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On 24 May 2020, the German government announced that it had agreed an extensive €9 billion rescue package for Lufthansa, including a significant recapitalisation leading to a government shareholding of 20 per cent. The European Commission indicated that any approval of the proposed bail out would be subject to slot divestitures at Lufthansa’s Frankfurt and Munich hubs. While Lufthansa’s supervisory board had initially indicated it would not approve a rescue package subject to these conditions, it reversed its position, and on 30 May 2020 decided to accept giving up eight aircraft with 24 landing slots at Frankfurt and Munich in return for the bail out. This case illustrates some important lessons.

Authors: Geert Goeteyn Richard M. Hakes

aerial view of airplane at airport

The Lufthansa case shows that while the Commission has accepted that government recapitalisations may be required to provide urgently needed liquidity, it is determined to ensure that such aid does not unduly distort competition in the market. Its firm position further reflects the fact that any Commission approval decisions are likely to be subject to appeal. Ryanair, in particular, has adopted an aggressive stance, and has indicated its intention to challenge a significant number of aid packages.

In addition to any conditions the Commission may impose, national governments may attach further strings. For example, Air France has had to accept certain environmental obligations in return for the French government’s financial support.

It is clear that a major restructuring of the aviation industry will take place when the worst effects of the pandemic have subsided. The conditions attached to the rescue packages may, however, impose some important limitations that the airline recipients will need to take into account when devising their post-COVID-19 strategy to deal with these changes.

Background

While COVID-19 has badly impacted almost all sectors of the economy, there is no doubt that the aviation industry is amongst the worst hit. Passenger air traffic has all but ceased and a significant number of carriers have grounded all or most of their fleet. It therefore comes as no surprise that a number of EU governments have stepped in to provide support to airlines. These support packages have relied either on the Temporary Framework adopted by the Commission in response to the pandemic, which has Article 107(3)(b) TFEU as its legal basis, or on Article 107(2)(b) TFEU, which allows for state aid designed to make good “damages as a result of … exceptional occurrences”.

Examples of aviation-related financial support measures include, amongst others:

  • Swedish and Danish government financial support for SAS and a €500 million state guaranteed loan adopted by the German government to the benefit of the charter airline Condor (all of which were adopted on the basis of Article 107(2)(b) TFEU); and
  • a €455 million Swedish guarantee scheme in support of airlines affected by the coronavirus outbreak, a Finnish state guarantee on a €600 million loan to Finnair, and an aid package designed to provide €7 billion in urgent liquidity support to Air France (all of which were granted in line with the provisions of the Temporary Framework).

The Temporary Framework has been amended twice since its adoption on 19 March 2020. The second amendment, adopted on 8 May 2020, grants EU Member States the ability to provide recapitalisations and subordinated debt to companies in need of urgent liquidity.

The new rules also include measures designed to protect the level playing field and avoid undue distortions of competition. EU Commission Executive Vice President Margrethe Vestager was quoted as saying that: “If Member States decide to step in, we will apply today’s rules to ensure that taxpayers are sufficiently remunerated and their support comes with strings attached, including a ban on dividends, bonus payments as well as further measures to limit distortions of competition.”

In addition to the ban on dividends and bonus payments referred to by Executive Vice President Vestager, the following measures apply in the case of recapitalisations:

  • conditions relating to the appropriateness of the aid;
  • suitable entry and exit provisions (in the case of publicly listed companies, the government should, in principle, exit in full within a period of six years);
  • a ban on share buybacks;
  • a prohibition on cross subsidisation of parts of the business that were already in difficulty prior to 31 December 2019; and
  • a ban on acquisitions of a stake of more than 10 per cent in competitors for as long as at least 75 per cent of the government’s recapitalisation has not been redeemed.

The Lufthansa bail out

On 24 May 2020, the German government announced that it had agreed an extensive €9 billion rescue package for Lufthansa, subject to EU Commission approval. The government planned to provide financial aid in a number of ways, including through loans as well as a 20 per cent stake in Lufthansa’s capital. It was the first aid package that included a recapitalisation of the airline beneficiary of the aid.

In its discussions with the German government, the Commission indicated that to ensure that effective competition in the market would be preserved, it intended to make the approval of the package conditional on slot divestitures at Lufthansa’s hubs of Frankfurt and Munich. Lufthansa’s supervisory board initially announced it would not accept the aid package under those conditions, stating that they: “would lead to a weakening of the hub function at Lufthansa’s home airports in Frankfurt and Munich”. The Commission, however, held firm, pointing to the different nature of the proposed bail out. Contrary to previous aid packages that had consisted of loans or loan guarantees, the Lufthansa package included a significant capital injection and would provide the company with a strong shareholder. This, the Commission said, would reinforce Lufthansa’s balance sheet, making it easier to obtain further funds and strengthening Lufthansa’s position as a competitor in the market. To ensure that the proposed package would not have an unduly distortive effect, the Commission felt it necessary to take measures to increase competition at Frankfurt and Munich where Lufthansa holds a very strong position. Executive Vice President Vestager pointed out that slot divestitures are common antitrust remedies in aviation-related matters, referring to merger and Article 101 TFEU alliance decisions where such divestitures are at the centre of the remedy packages accepted by the Commission. Reversing its initial opposition to the Commission’s position, the Lufthansa supervisory board indicated on 30 May 2020 that it would agree to the Commission’s requests for it to give up eight aircraft with 24 landing slots at Frankfurt and Munich airports, an ask that it said was smaller than the divestitures originally requested by the Commission.