The EU Commission conditionally clears pandemic-related package aid to a German airline company (Lufthansa)

Introduction

Applying its Temporary Framework, [1] the European Commission (EC) has conditionally authorized a rescue package granted by German to Lufthansa to cover financial losses resulting from the Covid-19 crisis. [2] Conditions for the approval of tge proposed bail out included, among other things, divestiture of 24 slots held by the aid beneficiary at the congested airports of Frankfurt (FRA) and Munich (MUC).

The facts of the case

On 12 June 2020 Germany notified the EC a € 9 billion aid package for Deutsche Lufthansa AG (DLH), the parent company of the Lufthansa Group (LH). First, the notified aid consists of a € 300 million equity capital injection to be raised through the issue of about 120 million new shares corresponding to a 20% increase of the authorised share capital of DLH. These shares are to be allotted to ESF. This is a special fund the statutory task of which is to provide financial support to German companies hit by the pandemic. The aid also comprises two hybrid instruments: Silent Partecipation I and Silent Partecipation II that are € 4.7 billion and € 1 billion worth, respectively. Both of them will be subscribed by ESF and entail loss participation but only Silent Partecipation II confers on the holder the right to conversion into ordinary shares. Lasty, the package aid includes a € 3 billion loan to DLH under a scheme that has been previously approved by the EC in March 2020. The objective of the notified measure is the recapitalisation of DLH whose financial situation was seriously affected by the Covid-19 outbreak

The decision of the Commission

To begin with, the EC observed that the notified aid meets the conditions in point 49 of the Temporary Framework that come into play with regard to recapitalisation measure. DHL was not already in difficult on 31 December 2019 but was expected to face illiquidity gap without aid. The aim of the aid is to restore the capital structure and liquidity of DHL. Due to its systemic importance, the default of DHL would have a serious impact on Germany. It is thence in the common interest to intervene.

Next, after considering that the aid met the proportionality test in point 54 of the Temporary Framework [3] the EC dealt with the question whether the aid would distort competition. Importantly, in case of recapitalisation measures in excess of € 250 million in favour to an undertaking with a significant market power in a relevant market where it operates, point 72 of Temporary Framework requires Member States to take additional measures to preserve competition in such market. Because the recapitalisation commitments in favour of DLH exceeded this threshold, the EC applied the rules in point 72 of Temporary Framework.

The first step in the EC analysis was to identify the relevant markets affected by the national measures. Lending from its decisional practice concerning the review of aviation mergers, the EC opted for the “airport-by-airport” approach to define relevant markets. Under this approach, every airport or substitutable airports constitute a distinct market. In this case the EC preferred the “airport-by-airport” approach to the alternative “O&D” city-pair approach because the former enables to evaluate the market power of an airline at airports that suffer from a dearth of slots. [4] Indeed, slots are rare resources and access to them is essential for the provision of air transport services. This is even more important for air links for congested or coordinated airports where only a few slots are available. [5] Therefore, the relevant market was identified in the markets for the provision of passenger air transport services to and from the airports served by DLH.

The next step was to assess the market power of DLH in the relevant markets on the basis of a two-limb test: the level of congestion of the airports and the shares of slots held by the aid beneficiary. Under this test, only MUC and FRA are problematic because they are highly congested airports with limited capacity available. And a relevant share of capacity at these airports is hold by DLH: at FRA, 50-60% on average in Summer IATA Season (up to 75-85% at peak times) and 40-50% in Winter IATA Season (up to 60-70% at peak times); at MUC 45-55% on average in Summer IATA Season (up to 75-85% at peak times) and 35-45% in Winter IATA Season (up to 65-75%). In contrast, the EC excluded the risk of competition distortion at the other hub airports of DLH on account of the limited average slot holding of the beneficiary and the presence of strong competitors. In accordance with point 72 of the Temporary Framework, to deal with the competition concerns raised by the notified aid at FRA and MUC, Germany offered a set of undertakings that will apply for a period of six full consecutive IATA seasons. This set consists of the divestiture of 24 slots at each of FRA and MUC, [6] supplemented by the obligation to make available to purchasers of slots: access to the airport infrastructure at FRA and MUC; overnight parking stands for the aircraft to be based at these airports; and relevant staff to operate the basis.

This set of structural and behavioural remedies was accepted by the EC. As said above, lack of access to slots is a significant entry barrier at congested airports. Drawing on its past experience in merger and antitrust aviation cases, the EC held that the offered remedies would enable competing carriers to set up bases at airports where the aid beneficiary has a significant market power. As a general rule, divestiture remedies are highly effective to prevent distortions of competition because they will inject structural competition in the relevant markets where DLH enjoys a significant market power. As stressed by the EC, the proposed divestiture of 24 slots/day would enable purchasers to establish viable operation at FRA and MUC and effectively compete with DLH.

Conclusion

It can be said that a key aspect of Covid-19 aid to Lufthansa is the set of competition remedies offered by Germany in accordance to point 72 of the Temporary Framework. This decision gives an insight into how the EC applies the rules in point 72. It seems that in many aspects the EC has followed its decisional practice in the application of the SIEC test in the context of competition review of concentrations between air carriers. First, the EC identified the relevant markets affected by the recapitalization measures relying on methodologies that were previously developed in merger cases. Second, the EC examined the competition structure of the relevant markets to assess whether the aid recipient enjoyed a position of significant market power. As already seen in merger cases, whether the aid recipient has a large quantity of slots at congested airports is considered as a proxy of market power of the beneficiary. Third and lastly, divestiture of slots is thought to be effective measure to preserve competition in the relevant markets. The EC took a similar approach in Covid-19: Recapitalisation of Finnair that also fell within the scope of application of Point 72 of the Temporary Framework because the beneficiary was granted a € 268 million recapitalization measure. [7] In this case, however, Finland did not have to submit competition remedies. The airport of Helsinki (HEL) that was the hub airport of the aid beneficiary had several slots available to competitors. Hence, the EC concluded that HEL was not a congested airport and Finnair had no significant market power. Finally, it should be noted that the divestiture remedy concerns only a limited percentage of the portfolio of slots held by DHL at FRA and MUC. Bearing that in mind and also considering the tough market conditions for airlines in the years to come, it is unclear whether such measure will be enough to attract competitors capable to effectively compete with DLH.

Footnotes

[1Communication from the Commission- Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, 19 March 2020, OJ C 911, 20.03.2020.

[2European Commission, decision of 25 June 2020, Case SA.57153, Germany-Covid 19- Aid to Lufthansa, available at 286587_2201652_220_2.pdf (europa.eu).

[3According to the proportionality test in point 54: a) recapitalisation must not exceed the minimum needed to ensure the viability of the beneficiary or it cannot go beyond the minimum amount of recapitalisation aid needed to restore the company’s access to the capital markets; b) recapitalisation cannot go beyond restoring the capital structure of the beneficiary to the one predating the Covid-19 outbreak.

[4Case M.8869, Ryaniar/LaudaMotion.

[5Article 2 of the Slot Regulation No 95/93 of 18 January 1993 defines a coordinate airport as an airport where a coordinator has been appointed to facilitate the operations of air carriers operating or intending to operate at that airport.

[6In practice to ensure the viability of the hub-and-spoke network of DLH, the aid recipient committed to divest three departure slots and three arrival slots in any one of the three one-hour periods at each of FRA and MUC.

[7European Commission, decision of 9 June 2020, Case SA.57410, Finland- Covid-19: Recapitalisation of Finnair.

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Citation

Michele Giannino, The EU Commission conditionally clears pandemic-related package aid to a German airline company (Lufthansa), 25 juin 2020, e-Competitions June 2020, Art. N° 98500

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