German Government Getting Back In The Airline Business

Germany will offer Deutsche Lufthansa AG a 9 billion-euro ($9.8 billion) bailout that puts the state back into the ownership of the airline that they privatized twenty years ago.

The government will pay about 300 million euros for new Lufthansa stock at the discount price of 2.56 euros discounted from its trading price of 8.64 euros on the Frankfurt exchange.  There will also be a 5.7 billion-euro investment via a so-called silent participation -- a debt-equity hybrid instrument that would not dilute shareholder voting rights but could help Lufthansa stave off a hostile takeover if necessary.  Lufthansa will have to pay a guaranteed dividend on the investment, which will be ratcheted up from 4% to 9.5% over the next 7 years.   The state will also back a three-year loan of 3 billion euros.  The German Government stated plans to sell the investment by 2023 provided all goes according to plan.  The German government will not have operational oversight but will have 2 board seats in conjunction with the investment.

As this deal needs to be approved by the EU and faces stiff challenges from many competitors, it represents a return to a time in the past when governments had a vested financial interest in the aviation industry.  “I wonder if the same preferential treatment commonly granted in days gone by may return to protect national investments in these airlines” cited Sal Esposito airline analyst.  “There is a natural political tendency to protect taxpayer investment in any private endeavor and granting gates, slots, and O&D rights is a easy way to do that” added Esposito.  

It is worth noting that Lufthansa has already secured additional bailout money for its subsidiary companies in Switzerland, Austria and Belgium.  Overall, they could gain over 10 billion Euros in capital to set the airline up to weather our current crisis and potentially capitalize if other carriers are unable to structure similar deals.
​
“You don’t have to think back very far to remember having to travel to specific hub cities in the North America  to catch international connecting flights, or the higher prices that were affixed to them”, commented Erik Hastings (AKA Erik the Travel Guy) .  “Much of that had to do with limited choices and the granting of rights for airlines to fly through various European cities and continue on to their final destinations”.  “Are we seeing an attempt to re-regulate the aviation industry, it might be too soon to tell but this deal absolutely spells trouble for open competition” Hastings concluded.

Sal Esposito 
Aviation Analyst
Erik the Travel Guy