Will Lufthansa once more have to repay the German state aid?

Can and will Lufthansa be forced to repay the state aid that the airline received as part of the recapitalization plan during the Covid crisis in June 2020? That’s the question now that the Court of Justice of the European Union ruled on Wednesday that the European Commission made mistakes when approving that aid package of the German government. The case was filed by Ryanair and Condor Airlines. Will Lufthansa once more have to repay the German state aid? “The Commission committed several errors, in particular, by considering that Lufthansa was unable to obtain financing on the markets for the entirety of its needs, by failing to require a mechanism incentivizing Lufthansa to buy back Germany’s shareholding as quickly as possible, by denying that Lufthansa held significant market power at certain airports, and by accepting various commitments that do not ensure that effective competition on the market is preserved,” the General Court says in a media statement. The German government notified the European Commission of its intention to help Lufthansa on June 12, 2020. The recapitalization plan consisted of silent participation 1 of €4.7 billion in non-convertible shares, silent participation 2 of €1.0 billion that included a convertible debt instrument, plus €0.3 billion equity participation through the Economic Stabilization Fund that gave the state a 20.05 percent share. KfW Bankengruppe provided another €3.0 billion in loans that were state-guaranteed. One of the arguments of the German government to offer the recapitalization aid was that, at the time, Lufthansa was almost unable to raise fresh capital from investors. Markets had little appetite to invest in the airline sector, given the uncertainties around the Covid-crisis that had emerged only three months earlier. Also, Lufthansa did not have sufficient collateral to obtain private financing. ‘Brussels’ subsequently approved the package two weeks later under the Temporary Framework, “without initiating the formal investigation procedure provided for in Article 108(2) TFEU, the Commission classified the measure at issue as State aid that was compatible with the internal market 2 under Article 107(3)(b) TFEU 3 and the Communication from the Commission on the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak.“ Ryanair and Condor Flugdienst appealed to annul the decision on grounds of illegal state aid to Lufthansa. EC hasn’t done enough In its ruling today, the General Court says that the European Commission hasn’t done enough to assess if collateral, such as unencumbered aircraft, their value and the terms for any loans would have been available to Lufthansa. “Furthermore, the assertion that the ‘collateral’ – not specified in the contested decision – would not be sufficient to cover the entire amount of the funds necessary is based on a false premiss, that the financing that can be obtained on the markets must necessarily cover all of the beneficiary’s needs.” The court also ruled that the Commission didn’t correctly observe the conditions laid out in the temporary framework for equity and hybrid capital investments, to make sure that a step-up mechanism on the remuneration and exit of the German State was followed. Specifically, the recapitalization measure requires a step-up mechanism to increase the remuneration of the State, in order to incentivize Lufthansa to buy back the State capital injections. Ryanair and Condor also stated the Commission failed to propose additional measures to preserve effective competition on markets, on which Lufthansa Group had significant market power. The Commission only looked at Frankfurt and Munich Airport and ordered Lufthansa to surrender 24 slots at each airport. But it should also have looked at Düsseldorf and Vienna, where Lufthansa subsidiaries Eurowings and Austrian Airlines had significant market power. By excluding competitors like Ryanair and Condor that already had slots at Frankfurt Airport or Munich Airport from the divestiture procedure for the Lufthansa slots, the Commission made a “manifest error of assessment.” What’s next? Now that the General Court has annulled the June 2020 decision, the European Commission will have to review the approval of the recapitalization package to Lufthansa. A spokesperson of the Commission said that the court decision will be carefully studied. Lufthansa used identical wording and said that the ruling will be analyzed to see if further action is needed. To make matters more complex is that Lufthansa has already fully repaid the state aid. It drew only €2.5 billion from the €4.7 billion it was offered in silent participation 1 and 2 and repaid €1.5 billion of the first tranche in October 2021 and the remaining €1.0 billion in November. Of the €3.0 billion KfW credit facility, €1.0 billion was repaid in July 2021. The remaining €2.0 billion was repaid with the proceeds of the €2.2 billion capital increase that the airline group from investors in October 2021. In September 2022, the German Economic Stabilization Fund sold the remaining 6.2 percent share of the original 20.05 percent for €760 million, bringing the total proceeds of the original €306 million investment in Lufthansa to €1.06 billion. As such, the state made a nice profit on its investment. It would become most complicated if the European Commission would rule that the recapitalization package was provided incorrectly and that Lufthansa would be forced to repay the aid. Ryanair In a media statement, Ryanair welcomed the decision of the General Court: “The European Commission’s approval of the German recapitalization aid to Lufthansa and the Swedish and Danish recapitalization aid to SAS went against the fundamental principles of EU law. Today’s judgments confirm that the Commission must act as a guardian of the level playing field in air transport and cannot sign off discriminatory State aid under political pressure by national governments. The Court’s intervention is a triumph for fair competition and consumers across the EU.”

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