Lufthansa Running Out of Bailout Road as Germany Sets Terms

(Bloomberg) -- Germany's government has set out a unified position on a bailout for Deutsche Lufthansa AG, with the airline group expected to accept a significant state stake and veto rights in exchange for a multibillion-euro package of assistance, according to people familiar with the matter.

While details are still being negotiated, the economy and finance ministries have ironed out disagreements that dragged on for weeks, the people said, asking not to be named discussing the deliberations. The plan foresees Germany taking a least a 25% stake in the airline and receiving at least one seat on the firm's supervisory board, the people said. The assistance could run to 10 billion euros ($11 billion).

The size of Germany's equity stake, whether part of it will be under a so-called silent participation that limits state control, and how many seats the government will have on Lufthansa's supervisory board are still subject to negotiations, according to the people. Talks between the airline and the government are expected to stretch into next week, the people said.

“The future of Lufthansa is being decided in these days,” Lufthansa Chief Executive Officer Carsten Spohr said, according to the text of a speech to be given at the company's annual meeting on May 5. “It is about avoiding an insolvency with the help of the governments of our four home markets.”

The airline, faced with a substantial loss in revenue due to the worldwide grounding of most of its fleet, is locked in multi-state bailout talks with the governments of Germany, Switzerland, Austria and Belgium. Lufthansa operates so-called flag carriers in all four nations, and has warned that it will run low on cash within weeks if it can't reach an accord.

Like airlines the world over, Lufthansa is wrestling with a crisis that's punctured a decades-long aviation boom. The firm is scaling back its fleet and closing the Germanwings discount arm to resize the airline group for depressed levels of travel that could last for years.

The firm isn't alone in expecting a slow return to normality: an International Air Transport Association survey found 40% of recent travelers anticipated waiting at least six months after the virus is contained before flying again.

Airline Leverage

Lufthansa understands it has little leverage in the talks with Germany, the people said, and an agreement is likely to be reached based on terms being outlined by the state. While the company is leaving all options open, it's unlikely to seek court protection -- an idea floated this week as a last resort -- due to potential reputational damage with investors and financial markets, the people said.

The airline needs financial aid from the government, but not management help, Spohr warned. Too much debt would weigh on its competitiveness for years. He said business will probably restart in fall at the earliest, and the company is doubling its target for annual unit cost savings.

Lufthansa's pilots union on Thursday said its members were prepared to take a 45% pay cut if the airline's management promised not to enter court protection.

“These concessions are worth around 350 million euros and make a significant contribution to the viability of the company,” the VC pilots' union said in a statement.

A spokesman for Lufthansa said earlier that talks were ongoing.

Austrian Stake?

The government in Vienna could also join the German government in taking an equity stake, people familiar with the matter said. Lufthansa's Austrian Airlines has asked the state for aid close to 800 million euros, about 300 million of which may be equity, with the remainder loans, guarantees and non-repayable subsidies.

In a Wednesday meeting with Spohr, Austrian Chancellor Sebastian Kurz asked for guarantees to maintain and possibly extend Vienna airport as a hub for the group, according to people familiar with the talks. Austria is willing to take an equity stake in Lufthansa along with the German government, the people said.

“We took a step forward yesterday, the talks continue,” Austrian Finance Minister Gernot Bluemel told reporters on Thursday. Austria “isn't ruling out anything,” he said, when asked if the country would consider taking a stake in Lufthansa.

Lufthansa's Swiss and Edelweiss subsidiaries on Wednesday reached a deal to receive 1.3 billion francs ($1.3 billion) in credit guarantees from Switzerland's government, the first plank in a bailout package the parent company is negotiating with the four governments.

Talks with the Belgian government are ongoing.