The European Commission (EC) has approved German plans to contribute €6 billion to the recapitalisation of Deutsche Lufthansa AG (DLH), the parent company of Lufthansa Group. The measure was approved under the State aid Temporary Framework adopted by the Commission on 19 March 2020, as amended on 3 April and 8 May 2020.
The recapitalisation measure is part of a larger support package that also includes a state guarantee on a €3 billion loan that Germany plans to grant to DLH as individual aid under the German scheme approved by Commission decision of 22 March 2020.
The EC approval of the scheme came hours before Lufthansa Group shareholders voted 98% to approve the funding at an Extraordinary General Meeting.
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “Germany will contribute €6 billion to Lufthansa’s recapitalisation, together with a €3 billion state guarantee on a loan. This substantial amount of aid will help Lufthansa weather the current coronavirus crisis, which has hit the airline sector particularly hard.
“But it comes with strings attached, including to ensure the State is sufficiently remunerated, and further measures to limit distortions of competition. In particular, Lufthansa has committed to make available slots and additional assets at its Frankfurt and Munich hub airports, where Lufthansa has significant market power. This gives competing carriers the chance to enter those markets, ensuring fair prices and increased choice for European consumers.”
Carsten Spohr, Chairman of the Executive Board of Deutsche Lufthansa, speaking after the shareholder vote, said: “The decision of our shareholders provides Lufthansa with a perspective for a successful future. On behalf of our 138,000 employees, I would like to thank the German federal government and the governments of our other home countries for their willingness to stabilize us.
“We at Lufthansa are aware of our responsibility to pay back the up to 9 billion euros to the taxpayers as quickly as possible.”
Lufthansa subsidiary airlines SWISS and Edelweiss welcomed the decision by Lufthansa’s shareholders. SWISS CEO Thomas Klühr said: “Today’s decision by Lufthansa’s shareholders gives us the sound planning foundation we need to continue to resume our flight operations and ensure Switzerland’s connections with the world.”
The German recapitalisation measure
Germany notified to the Commission under the Temporary Framework a €6 billion recapitalisation of DLH. The plan comprises:
(i) €300 million equity participation through the subscription of new shares by the State, corresponding to 20% of DLH’s share capital;
(ii) €4.7 billion silent participation with the features of a non-convertible equity instrument; and
(iii) €1 billion silent participation with the features of a convertible debt instrument.
The recapitalisation will be financed by the Economic Stabilisation Fund (Wirtschaftsstabilisierungsfond), a special fund established by Germany in order to provide financial support to German companies affected by the coronavirus outbreak.
In the second quarter of 2020, Member States and third countries have implemented travel restrictions necessary to face the health emergency. This has resulted in a heavy decline in travel, with a significant effect on the entire air travel industry, including Lufthansa Group’s carriers: Deutsche Lufthansa, Swiss International, Brussels Airlines, Austrian Airlines, Air Dolomiti, Eurowings, Germanwings, Edelweiss Air, and SunExpress Deutschland.
DLH plays a major role in the German economy, notably because it ensures essential connectivity services within Germany through an extensive domestic network. It also ensures international connectivity through network airlines based in major hubs such as Munich and Frankfurt airports. DLH’s airfreight also contributes significantly to foreign trade, contributing to the German export economy and guaranteeing a steady flow of goods for all citizens in these difficult times.
The Commission found that the German measure is in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework adopted by the Commission on 19 March 2020 and amended on 3 April 2020 and 8 May 2020. In particular, as regards:
- Conditions on the necessity, appropriateness and size of intervention: The measure will not exceed the minimum needed to ensure the viability of DLH and will not go beyond restoring the capital position to before the coronavirus outbreak. When assessing the proportionality of the recapitalisation measure, the Commission took into account the capital and liquidity needs of DLH at group level.
- Conditions on the State’s entry in the capital of companies and remuneration: The recapitalisation aid will prevent an insolvency of DLH, which would have serious consequences on German employment, connectivity and foreign trade volumes. The State will receive an appropriate remuneration for the investment and there are additional mechanisms to incentivise DLH to buy back the State’s equity participation and the silent participations;
- Conditions regarding the exit of the State from the capital of the companies concerned:Germany submitted a business plan developed by DLH to redeem by 2026 both the loan as well as the recapitalisation instruments. Germany also committed to work out a credible exit strategy within 12 months after the aid is granted, unless the State’s intervention is reduced below the level of 25% of equity by then. If six years after receiving the recapitalisation aid, the exit of the State is in doubt, a restructuring plan for DLH will be notified to the Commission.
- Conditions regarding governance: Until the State has exited in full, DLH is subject to bans on dividends and share buybacks. Moreover, until at least 75% of the recapitalisation is redeemed a strict limitation of the remuneration of their management, including a ban on bonus payments, is applied. These conditions also aim at incentivising DLH and its owners to buy out the shares owned by the State as soon as the economic situation allows.
- Prohibition of cross-subsidisation and acquisition ban: To ensure that DLH does not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, it cannot use the aid to support economic activities of integrated companies that were in financial difficulties prior to 31 December 2019. Moreover, until at least 75% of the recapitalisation is redeemed, DLH is in principle prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
- Commitments to preserve effective competition: DLH will benefit from a recapitalisation measure above €250 million and holds a significant market power on the relevant markets on which it operates. Before the coronavirus outbreak, its hub airports of Munich and Frankfurt were congested, meaning that landing and take-off slots were in short supply. Therefore, in line with requirements of the Temporary Framework, additional measures to preserve effective competition are necessary. These consist in the divestment of up to 24 slots/day at Frankfurt and Munich hub airports and of related additional assets to allow competing carriers to establish a base of up to four aircraft at each of these airports. These measures would enable a viable entry or expansion of activities by other airlines at these airports to the benefit of consumers and effective competition.
- Public transparency and reporting: DLH will have to publish information on the use of the aid received, including on how the use of the aid received supports the company’s activities in line with EU and national obligations linked to the green and digital transformation.
The Commission concluded that the recapitalisation measure will contribute to manage the economic impact of the coronavirus outbreak in Germany: the measure aims at restoring the balance sheet position and liquidity of DLH in the exceptional situation caused by the coronavirus pandemic, while maintaining the necessary safeguards to limit competition distortions. It is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the general principles as set out in the Temporary Framework.
On this basis, the Commission approved the measure under EU State aid rules.
