Merkel vows a ‘tough fight’ with Brussels over Lufthansa rescue

Merkel and Vestager brace for a fight over how far Berlin can go to save its flag carrier.

BERLIN — Germany's Lufthansa bailout is putting Chancellor Angela Merkel and European Commission competition chief Margrethe Vestager on a collision course.

After weeks of back and forth over the terms of a €9 billion rescue for Lufthansa that includes a 20 percent ownership stake for the German government, the flag carrier said Wednesday it could not accept conditions imposed by the EU's competition department.

The Continent's second-largest airline felt Brussels' demands "would lead to a weakening" of its core Frankfurt and Munich hubs by forcing it to relinquish prized landing slots, it said in a statement.

“We won’t allow that to happen,” Merkel is reported to have told her party colleagues earlier this week in response to suggestions the Commission would play tough.

Merkel is said to have pledged a “tough fight” should EU officials, principally Vestager, try to water down Lufthansa's position in the European aviation market to get the deal through.

Lufthansa's decision to delay its approval of the rescue tees up a conflict between the two over how far Brussels should drag on German economic policy in what Merkel has called the worst crisis since the close of World War II.

Even before the pandemic, Vestager had dashed hopes for a mega rail merger between Germany's Siemens and France's Alstom, a pet project for Merkel's ally, Economy Minister Peter Altmaier. He also helped broker the Lufthansa deal, Europe's biggest pandemic airline bailout.

France stumped up €7 billion to help Air France and Italy pitched in €3 billion to renationalize Alitalia. In Berlin, the fear is that the Commission wants to make an example of Lufthansa.

"The French and Italians put their money in the airlines that they want," one senior German aviation executive complained, insisting that giving away slots would do nothing to boost competition. "Slots in the next two years are not our issue at all. Everyone is flying less."

Buckle up

Brussels recently adopted temporary bailout rules that apply during the coronavirus crisis. They impose strict conditions on EU countries willing to support their champions in distress, aimed at preventing states from helping struggling companies to take over markets once the crisis ends.

The new rules allow the European Commission to demand concessions "to preserve effective competition," when the public money top-up is greater than €250 million, a Commission spokesperson told POLITICO. France and Germany agreed to the rules, after forcing Brussels to back off some of its original demands.

In previous aviation competition cases, the European Commission asked airlines to divest slots at airports, but this is a no-go for Berlin.

The fear is that giving up slots at Frankfurt and Munich — where the company holds roughly two-thirds of take-off rights — endangers Germany's links to destinations in Asia and North America. What's more, workers argue that vacated slots would otherwise go to low-cost airlines with looser labor standards.

But those low-costs argue that such measures are the only way of playing fair. Ryanair threatened to appeal the German bailout, arguing the deal amounts to “illegal state aid." It is also planning a bloc-wide legal attack against other rescues.

To save their national flag carriers, Paris provided a €7 billion loan package, while Italy is planning to take a stake in exchange for fresh money, the same idea proposed by Berlin.

The Commission doesn't treat those types of rescues in the same way.

"There is a substantive difference in nature" between public loans that have to be repaid and injecting public money into a company, and in how it affects competition, according to the Commission official.

Injecting equity "does not increase the debt exposure of the company and ensures that the company is supported by a strong shareholder," she added.

This explains why the Commission did not request that Air France divest slots at airports where it has a strong market position. But there is no doubt, according to two competition experts, that Brussels will ask Alitalia to make important concessions to preserve competition.

The Lufthansa Group, which also includes the Austrian, Brussels, Swiss and Eurowings brands, has been desperate to keep the state off its board, insisting Berlin only appoint "independent experts" rather than occupy the two supervisory board seats its 20 percent stake would warrant.

The problem for Lufthansa is that the airline, which says it is losing €1 million an hour and is flying only 1 percent of its normal passenger load, needs help. A German government bailout is the "only viable alternative for maintaining solvency," it said in the statement, but said it would hold off on taking the deal to a shareholder vote "for the time being."

"The resulting economic impact on the company and on the planned repayment of the stabilization measures, as well as possible alternative scenarios, must be analyzed intensively," said Lufthansa.

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