Lufthansa closes in on multibillion bailout deal

Deutsche Lufthansa said it's close to a multibillion euro bailout deal that would see the state become its biggest shareholder after the coronavirus punctured a decades-long boom in air travel.

Lufthansa shares gained as much as 5.8 per cent Thursday after Europe's largest carrier confirmed it's in advanced talks with Germany's WSF Economic Stabilization Fund for aid of as much as €9 billion. The package would include a €3 billion loan, a so-called silent participation and the WSF obtaining a 20 per cent stake through a capital issuance, Lufthansa said.

The government would also receive a convertible bond equivalent to an additional 5 per cent plus one share of the company’s increased capital. Under German law, a 25 per cent plus one share stake would enable the state to block motions at annual general meetings, giving it a veto over hostile takeover attempts.

"A decision can be expected shortly," Mrs Merkel said late Wednesday in Berlin, adding that "intensive talks" were ongoing with the company and the European Commission, which would need to approve a deal. She declined to go into details, saying: "I would give the advice: wait for the talks to end."

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Lufthansa also said two seats on its supervisory board are to be filled in agreement with the German government. It didn’t say whether these would be political or independent figures, a matter under discussion in negotiations.

Tense Talks

If agreed, the deal would bring the curtain down on weeks of tense negotiations between the company and state officials. It would also set the scene for a dramatic extraordinary general meeting at which shareholders would vote on whether to accept a package that would dilute their own stakes.

Lufthansa would issue the shares to the government for the nominal price of €2.56, a steep discount that would allow the state to profit from any upside to the price.

Ryanair has already opposed Lufthansa subsidiary, Austrian Airlines’ bid for €767 million in state grants and loans, while it has challenged French and Swedish tax breaks for airlines registered in those countries. Chief executive, Michael O’Leary, last week claimed its German rival was “hoovering up state aid like a drunken uncle at a wedding”.

The contours of a deal come after the airline warned in a letter that cash reserves continued to shrink while it negotiates the rescue package. Lufthansa’s board said it hoped the government would find the “political will” for a deal that would keep the carrier competitive against international airlines.

The German government and Lufthansa have been locked in intense negotiations for weeks over the rescue plan. While the Economy Ministry and Finance Ministry internally agreed on taking a stake of 25 per cent plus one share, the company had opposed the move, people familiar with the matter said earlier.

Lufthansa executives had raised concerns that the terms on offer would hamstring it against international competitors who’ve received less stringent bailout conditions, a point the management board repeated in the letter to employees.

Lufthansa is burning through €800 million each month after the coronavirus grounded most of its fleet. Chief executive Carsten Spohr said on May 5th that the company had about €4 billion in cash remaining.

300 Planes

The letter to employees this week gave further details of Lufthansa’s expected fleet reductions for the coming years. The board said it expected 300 of its aircraft to remain grounded in 2021 as demand for flying recovers only slowly, with 200 remaining out of service into 2022.

Lufthansa had previously said it expected its pre-crisis fleet of around 760 aircraft to be around 100 smaller once normality returns around 2023, a forecast it stuck to in the letter.

Spohr earlier this month said the airline is in "intense" talks with Airbus and Boeing about postponing plane deliveries as he set out plans for surviving the coronavirus storm. – Bloomberg