Lufthansa 1
Lufthansa wants some wriggle room even if the government is writing the cheques out for its survival. Image Credit: Reuters

Frankfurt: Deutsche Lufthansa AG, locked in tense negotiations over terms of a multi-billion euro state bailout, is considering court protection as a last resort should the sides fail to reach an agreement.

The so-called “Schutzschirm” protection would shield Europe’s biggest airline from creditors for three months while it works out a management-led restructuring plan. The specter of a court-supervised proceeding comes as talks with Germany intensify over terms of a rescue that could exceed 8 billion euros ($8.7 billion). One option being discussed could include giving the government seats on the board and the power to block strategic decisions - terms Lufthansa is loath to accept because they may dent the firm’s competitiveness.

Ringfencing

While talks are continuing and German leaders have promised not to allow Lufthansa to fail, the possibility of creditor protection - unthinkable before the coronavirus hit - harkens back to the global financial crisis a decade ago. Then, financial institutions and US automakers like General Motors were restructured under government oversight using Chapter 11 bankruptcy protection.

The airline’s management team fears that the terms on offer would limit Lufthansa’s ability to compete in Europe against low-cost carriers like Ryanair Holdings Plc, and internationally against US and Asian carriers that won’t be as indebted in the wake of the crisis,.

Lufthansa has been wrangling with the government over a package that could amount to more than double the company’s market value of 4 billion euros.

A last resort

Entering into Schutzschirm, or protective shield in German, must be approved by a court, and must be requested before the company is actually unable to pay its bills. The move would give the airline flexibility to part with more than 160 outstanding plane orders on the books of Boeing Co. and Airbus SE, with the impact potentially rippling through the European planemaker’s factories in France, Germany and the UK.

No option but tap state support

German Chancellor Angela Merkel’s government has been haggling for weeks over the planned lifeline as Lufthansa loses 1 million euros an hour after travel restrictions decimated the global industry. Lufthansa CEO Carsten Spohr warned on Friday the carrier could face a liquidity crunch in a few weeks and would need state aid.

German Economics Minister Peter Altmaier has favored a silent participation and a loan package to help Lufthansa through the crisis, but the Social Democrats, Germany’s junior coalition partner, have demanded far-reaching control over the day-to-day running of the company in return for a multi-billion rescue package.

While the Social Democrats seek a veto right with the stake and government representation on the supervisory board, Merkel’s party block wants to lower the active stake to below 25 per cent to avoid making the German carrier too political. German government officials came close to hammering out an accord with Lufthansa on Monday, but discussions about the state taking a stake and the limiting of political control are still ongoing.

Companies like Lufthansa should “have the opportunity to get back on their own two feet and turn a profit,” Altmaier said on local radio.