After tough talks, Berlin and Brussels reach a compromise on the rescue package requirements. The Lufthansa board agrees. The EU Commission’s approach raises questions about equal treatment. Alitalia should be a litmus test here.
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Now there is hardly anything standing in the way of saving Lufthansa. Late on Friday evening before Pentecost, there was movement in the talks between the EU Commission, the German government and Lufthansa management. The airline then announced after midnight that it accepted conditions from Brussels for state aid. Accordingly, the Lufthansa Group, which also includes Swiss, Austrian Airlines and Brussels Airlines, is ready to surrender capacities at its two German home airports in Frankfurt am Main and Munich.
Slot losses hurt
Specifically, the Kranich Line undertakes to give each competitor up to 24 take-off and landing rights, so-called slots, to station four aircraft. In purely mathematical terms, there are three take-off and three landing rights per machine per day. This is less than Brussels originally claimed to have asked for. It has been reported that there were up to 20 aircraft. For a year and a half, the new regulation will only be available to new competitors at Frankfurt and Munich airports. If no new competitor makes use of the option, the offer will be extended to existing competitors at the airports.
The slots are to be allocated as part of a bidding process and may only be taken over by a European competitor. However, this does not apply to competitors who have received substantial state recapitalizations due to the Corona crisis. The German Federal Ministry of Economics announced that an important intermediate step in the aid negotiations had been achieved with the regulation. This paves the way for a decision at the Lufthansa general meeting. However, the talks with the EU Commission were still ongoing. On the one hand, Lufthansa has to approve the compromise, on the one hand, the shareholders and, on the other hand, the supervisory board.
The negotiations were so bitter because the number of planes and slots affect the core of Lufthansa’s business model. While low-cost airlines such as Ryanair or Easy Jet operate in European so-called point-to-point traffic, i.e. fly from airport to airport, Lufthansa operates a turnstile model in which several dozen feeder flights from Germany and Europe often bring passengers to the hub, for example in Frankfurt and Munich or in the Lufthansa Group also Zurich and Vienna.
The intercontinental flights, which the low-cost airlines generally do not offer, start from there. If Lufthansa loses too many slots at attractive times, the company can no longer utilize some intercontinental flights and must remove them from the range accordingly. This hurts the company and the passengers. However, one can assume that complaining in the negotiations was part of the strategy. Lufthansa is still the dominator in Frankfurt and Munich compared to any other provider.
Vestager fights in terms of competition
The EU Commission announced that it took note of Germany’s proposed obligations to maintain effective competition. The company is ready to provide slots and assets in Frankfurt and Munich as soon as the airports are congested again. That should allow other airlines to enter the market or allow competitors to expand, for the benefit of customers and effective competition. Berlin must now formally submit an application for the aid package in Brussels. This is then assessed by the EU Commission within a short period of typically 24 hours as part of the coronavirus measures.
Aid Commissioner for Aid Margrethe Vestager spoke on Friday at a virtual press conference on the case. In doing so, she said that there could be no doubt that Lufthansa had market power. If such a company receives more than € 250 million in the form of an equity participation, then conditions must be ensured that competition is not endangered. This is provided for in the temporary, simplified aid regulations that were put into effect by the EU Commission in March. These new rules were adopted after extensive consultations, Vestager emphasized. One spoke with all member states. Germany was therefore well aware of this.
Questions were also raised as to whether the Commission measured European airlines with the same yardstick. Brussels, for example, approved aid for Air France KLM without conditions. Vestager once again emphasized on Friday that it differentiates between loans and equity aid. The state is an important player and if he gets involved as a shareholder, that will give the company advantages. This would make the company look more stable overall and could make it easier to obtain additional money. In addition, the debt remains unchanged in this case. It is different with a loan. The Commission therefore wants to prevent competition from distorting itself if the economy – and with it, for example, air traffic – picks up again.
Unequal treatment of airlines?
However, it should be noted that both France and the Netherlands each hold around 14% of Air France-KLM. This group is therefore also partially nationalized. However, these transactions took place before the coronavirus crisis. One could also object that Lufthansa is the stronger company with the greater market power. According to a survey for the “RP Online” portal, Lufthansa’s market share is 67.8% in Munich and 66.4% in Frankfurt. Air France-KLM, on the other hand, has a lower share of 53.5% in Amsterdam and 52% in Paris. British Airways and Iberia in turn have 51.7% in London and 48.8% in Madrid. There are indeed big differences, only that market power could also be assumed in these cases. A spokeswoman said on Saturday that the Commission applied the aid rules equally to all applications and that it had not yet approved an equity measure. The aid for Air France (France), SAS (Sweden and Denmark) and Condor (Germany) all affected loans and guarantees. From the Commission’s point of view, these cases can therefore only be compared to a limited extent with the Lufthansa package.
Alitalia becomes litmus test for the EU Commission
With Alitalia there is a dossier on the table of Margrethe Vestager, which – to put it mildly – she has treated rather neglected. It is now a litmus test. The Italian airline has been writing losses since 2008, according to a previous Commission decision. At the end of February, Vestager announced that it was launching an in-depth review of an Italian government loan of € 400 million for Alitalia. At the same time, an investigation that has been ongoing since April 2018 has still not ended. At that time, it was about a bridging loan totaling € 900 million that the Italian government granted the group in 2017 to continue operating. And now Rome apparently wants to pump another € 3 billion into a scaled-down «New Alitalia», which according to initial plans is expected to take off in June.
However, the softened aid rules prohibit the support of companies that were already in financial difficulties at the end of 2019. At the end of February, the commission wrote about Alitalia itself in a media release: “The company has been in financial difficulties for several years”. Accordingly, it would be astonishing and unbelievable if Brussels simply approved the aid from Rome for the ailing Alitalia.
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