. In her reply, the Belgian PM demanded that any state aid to Brussels Airlines would come with conditions and guarantees on growth and employment, additional investments, the preservation of Brussels airport and environmental targets.

Austrian Airlines end April submitted a formal request for €767 million ($838 million) in financial assistance from the Austrian state to survive the corona crisis, Die Presse reported. Talks so far have not resulted in a positive outcome and Austrian chancellor Sebastian Kurz has made clear that the government “will not deliver money to a German company without benefits for Austria.”

Lufthansa appears to be playing hardball also with the German government. The company last week rejected conditions of the German government for a rescue package and instead considered entering the so-called “protective shield” proceeding, according to German media. The Schutzschirmverfahren is a special procedure of German bankruptcy law, which is only available if the company is not yet illiquid and can be granted by the court in cases with a positive prospect of a successful restructuring. In a protective shield proceeding, management stays in charge, only with a court-appointed custodian at its side as a kind of supervisor. Under the deal proposed by the German federal government, the government would provide a rescue package to its flag ship carrier of around €9 billion ($9.8 billion) in return for a 25% stake in the company and two seats on the supervisory board. The financial support would be a mix of a capital increase and state-backed loans, with an interest-bearing rate of 9%. Lufthansa management considers the 9% rate is too much while the government shareholding would hinder its ability to restructure –and downsize—the airline.

Lufthansa needs government support “but we do not need government management,” Spohr told shareholders. Lufthansa was successfully privatized in 1997 and during the last three years the company has consistently generated an operating result of over €2 billion ($2.18 billion). “We have proven that we can do it and that is why it is important to us to preserve the entrepreneurial freedom of decision and action of the Lufthansa Group,” he emphasized. He, however, softened his tone on the Schutzschirmverfahren scenario stating that “nobody has an interest” in such conversations while also reassuring shareholders who fear that a German stake would dilute their shareholding that “even in the federal government, no one wants a state-controlled Lufthansa.”