Germany Reaches EU Deal on $9.9 Billion Lufthansa Bailout
Germany and EU Reach Deal Over Lufthansa’s Bailout
(Bloomberg) -- The German government worked out its differences with the European Commission over a 9 billion-euro ($9.9 billion) bailout of Deutsche Lufthansa AG, clearing the way for the rescue of Europe’s biggest airline to move forward.
After intense talks, the commission and the German government agreed that Lufthansa will reduce its presence at airports in Frankfurt and Munich by four aircraft each. The accord, which the airline’s management said it would accept, would give a toehold to new competitors hoping to challenge the dominant German carrier on its home turf.
The compromise settles a high-stakes showdown that played out over the past week, pitting the European Union’s most powerful member state against the regulator tasked with ensuring fairness in the bailout process. The economic damage of the coronavirus crisis has unleashed an unprecedented gusher of state aid, led by Germany’s 600 billion-euro ($666 billion) effort to shore up its economy.
With Lufthansa’s future in the balance, Germany on Monday offered the carrier a package of loans and equity investment to keep it aloft. But after the EU demanded it give up slots, the airline’s supervisory board unexpectedly held off on accepting this lifeline -- throwing the rescue plan into turmoil after weeks of talks. Ultimately, the EU pared back some of its demands.
“There will be worries for Lufthansa about other airlines moving in, but the slot rules would seem to limit the threat,” said John Strickland, director of JLS Consulting in London, who has held senior positions at British Airways and KLM.
The EU conditions kick in when airports become congested again, at which point Lufthansa will have to surrender as many as 24 takeoff-and-landing slots at Munich and the same at Frankfurt -- enough for a competitor to base four planes at both airports, each making three daily round-trips.
Assessing the Deal
There are significant catches, however, that suggest the strongest potential beneficiaries, such as Ryanair Holdings Plc -- a loud critic of the Lufthansa aid -- won’t be able to fully take advantage of the slots.
For the first 18 months, for example, the capacity is reserved for new competitors in Frankfurt and Munich. With the global airline industry in retreat, the likelihood of a fresh entrant may be limited.
The EU is comfortable with the deal, having overshot in its initial demands in anticipation of a compromise, according to a person familiar with the matter. It’s not certain the remedy will be taken up, but regulators didn’t have time to test the interest, the person said, asking not to be identified on a confidential matter.
The commitments will “enable a viable entry or expansion of activities by other airlines at these airports to the benefit of consumers and effective competition,” the EU said in an emailed statement.
Talks with the EU over other aspects of the deal will continue, a spokeswoman for Germany’s economy ministry said.
The agreement would then require approval of Lufthansa’s supervisory board, followed by a formal signoff by the EU, which polices state aid to ensure one country doesn’t give its companies an unfair advantage.
The bloc’s regulators will assess the German aid package “as a matter of priority,” the EU said Saturday.
Ryanair, Wizz
Discount operators are the most likely to show interest in the new capacity, Strickland said. If the slots had become available before the coronavirus, Lufthansa “would have been concerned about long-haul rivals -- Gulf carriers say -- but that’s really gone now with markets so weak.”
Of the two main European discounters, Dublin-based Ryanair already has slots at Frankfurt’s main airport. U.K.-based Easyjet Plc has a presence in Munich. At least initially, each would be unable to use the new capacity in the location where it’s already planted a flag.
Another growing low-cost carrier, Wizz Air Holdings Plc, recently pulled out of Frankfurt. In an interview, Chief Executive Officer Jozsef Varadi called the bailout “market distorting,” and said the slots don’t come close to balancing out the amount of aid Lufthansa is getting.
He said he’ll consider the capacity on offer, but cautioned it will depend on details including costs, which are higher for point-to-point operators like Wizz because of transfer discounts granted in Frankfurt.
“We need to look at whether there is any way of taking advantage of this,” Varadi said. “We need to know more about the process of applying for the slots and what the conditions are, and also what slot pairs we are talking about, the time of day, the rotations.”
The slot pairs will be allocated in a bidding process, Lufthansa said, and only be available to European carriers that haven’t received substantial state recapitalization due to the coronavirus pandemic.
Market Power
The supervisory board’s rejection of the initial rescue proposal had triggered an open dispute between the German government and the EU commission, revealing the political tensions underpinning the effort to stabilize Lufthansa in the midst of a historic collapse in travel.
The labor-heavy supervisory board saw a threat that jobs would be lost and the market would shift toward the discount airlines, which pay their personnel less.
Still, all sides were seeking a breakthrough. Even before the compromise, the board had called the bailout “the only viable alternative for maintaining solvency.”
“Lufthansa is indeed a very impressive company and they have market power,” EU competition watchdog Margrethe Vestager told reporters in Brussels on Friday. “There is a high risk that if you hold market power” that “competition will be disturbed,” especially when state recapitalizations strengthen a company.
The supervisory board wasn’t planning to meet this weekend, but could be called to do so at short notice, people familiar with the matter have said. It may meet on Monday, German newspaper Handelsblatt reported.
Shareholder Vote
Lufthansa’s shareholders would also be called to vote on a proposed capital increase that’s part of the rescue plan at an extraordinary general meeting, most likely toward the end of June, meaning it could be weeks before Lufthansa receives government cash.
Like airlines across the world, Lufthansa is fighting for survival as the coronavirus crisis punctures a decades-long aviation boom. The company, which connects Germany’s industrial titans to far-flung export markets, plans to operate fewer aircraft when flights resume and is closing discount arm Germanwings to prepare for what could be years of depressed demand.
Lufthansa is also poised to receive some 2 billion euros in aid from Austria, Belgium and Switzerland, where the airline owns units.
The German package represents the biggest corporate rescue in the country during the pandemic crisis. It’s also the only one that involves a direct investment by German Chancellor Angela Merkel’s government, but more may be coming. The government set up a 100 billion-euro fund to buy stakes in stricken companies as part of its effort to stabilize Europe’s largest economy.
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