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Lufthansa to enter insolvency amidst shareholder revolt?

It seemed like a stressful month of negotiations was already over for Lufthansa. All sides, including the German government, the European Commission, and the airline‘s own executive and supervisory boards approved the $9.8 billion (€9.0 billion) state aid package. The company had just one more hurdle to clear – its shareholders.

However, the hurdle might become too high. At the forefront of the revolt is Heinz-Hermann Thiele, the largest single shareholder of the airline. Thiele publicly criticized the terms and conditions of the deal, including the lack of transparency from the Lufthansa’s chairman, Carsten Spohr. The shareholder, who planned to increase stake at the airline to 15%, indicated having concerns that Spohr did not disclose all the options available to the German airline group.

In response, Lufthansa warned that the stabilization package was “not secured”. If the stabilization package is not approved by shareholders on June 25, 2020, the airline “would possibly have to apply for protective shield proceedings under insolvency law,” if no other solution is found immediately. Protective shield proceedings, a procedure similar to Chapter 11 bankruptcy in the United States, would allow the airline to restructure business while being protected from its creditors. However, a lot of fat would have to be trimmed in order to sustain liquidity, which could strain the carrier’s relationships with unions and negatively impact its credit rating, hindering prospects of growth in the future.

The company publicly pleaded its shareholders to attend the extraordinary general meeting on June 25, and to vote in favor of the conditions attached to the state aid. Attendance seems like a crucial factor: if there are less than 50% of shareholders present, a decision needs to amass a two-thirds majority of votes in order to be accepted. If more than 50% of shareholders are present, the decision needs a simple majority vote to pass. Currently, Lufthansa expects that less than half of its shareholders would be present at the meeting.

The company indicated that in Q1 2020 it burned through $896 million (€800 million) liquidity reserves per month. Furthermore, Lufthansa stated that it has a surplus of around 22,000 full-time positions due to the current coronavirus pandemic. It expects that those jobs will be lost permanently.

The airline group already considered insolvency when it hit a bump in the road in the negotiations with Germany’s Economic Stabilization Fund (WSF).

 

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