Brussels vs Berlin over Lufthansa rescue – will it lead to a change in EU competition policy?

The dispute between the EU Competition Commission and the German government over a 9-billion-euro state rescue package for Lufthansa heated up last week. The protagonists in this duel are, unlike in classic U.S. westerns, two self-confident and influential women: EU Competition Commissioner, Margrethe Vestager, and German head of government, Angela Merkel. Although a compromise proposal is meanwhile on the table, the debate over the EU competition policy is gaining speed.

The struggle to secure Lufthansa’s future took on ever sharper dimensions during the last few days. However, over the weekend the conflicting parties seem to have consented to a deal. According to news agencies, Lufthansa will lose 24 landing rights at Frankfurt and Munich and is forced to dispose of 8 long-haul jetliners, 4 based in MUC and 4 in FRA. Originally, the Competition Commission had demanded the carrier to give up 100 slots and to cut its intercontinental network to the equivalent of removing 20 long-distance aircraft from its fleet.

Bankruptcy option is still on the table
If the bankruptcy option were to be officially confirmed, those far-reaching demands originally tabled by Mrs. Vestager and her Competition Commission as prerequisites for consenting to the Lufthansa restructuring plan, would be void. Although the carrier’s Executive Board has already signaled its agreement to the modified settlement described above, the members of the Lufthansa’s Supervisory Board are still considering the bankruptcy of the airline under its own administration as an alternative to the compromise reached between the Merkel administration and Vestager’s Commission.
This alternative, the Lufthansa controllers hold, would enable more liberal “advantages”, such as laying off more staff than the Berlin government agreed 10,000 jobs, cutting costs on a broad basis, and allowing Lufthansa to not repay invalid passenger tickets for corona-canceled flights. According to insiders, their combined value amounts to 1.8 billion euros. 
Hence, the insolvency threat, tabled by Lufthansa’s Supervisory Board, is still a policy option, exerting pressure on the negotiators in Brussels and Berlin. 

Less slots, network shortages, no takeovers permitted
The now emerging consensus was preceded by a hefty conflict between Vestager and Merkel on the conditions under which Brussels allows the German state to rescue Lufthansa by becoming a 20% stakeholder as part of a restructuring program amounting to 9 billion euros. Confronted with this plan, Mrs. Vestager expressed her skeptical stance towards Berlin’s rescue initiative in a press briefing last Friday: She did not comment on details of the ongoing talks but said: "It is a high priority to reach an agreement. But the conditions are the same for everyone.” The EU Commissioner  went on to say: “Any Member State wishing to recapitalize a powerful company by injecting more than 250 million euros for its survival, will have to ensure that a level playing field in the internal market is maintained.” Moreover, the EU countries had accepted the relevant competition rules, she reminded. "We are not setting up additional hurdles," she exclaimed. “Lufthansa enjoys market power, and our aim is to eliminate the distortions of competition created by state aid.”
Simultaneously, she made clear that her Commission would torpedo any Lufthansa attempt to take over another airline as long as the state is an anchor stakeholder in the German carrier. 

Alitalia? Never heard of it!!
Faced with this conflict, market observers wonder why Brussels competition watchdogs unconditionally okayed state subsidies time and again for ailing carrier Alitalia. It is taxpayer’s money thrown out of the window, they hold, because Rome decided to nationalize the indebted carrier effective in June after diverse attempts to privatize Alitalia failed due to high political constraints imposed by Rome’s rulers.  
It is worth noting that when the Italian government announced the nationalization, no protests were heard from Brussels nor did the option of a veto stand on the Competition Commission’s agenda.

Better keep an eye on global competitors
All in all, the current conflict over the Lufthansa rescue clearly illustrates the fundamental differences within Europe in the interpretation and enforcement of competition rules. Since a long time, critics have questioned the EU Competition Commission’s stance of basing their decisions solely on developments taking place within the block’s internal market, instead of looking beyond the fence and taking into consideration that challengers in China, the USA, Russia, or the Middle East are fast emerging, often financed by their respective states.

Mrs. Vestager’s interpretation of competition rules is outdated, states an aviation analyst: “She concentrates on ensuring competition within the EU. It is time she and her Commission members open their eyes to see the broader picture. It would lead to a badly needed paradigm shift, giving the protection of those European commercial carriers high priority that have come under increasing pressure from state financed airlines based in the Gulf region, China or Russia, which have little interest in fair competition.”  

Narrow interpretation of competition must end, Macron
A thoughtful observation proved when Mrs. Vestager rejected the intended merger of train makers Alstom and Siemens. Even combined, the French and German companies would have reached turnovers of less than 50% of those generated by rival China Railways.
Having said this, the duel between Brussels and Berlin over the Lufthansa issue could lead to a new interpretation of EU competition policies. If so, it might pave the way to creating more European Champions, such as aircraft manufacturer Airbus, strongly advocated and demanded by French president Emmanuel Macron for some time.

UPDATE, 01Jun20, 3pm CET

At today's meeting (01Jun20) the Lufthansa Supervisory Board approved the conditions demanded by the EU Competition Commission as precondition for the Brussels watchdogs to consent the Lufthansa rescue plan totaling 9bn euros. Karl-Ludwig Kley, Chairman of Lufthansa's Borad of Directors commented: "It was a very difficult decision. After intense discussion, we came to the conclusion to agree to the Executive Board's proposal (that had previously opted for this solution, hs). We recommend our shareholders follow this path, even if it requires them to make substantial contributions to stabilize their company. It must be clearly stated, however, that Lufthansa is facing a very difficult road ahead."

CEO Carsten Spohr added to this: "Stabilizing our Lufthansa is not an end in itself. Together with the German government, it must be our goal to defend our leading position in global aviation. We are grateful to all those involved in the stabilization process, including our customers, employees and shareholders for this perspective. We will not disappoint them and will now work hard to ensure the competitiveness and future viability of our airline group."

Following the Controlling Board's decision, the stabilization package still requires the approval of the competition authorities. In addition, shareholders still have to consent the project. Their general meeting will take place on 25Jun20 and be transmittd on the company's website via livestream, accessable by all shareholders. Earlier, on 03Jun20, LH will publish an interim report for Q1, 2020.

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