Lufthansa is one of the biggest brands created by Germany, and one of the biggest and most successful airlines in the world. Like all other airlines in the industry, it’s struggling to survive amid the global health crisis that caused the demand for air travel to plunge drastically.
The German flag carrier is in talks with the federal government for financial support, but no agreement yet on the aid terms offered by the government side. Obviously, world aviation may not be the same without Lufthansa.
Lufthansa German Airline and the Lufthansa Group may be preparing for bankruptcy. This was reported in the German magazine Capital. According to this report, the airline may be preparing for the German protective shield proceedings, known as “Schutzschirmverfahren”. German insolvency law, unlike US insolvency law, only recently introduced (in 2012) the so-called protective shield proceedings to enable potentially illiquid and/or over-indebted debtors to restructure the company on the basis of a so-called insolvency plan. Thereby, the liquidation of a company by a future insolvency administrator can be avoided.
In general, protective shield proceedings are fairly comparable to US Chapter 11 proceedings. However, comparable to the history of Chapter 11 proceedings, the number of cases remains at a low level since 2012 compared to the absolute numbers of insolvency proceedings. The same applies to the numbers of debt-equity-swaps (DES) carried out under protective shield proceedings. But with regard to current debt developments and based on the facilitated formalities for DES under protective shield proceedings, it is expected that the number of cases of DES under protective shield proceedings will rise in the near future – similar to past developments in the US.
In particular, if the company is potentially insolvent but its core business operations are profitable, a DES under the protective shield proceedings becomes attractive, providing the creditors with direct participation in them, by either the acquisition of shares in the company or by DES. In a DES, existing claims are used to acquire (newly issued) shares in the company.
The advantage of DES in such cases is obviously that outstanding debts are converted into equity, i.e. new shares (without any encumbrances) that are transferred to the creditors, cutting down the overall outstanding debt value, and hence, the company’s indebtedness. As the latter is one of two criteria for the determination of insolvency under German insolvency law (over-indebtedness or inability to pay its [due] debts), a reduction of the grade of indebtedness may also lead to the termination of insolvency proceedings and enable the company to resume normal business operations.
Firstly, the existing shareholders pass, in the shareholders meeting, a shareholders’ resolution increasing the registered capital of the company and issuing new shares. To increase the registered capital, the company needs an equivalent contribution to its capital account by either a payment or a so-called contribution in kind.
Such contribution in kind, in the case of a DES, is done by interested creditors of the company by way of transfer of their claims against the company to this company. The new shares will be distributed exclusively to the creditors participating in a DES, who become the new shareholders of the company.
This move is parallel to the request by Lufthansa to secure €9 billion in government rescue funding due to the COVID-19 epidemic. Experts think such a rescue package would give the government massive influence over the operation of the German national carrier. Lufthansa hired Arndt Geiwitz, a known attorney specialised in restructuring and out of court insolvency administration, restructuring mediation and trust litigation.
Also, the name Lucas Flöther was mentioned as an administrator. Flother was the Air Berlin administrator and was also appointed trustee in self-administration over German airline Condor after it filed restructuring proceedings in Frankfurt to shield its business from the collapse of parent Thomas Cook.
Such a move by the German Airline may come forward as soon as next week. Lufthansa hired US consulting firm Boston Consulting Group. Boston Consulting Group is an American management consulting firm founded in 1963. The firm has more than 90 offices in 50 countries, and its current CEO is Rich Lesser. BCG is one of the three biggest employers in management consulting, known as MBB or the Big Three.
The Lufthansa Group is an aviation group with operations worldwide. With 138,353 employees, the Lufthansa Group generated revenue of €36,424 million in the financial year 2019. The Lufthansa Group is composed of the segments Network Airlines, Eurowings, and Aviation Services. Aviation Services comprises the segments logistics, MRO, catering, and additional businesses and group functions. The latter also includes Lufthansa AirPlus, Lufthansa Aviation Training, and the IT companies. All segments occupy a leading position in their respective markets. The Network Airlines segment comprises Lufthansa German Airlines, SWISS and Austrian Airlines.