Airline Privatization: Gradual Privatization (Part 3)

A Lufthansa A340-600 in Munich (Photo: AirlineGeeks | Fabian Behr)

As part of a series surrounding airline privatization, we have dived into numerous ways airlines opt to join the market, including public issuance of shares and trade sales. This covers a good portion of the industry, but there are still many ways that airlines go from the hands of the government to the investors either in full or in part.

In the third part to this series, we’ll discuss gradual privatization. Gradual privatization is as the name says, the gradual privatization of an organization. In this situation, the entire company isn’t sold to investors, but the controlling government gradually reduces its stake in the company to either a small portion under government ownership or 100% private ownership. One common example of this process is none other than Lufthansa.

Gradual Privatization of Lufthansa

Lufthansa has had owned by private shareholders for many years, however, the German government was still the largest single shareholder, with an ownership stake varying between 72 percent and 85 percent from the 1950s to late 1980s before declining to 65 percent.

Then, in 1989, the German government took the first step in their ultimate goal of privatizing the airline. In the autumn of 1989, the airline issued additional shares that diluted the government stake in the airline from around 60 to 52 percent.

Pension Troubles

However, the issue of further shares hit a technical snag that proved to be a challenge for the airline. While some unfortunate financial luck hit with the Gulf War recession, an issue around Lufthansa employee pensions arose swiftly. As government employees, Lufthansa employees were covered by a government-backed pension fund. If the government’s share of Lufthansa fell below 50 percent, the airline would lose pension rights from the fund.

Since fully funded pension funds are few and far between, it was no surprise that if the German government’s ownership of Lufthansa were to fall below 50 percent, then Lufthansa as a private entity would not be able to fund its entire pension obligations.

This issue was finally resolved in 1994 when the German government agreed to give Lufthansa roughly 1.5 billion Deutsche Marks, just under $1 billion at the time, to help fund the pension benefits of the existing staff after the airline withdraws from the government-backed pension fund.

By the fourth quarter of 1994, Lufthansa issued additional shares to the public and the government sold off 2 million shares, placing them with institutions. This further reduced the government’s share in the airline.

Foreign Ownership Challenges

With some of the major challenges out of the way, time went on and new challenges arose. Most shares in German companies at the time were “bearer” rather than registered in the shareholder’s name. Similar to central bank notes, the owners aren’t really known and can’t be traced.

This made it quite difficult if not impossible to know who exactly was holding shares of the airline. This isn’t really a problem when the government owns the majority of the airline, but as it gradually privatizes, it creates a problem. Foreign ownership restrictions and air services agreements come in to play.

Following full privatization, a group of state companies and institutions agreed to retain their holdings to ensure that there continues to be majority German ownership. In 2005, over three quarters of Lufthansa shares were in German hands. However, by the next year, this dropped to around 60 percent. However, the airline wasn’t too concerned about the threat of excessive control at the time.

The airline is now fully private following the gradual selling of shares by the government to the general public. While the process took quite a long time, the eventual result was a company responsible for its own bottom line without the influence of government ownership.

Hemal Gosai

Hemal took his first flight at four years old and has been an avgeek since then. When he isn't working as an analyst he's frequently found outside watching planes fly overhead or flying in them. His favorite plane is the 747-8i which Lufthansa thankfully flies to EWR allowing for some great spotting. He firmly believes that the best way to fly between JFK and BOS is via DFW and is always willing to go for that extra elite qualifying mile.
Hemal Gosai