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Frankfurt, Germany - German flag carrier Lufthansa is in talks with the government over the terms of a multibillion bailout. The airline also considers court protection as a last resort in case it fails to reach a deal with the German government.

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 a rescue that could exceed 8 billion euros ($8.7 billion), said the people, who asked not to be named because the talks are private.

One option being discussed includes giving the government seats on the board and the power to block strategic decisions, one person said, terms Lufthansa is loath to accept because they may dent its competitiveness. The carrier is already cutting back its fleet to reflect depressed levels of travel that could last for years after the coronavirus pandemic passes.

A spokesperson for Lufthansa said the company was examining all possibilities, while a government official said Germany is seeking a consensus.


Bankruptcy

Major U.S. airlines such as American Airlines Group Inc., Delta Air Lines Inc., and United Airlines Holdings Inc. have been through bankruptcy proceedings over the last two decades, but it’s less common for flag carriers in Europe. German airline Condor last year applied for court protection after the demise of U.K. parent Thomas Cook Group Plc.
While talks are continuing and German leaders have promised not to allow Lufthansa to fail, the possibility of creditor protection -- unthinkable before the virus hit -- harks back to the global financial crisis a decade ago when some banks and automakers were restructured under government oversight.

The International Air Transport Association has said the coronavirus will lead to $314 billion in lost revenues for airlines, and force many out of business.

Lufthansa’s management team fears that the terms on offer would limit the airline’s ability to compete in Europe against low-cost carriers like Ryanair Holdings Plc, and internationally against the U.S. and Asian carriers that won’t be as indebted in the wake of the crisis, the people said.
Lufthansa, which connects Germany to the far-flung export markets on which its economic juggernaut depends, has been wrangling with the government over a package that could amount to more than double the company’s market value of about 4 billion euros, said one of the people.
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 and Airbus, with the impact potentially rippling through the European planemaker’s factories in France, Germany, and the U.K.

French Rescue

A bailout would follow an even bigger package for European rival Air France-KLM, which was unveiled Friday by French and Dutch finance ministers and came after weeks of talks between the airline, banks, and the governments. France and the Netherlands pledged as much as 11 billion euros in loans and guarantees that the carrier had said were crucial to its survival. Lufthansa and Air France-KLM are the region’s two biggest carriers by passenger traffic and considered by the states as too important to fail.

German Economics Minister Peter Altmaier has favored 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, Angela Merkel’s party block wants to lower the active stake to below 25% 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, one person said.

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


Flag Carriers

The company also operates so-called national flag carriers in Austria, Belgium, and Switzerland, which could also be involved in the bailout. The company’s Austrian arm late Tuesday said it is asking for 767 million euros in support from the Austrian government, large parts of which would be repayable loans.

In an ominous sign for airline employees in the region, Scandinavia’s main airline SAS became the first major European carrier to permanently slash staff numbers following the outbreak of the virus, cutting as many as 5,000 jobs or about 40% of its workforce. IAG followed suit by saying it will slash the workforce at its flagship British Airways by almost 30%, culling as many as 12,000 jobs.

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