EU Commission opens investigation on six billion from Germany to support Lufthansa

Brussels – Four years after it was approved, the European Commission is back on its heels and opening an in-depth investigation into German state aid to Lufthansa during the pandemic. Six billion with which Berlin, in the summer of 2020, supported the airline to restore its balance sheet and liquidity: initially endorsed by Brussels because considered in line with EU state aid rules, the maxi-measure was annulled last year by a ruling of the Court of Justice of the European Union. And now, the Commission wants to do the same.

Just days after the hard-earned ‘yes’ to the merger with Ita Airways, the German airline – which also owns Air Dolomiti, among others – is still among the European Commission’s dossiers. The recapitalization package approved by Brussels on June 25, 2020, consisted of a €306 million equity component and two hybrid instruments components, namely Silent Participation I of €4.7 billion with features of non-convertible equity instrument, and Silent Participation II of €1 billion with features of a convertible debt instrument. According to the Commission, the measure was compatible with EU constraints on state aid, expanded in the Covid Temporary Framework.

The guarantees required of Lufthansa consisted of a ban on dividend payments and a strict limitation on the remuneration of its executives. In addition, Lufthansa had to divest up to 24 slots per day at the Frankfurt and Munich airports to allow competing airlines to establish a base there.

However, on May 10, 2023, the EU court annulled the Commission’s green light. According to the judges, the EU executive had “committed several errors, in particular, by considering that Lufthansa was unable to obtain financing in the markets for its entire requirements.” It had also failed to require the inclusion of any mechanism “that would incentivize Lufthansa to buy back Germany’s stake as soon as possible.” The appeal filed by Lufthansa against the EU ruling is still pending.

In parallel with the dispute between the European court and Lufthansa, Brussels has also decided to review the capitalization measure. In particular, the Commission explains in a statement that the investigation will focus on the eligibility of Lufthansa for state aid, the need for a so-called “step-up” mechanism to incentivize the state’s exit from the company’s capital, the share price at the time of a potential conversion of the Silent Participation II into shares, the existence of significant market power at airports other than Frankfurt and Munich, at least at Dusseldorf and Vienna, and, finally, some aspects of the structural commitments imposed on Lufthansa.