Lufthansa Is Reportedly Examining Bankruptcy Proceedings

German airline group Lufthansa is awaiting the outcome of negotiations for a €9bn ($9.74bn) bailout, with Chancellor Angela Merkel and CEO Carsten Spohr fleshing out the details today. However, it appears that a rescue package is not the only option for the carrier, as reports today suggest bankruptcy is still being explored as an option.

Lufthansa, Airbus A340, Graveyard
As well as the bailout, Lufthansa is keeping bankruptcy open as an option. Photo: Oliver Roesler via Lufthansa

Bankruptcy on the table

While the finalization of a €9bn ($9.74bn) bailout for German airline group Lufthansa is eagerly awaited today, it appears this is not the only option on the table. According to Aero.de, Lufthansa is also examining self-administered bankruptcy as an alternative.

Although the conditions of the state aid agreement are still being negotiated, the consensus is that it will come with some political strings attached. Notably, it is expected that Lufthansa will need to give the German government a voice on the board, including a blocking minority.

The publication states that Lufthansa CEO Carsten Spohr has said internally that he would rather steer the company into insolvency than have politicians talking him into it.

Lufthansa, Low Fares, Carsten Sphor
CEO Spohr would rather steer his airline into self-administered bankruptcy than be told to do so by politicians. Photo: Lufthansa

The problem with the state

While Lufthansa, like all airlines, is struggling with the impact of the coronavirus pandemic, its CEO is keen to look to the future. A bailout, although much needed right now, should not hamper his airline’s ability to remain competitive.

As reported by Reuters, Spohr has flagged concerns about governments getting too involved in airlines. He worries that should Berlin begin to exert too much influence over Lufthansa, then other governments of the airlines in the group could seek to hop in too. With subsidiaries in Austria, Switzerland and Belgium plus hubs in the German federal states of Hesse and Bavaria, Spohr is concerned that the future competitiveness of Lufthansa could be damaged. He commented to Die Zeit,

“You can hardly steer a group this way.”

Lufthansa, Grounded Aircraft, Frankfurt
Spohr wants Lufthansa back in the sky, but with all its competitiveness intact. Photo: Oliver Roesler – Lufthansa

While aviation has historically been politically linked, the involvement of governments in the commercial operations of airlines has diminished. Where states still retain an active role in their flag carrying airline, the result tends to be inefficiencies and poor decision making. Spohr is keen to avoid these types of interventions, saying,

“Lufthansa has had the three best years in its corporate history. If it is to be successful in the future, it must continue to be able to shape its fate in an entrepreneurial manner.”

Clearly, Spohr is keen to keep the state at arm’s length, but is voluntary insolvency really the way forward?

The protective shield of bankruptcy

Although bankruptcy sounds like a drastic step, it could actually give Lufthansa the breathing room it needs to secure a healthier future. The type of scheme that could come into play acts as a ‘protective shield,’ allowing the management to undertake a restructuring of the business while giving it some safeguards against its creditors.

German airline Condor also went through the protective shield bankruptcy process. Photo: Tom Boon – Simple Flying

Fellow German airline Condor has been through this type of creditor protection program following the demise of its parent company Thomas Cook. As long as the airline is not already bankrupt, the protective shield process could be a workable alternative if the details of the rescue package prove to be too restrictive.

With the details of the bailout agreement set to be unveiled later today, it should start to become clear which direction Lufthansa will be headed. Although some might think it bonkers to turn down a €9bn bailout in the current climate, Spohr’s focus on maintaining the future health and competitiveness of his airline is excellent to see.

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