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European Commission caves in to Lufthansa over its €9 billion bailout

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The saga of the Lufthansa bailout is finally over after the European Commission caved in to Lufthansa’s demands to – as near as matters – be given €9 billion with no preconditions.

You can read the full announcement on the Lufthansa website.

Lufthansa hasn’t got off entirely scot free, but near enough.  It’s not clear if Ryanair is able to take the deal to the courts, as it has been threatening.  It wouldn’t be surprising, as the deal is specifically designed to hit Ryanair as well as boost Lufthansa.

Lufthansa A340

What are the terms of the Lufthansa bailout?

As a reminder, the Supervisory Board of Deutsche Lufthansa refused to accept the terms of the €9 billion bailout which the main board had agreed on Monday.

It’s not as if the €9 billion had to be repaid.  Only €3 billion was in the form of a loan.  The rest of the investment carried heavy interest payments, to encourage the airline to pay it back, but there was no obligation to do so.

The proposed structure was:

€300 million to acquire a 20% shareholding

€5.7 billion in redeemable non-voting shares, of which €4.7 billion will carry a guaranteed 4% yield, rising in stages to 9.5% by 2027 

€3 billion as a three year direct loan provided by the state-run development bank KfW

Lufthansa's board rejects €9 billion Government bailout

What conditions had the European Commission proposed?

The deal was rejected because the Supervisory Board believed that the European Commission wanted too high a price.  Lufthansa had been asked to surrender 72 slot pairs (36 daily return flights) at both Frankfurt and Munich airports which the Supervisory Board felt was too much.

Lufthansa flies 300 aircraft out of Frankfurt and Munich.  The European Commission’s proposal would have meant that it would need to cut 12 aircraft.  It would still have enough slots to operate 288 planes.

To me, this seems like a pretty good deal for being given €9 billion, of which €6 billion is not repayable.

Apparently not.  Scare stories were put out by every branch of the airline suggesting that budget airlines might be able to gain a stronger foothold in Frankfurt and Munich and that this was clearly unacceptable …..

Lufthansa's board rejects €9 billion Government bailout

Despite Lufthansa having no cards to play – given that it is on the edge of insolvency – the European Commission gave in yesterday.

What is the new European Commission proposal for Lufthansa?

Lufthansa will now only need to give up 24 take-off and landing slots at both Frankfurt and Munich.  This is 2/3rd fewer divestments than originally proposed.

This means that Lufthansa is giving up a grand total of 12 flights per day at each airport.  Imagine how much damage it would do to British Airways if it had to give up 12 short-haul flights per day at Heathrow ……. virtually none at all.

However, giving up 12 slot pairs per day was STILL too much for Lufthansa to concede in return for €6 billion of free money and €3 billion of soft loans.

The European Commission therefore added additional clauses to soften the blow.

Only four aircraft will be allowed to operate the 12 slots

This means that the slots cannot be used for long-haul services, or even mid-range short-haul services, since this would require more aircraft.  Each aircraft will need to complete three return flights per day, which realistically restricts the choice of routes to a 2-hour range from Frankfurt or Munich.

For 18 months, the slots will only be offered to airlines who do not already fly from Frankfurt or Munich

This is a cunning one.  It means that Ryanair and easyJet are conveniently excluded.

If any airline does come forward, they will not have anywhere near enough capacity to build a market position to challenge Lufthansa.  At best, 12 flights per day would allow a competitor to fly 3-4 daily rotations on 3-4 European routes.  If the frequency was any lower, it wouldn’t attract any business passengers.

It is possible, in 18 months, that no-one has come forward and that existing carriers at Frankfurt and Munich can take the slots.  However, carriers which have received Government money during coronavirus will not be allowed to request them.  This leaves a small list of airlines, and if the definition of ‘substantial state recapitalization’ includes taking soft loans then easyJet and Wizz Air are excluded.

(I forgot to mention that the slots aren’t free, either.  There will be an auction process with Lufthansa receiving the proceeds.)

However you look at it, it is hard to see these ‘concessions’ as anything but a joke.  I can only hope that Michael O’Leary did not choke when he read about it.  I’m not sure if Ryanair does still have the ability to challenge the deal or not.

Comments (81)

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  • Anna says:

    Leaving the EU doesn’t mean we have to also leave behind our political and social consciences. Take the extraordinary case of Clara Ponsati, which will keep us (or at least the Scots) involved with Europe for the foreseeable future. During the Catalonian independence “referendum” (whether lawful or not) in 2017, the European parliament dismissed the response of the Spanish government as an “internal matter” and refused to be drawn in further even as the police in Catalonia were literally taking people’s eyes out with ( definitely illegal) rubber bullets. Several Catalan ministers were subsequently sentenced to prison terms of up to 13 years for their involvement in the referendum, and some fled to other European countries to seek political asylum in scenes more reminiscent of the Franco era than a 21st century Western democracy. One of these, Clara Ponsati, is currently effectively a political refugee from one EU nation, living under the protection of another (Scotland – which claims to want to remain in the EU, with Spain). Spain promptly applied for a series of European arrest warrants in an attempt to haul Ponsati back to Spain to stand trial for sedition. To put this into context, this is the equivalent of the UK government putting Nicola Sturgeon on trial for treason should she go ahead with another Scottish independence referendum without the assent of Westminster (I cannot for a moment imagine any UK PM taking such a course of action). Ponsati was arrested and bailed in Scotland while the case progressed. In the meantime, she herself has been appointed an MEP, which under EU law renders her immune from prosecution in this instance. The ECJ has stated that there is, therefore, no case to answer. The Spanish government, however, has taken great umbrage at the suggestion that it should acquiesce to an EU ruling, and declared that it will take Spain out of the EU before it allows the matter to drop. Ponsati faces going to prison with her former colleagues if she ever returns to her home country. Spain is also now demanding billions of Euros from the EU coffers to help it recover from the COVID crisis, so seemingly wants to have its cake and eat it.
    Anyway, this saga illustrates for me just how messed up and dysfunctional the EU is as a political and judicial entity and why so many people wanted to be out of it!

    • RussellH says:

      I believe that the Spanish Government has behaved appallingly in this matter. I had hoped that when PM Rajoy got the boot, his successors would have been rather less rigid and more understanding.
      They all maintain that the Spanish Constitution forbids any attempt on the part of one region to seek independence; if true then Spain needs a new constitution, with a proper structure that lays out exactly what the responsibilities of the Catalans and the Galicians (and othe regions too) and what the responsibilities of the Madrid Govt. are too.
      Instead, I get the impression that Spain has gone down a similar path to the UK, making it up as it goes along, so that while Scotland has certain powers, Wales does not, and so on.
      This all “llustrates for me just how messed up and dysfunctional the UK is as a political and judicial entity and why so many Scots, Welsh and Irish want to be out of it”!

      But in fact, whether it is Spain, the UK or the EU that is messed up and dysfunctional, walking away is not the answer.

    • J says:

      Amazed that you think the EU is dysfunctional yet apparently support the Tories? Enjoy your travel restrictions because of their incompetence. I get it, you don’t like the EU, well congrats you’ve got your way and the UK will leave. But I’m sure the Tories will still blame all the ills on the EU, the French, etc.

      • Anna says:

        I’ve never, ever said I support the Tories. I consider them the lesser evil at time time, though this may change if Keir Starmer can get a grip of his party, who knows?

        • Alex W says:

          Do you still think they are the lesser evil now the UK has the highest death rate on the continent? It’s a national disgrace, worst government in living memory.

          • guesswho2000 says:

            Yes, and imo the worst government in living memory was 1997-2010.

    • Nick says:

      Clara Ponsanti broke the law plain and simple. By leaving Spain to the UK effectively makes her a fugitive. This is exactly the same as Carlos Ghosn – although individual opinions vary, in international law there can be no dispute.

      The comparison with Scotland and Catalonia is unfair. There are multiple flaws with that.

      We (The UK) do not have a constitution. Whereas they (Spain/Catalonia) do; which Catalonia is a signatory. Odd that for apparent years of independence and a “Catalan state” previous leaders decided to agree to the formation of the Kingdom of Spain.

      If Scotland were to hold another referendum it would not be *illegal* nor an act of treason. It wouldn’t be binding either – but if Catalonia is to hold a referendum, without the Spanish constitution changing – this is illegal. Plain and simple.

      • Anna says:

        I’m not disputing the legality of a Catalonian referendum, my point is that sentencing someone to 13 years in prison for facilitating one is utterly disproportionate. There was no material attempt to secede from Madrid, which would have been a different matter.

        • Anna says:

          And my point is the inconsistency of the EU response, not Ponsati’s legal status. If Spain acted legitimately, how can other EU countries be allowed to shield her, and why has she been given immunity from prosecution? If it didn’t (and certainly elements of the ECHR have been breached by the government), why did the European Parliament implicitly condone it?

          • J says:

            The ECHR has nothing to do with the EU. If Spain want to extradite someone there’s an independent legal process, again nothing to do with the EU. Not sure what you’re arguing for?

          • Anna says:

            The ECJ has said there is no case to answer, so that’s quite a lot to do with the EU. The Spanish government has said they don’t accept the ECJ ruling, in which case they have no business being a member of the EU and receiving all the benefits which come with that. As I understand it, being a member of the EU means agreeing to accept its legal rulings. The extradition process has been rejected by the European court, and Spain is refusing to accept that.

        • J says:

          You’re a Brexiteer living in the UK so I’d say frankly you have no business in saying that Spain shouldn’t be in the EU because of a legal disagreement…

          • Don says:

            Comrade J, EU laws are flexible, depends how hard you Lobby and how much you put in the pot. Maybe if Thatcher hadn’t pushed for a rebate UK would have the rule of the roost.

    • Chris Heyes says:

      Anna@ Wow your roots (Diego Garcia i thought i was making a political statement lol)
      Well thought out Congats that came from the heart

    • Bazza says:

      You will have J crying in his frankfurter soup!

  • MatarredondaTony says:

    Ryanair, Easyjet and WizzAir must be secretly smiling to themselves as shows how fearful of them the LH group are.
    I can’t see Ryanair not appealing most likely joined bt EJ and WA.
    Hope Veulling go in for the slots as am fairly sure they do not fly to these airports at present.

    • Erico1875 says:

      I dont think Vuelling can as Im sure they got some of the !AG money

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