Lufthansa Faces Arduous Climb Out of Crisis After Bailout Sealed

(Bloomberg) -- Deutsche Lufthansa AG dodged insolvency. Now Europe’s biggest airline faces the arduous task of transforming itself into a leaner carrier to compete in an air-travel market hamstrung by the coronavirus.

The approval of a 9 billion-euro ($10.1 billion) German bailout concludes weeks of sometimes rancorous negotiations with the government and follows frenzied speculation in recent days over whether billionaire Heinz Hermann Thiele, Lufthansa’s largest shareholder, would scupper the deal. Instead, he backed it.

With the rescue sealed, Chief Executive Officer Carsten Spohr’s next challenge will be a restructuring to reflect a collapse in air travel and the dim prospects for a quick revival, especially on the business routes Lufthansa favors. The airline has said it may have to shrink its fleet by 100 jets and shed some 22,000 of its 140,000 or so employees.

The revamp won’t be easy. He’ll face resistance from powerful labor unions and work rules that make it hard to cut jobs or pay. And although the government has said it will stay out of management decisions, deep job losses may test that resolve. Unions are already arguing the bailout funds should be used to preserve employment.

“With government aid, jobs and income now have to be secured,” said Christine Behle, a member of Lufthansa’s supervisory board and chair of the Verdi union for ground staff.

The state will provide loans and equity to the airline after the coronavirus pandemic grounded its fleet and left it burning through cash. Under the rescue, the government will take a steeply discounted 20% stake, returning to the shareholder ranks of the German flag carrier two decades after its privatization.

The approval of the German package opens the door for further aid already promised by Austria and Switzerland for operations in those countries. Belgium is also discussing funding.

The shares fell 1.7% in early trading Friday, paring Thursday’s 7.1% gain. The stock has declined 42% this year.

Lufthansa will also have to deal with a total debt load that’s set to reach 26 billion euros with the rescue, according to Daniel Roeska, an analyst with Sanford C Bernstein. The airline will have to make tough choices to repay the government by 2023, he said.

CEO Spohr said the company is “aware of our responsibility to pay back the up to 9 billion euros to the taxpayers as quickly as possible.”

The company, which previously said it would look at selling its catering arm and a minority of its Lufthansa Technik jet maintenance and refitting division, reassured shareholders Thursday that there would be no fire sales. Even selling aircraft at decent prices may pose a challenge as long as the pandemic lasts.

The airline is also a fighting a rearguard action by discount carrier Ryanair Holdings Plc, which has argued that the state bailouts of Lufthansa and Air France-KLM confer an unfair advantage that will distort competition in Europe for years to come. Ryanair’s combative CEO, Michael O’Leary, last month pledged to challenge the European Commission’s approval for the Lufthansa aid.

On Thursday, European Union regulators signed off on the bulk of the package in exchange for Lufthansa making some slots available at its Frankfurt and Munich hubs.

Air France-KLM’s Dutch arm will get a 3.4 billion-euro bailout from the Netherlands, Dutch Finance Minister Wopke Hoekstra said in a letter to parliament Friday. That follows a 7 billion-euro aid package for the group from the French state.

Air France-KLM Gets $3.8 Billion in Aid From the Netherlands

German government officials applauded the Lufthansa vote.

“This is very, very good news for the company, the employees and German business,” said Finance Minister Olaf Scholz. “Our engagement is temporary. When the company is fit again, the state will sell its stake -- hopefully with a small profit.”

Securing a state holding marks a victory for Scholz and Economy Minister Peter Altmaier, who intend for the watershed deal to serve as a model for any future corporate bailouts. The approval also spares the German government the embarrassment of a second insolvency of a high-profile company after payments firm Wirecard AG collapsed this week amid an accounting scandal.

Protecting Employees

Labor tension was on display when Lufthansa missed a self-imposed June 22 deadline for a pay-cut accord with worker representatives before the shareholder vote.

Late Wednesday, it reached a deal with its cabin crew union that would save around 500 million euros through 2023. In return, Lufthansa pledged not to make redundancies for the duration of the coronavirus crisis. Agreements with the pilot and ground crew unions have yet to be reached.

“If there is a mountain to climb for Lufthansa, today they only reached base camp,” Roeska said of the bailout.

©2020 Bloomberg L.P.