COVID-19: the European Commission gives green light to Lufthansa's recapitalisation

The European Commission approved, on 25 June 2020, the recapitalisation by the German State of Deutsche Lufthansa AG (“DLH”), the parent company of Lufthansa Group, with a budget of EUR 6 billion. The measure is based on the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak.

The support measure is in addition to the German State guarantee on a EUR 3 billion loan granted to DLH and approved by the Commission in March 2020.

Following Condor (in October 2019), Flybe (in January 2020), Alitalia (in March 2020), French airlines (in April 2020), Swedish airlines (in April 2020), easyJet, Volotea and Germanwings (General Court decision in June 2020 of aid incompatibility), Finnair (in June 2020) and TAP (in June 2020), the green light has now been given for a rescue aid measure to Deutsche Lufthansa in the context of the COVID-19 crisis.

The European Commission approved, on 25 June 2020, the recapitalisation by the German State of Deutsche Lufthansa AG (“DLH”), the parent company of Lufthansa Group, with a budget of EUR 6 billion. The measure is based on the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak of 20 March 2020, as amended on 3 April and 8 May 2020.

Background to the aid

The worldwide travel restrictions imposed during the health emergency have led to a sharp decline in business for the air transport sector, including for Lufthansa Group’s carriers: Deutsche Lufthansa, Swiss International, Brussels Airlines, Austrian Airlines, Air Dolomiti, Eurowings, Germanwings, Edelweiss Air and SunExpress Deutschland.

The German State’s support for DLH is not surprising. Ongoing discussions between the company and the State since the pandemic began have been widely reported in the press. The company plays a major role in the German economy and ensures essential connectivity services at national and international level. Its airfreight also contributes to foreign trade, providing an export economy for Germany and ensuring a smooth flow of goods for all citizens in these difficult times.

The aid measure

The recapitalisation measure is part of a broader support package in the context of the current sanitary (and economic) crisis. These support measures include, in particular, a State guarantee on a EUR 3 billion loan that Germany granted to DLH. This individual aid was approved by the Commission in March 2020 under the German scheme to support the economy during the coronavirus outbreak.

The German recapitalisation measure notified to the Commission includes:

• EUR 300 million equity participation through the subscription of new shares by the State, corresponding to 20% of DLH’s share capital;
• EUR 4.7 billion silent participation with the features of a non-convertible equity instrument; and
• EUR 1 billion silent participation with the features of a convertible debt instrument.

The recapitalisation will be financed through the Economic Stabilisation Fund (“Wirtschaftsstabilisierungsfond”), a special fund set up by Germany to provide financial support to German companies affected by the coronavirus pandemic.

The Commission authorised the recapitalisation on the basis of the Temporary Framework (see our article of 7 April 2020) establishing the following conditions:

• the necessity, appropriateness and size of the intervention;
• the State’s entry in the capital of companies and its remuneration for the investment;
• the State’s exit from the capital of the companies concerned;
• governance: DLH is subject to bans on dividends and share buybacks until the State’s complete exit from the capital;
• prohibition of cross-subsidies and acquisition ban;
• commitments to preserve effective competition: 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; and
• public transparency and reporting, including on how the use of the aid received supports the company’s activities.

The Commission considers that the recapitalisation measure helps to manage the economic impact of the sanitary crisis by enabling DLH to restore its balance sheet position and liquidity, while maintaining the necessary safeguards to limit competition distortions.

Closely monitored State aid

Ryanair has already announced its intention to challenge before the General Court of the European Union the legality of the State aid granted to Lufthansa. The company is therefore pursuing its action against the State aid granted in the context of the COVID-19 crisis. Several actions for annulment have already been filed. It is continuing its fight against airlines that Ryanair described as “State aid junkies” in May 2020.

It is now up to the General Court to rule in this matter, in the knowledge that the Commission has considerable room for manoeuvre as regards the conditions it wishes to impose to declare aid compatible.