European Commission approves €6 billion German measure to recapitalise Lufthansa

2
363

The European Commission has approved German plans to contribute €6 billion to the recapitalisation of Deutsche Lufthansa AG (DLH), the parent company of Lufthansa Group. The measure was approved under the State aid Temporary Framework adopted by the Commission on 19 March 2020, as amended on 3 April and 8 May 2020.

The recapitalisation measure is part of a larger support package that also includes a state guarantee on a €3 billion loan that Germany plans to grant to DLH as individual aid under the German scheme approved by Commission decision of 22 March 2020.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “Germany will contribute €6 billion to Lufthansa’s recapitalisation, together with a €3 billion state guarantee on a loan. This substantial amount of aid will help Lufthansa weather the current coronavirus crisis, which has hit the airline sector particularly hard. But it comes with strings attached, including to ensure the State is sufficiently remunerated, and further measures to limit distortions of competition. In particular, Lufthansa has committed to make available slots and additional assets at its Frankfurt and Munich hub airports, where Lufthansa has significant market power. This gives competing carriers the chance to enter those markets, ensuring fair prices and increased choice for European consumers.”

The German recapitalisation measure

Germany notified to the Commission under the Temporary Framework a €6 billion recapitalisation of DLH. The plan comprises:

(i)   €300 million equity participation through the subscription of new shares by the State, corresponding to 20% of DLH’s share capital;

(ii)   €4.7 billion silent participation with the features of a non-convertible equity instrument; and

(iii)  €1 billion silent participation with the features of a convertible debt instrument.

The recapitalisation will be financed by the Economic Stabilisation Fund (Wirtschaftsstabilisierungsfond), a special fund established by Germany in order to provide financial support to German companies affected by the coronavirus outbreak.

In the second quarter of 2020, Member States and third countries have implemented travel restrictions necessary to face the health emergency. This has resulted in a heavy decline in travel, with a significant effect on the entire air travel industry, including Lufthansa Group’s carriers: Deutsche Lufthansa, Swiss International, Brussels Airlines, Austrian Airlines, Air Dolomiti, Eurowings, Germanwings, Edelweiss Air, and SunExpress Deutschland.

DLH plays a major role in the German economy, notably because it ensures essential connectivity services within Germany through an extensive domestic network. It also ensures international connectivity through network airlines based in major hubs such as Munich and Frankfurt airports. DLH’s airfreight also contributes significantly to foreign trade, contributing to the German export economy and guaranteeing a steady flow of goods for all citizens in these difficult times.

The Commission found that the German measure is in line with Article 107(3)(b) TFEU and the conditions set out in the Temporary Framework adopted by the Commission on 19 March 2020 and amended on 3 April 2020 and 8 May 2020. In particular, as regards:

  • Conditions on the necessity, appropriateness and size of intervention: The measure will not exceed the minimum needed to ensure the viability of DLH and will not go beyond restoring the capital position to before the coronavirus outbreak. When assessing the proportionality of the recapitalisation measure, the Commission took into account the capital and liquidity needs of DLH at group level.
  • Conditions on the State’s entry in the capital of companies and remuneration: The recapitalisation aid will prevent an insolvency of DLH, which would have serious consequences on German employment, connectivity and foreign trade volumes. The State will receive an appropriate remuneration for the investment and there are additional mechanisms to incentivise DLH to buy back the State’s equity participation and the silent participations;
  • Conditions regarding the exit of the State from the capital of the companies concerned:Germany submitted a business plan developed by DLH to redeem by 2026 both the loan as well as the recapitalisation instruments. Germany also committed to work out a credible exit strategy within 12 months after the aid is granted, unless the State’s intervention is reduced below the level of 25% of equity by then. If six years after receiving the recapitalisation aid, the exit of the State is in doubt, a restructuring plan for DLH will be notified to the Commission.
  • Conditions regarding governance: Until the State has exited in full, DLH is subject to bans on dividends and share buybacks. Moreover, until at least 75% of the recapitalisation is redeemed a strict limitation of the remuneration of their management, including a ban on bonus payments, is applied. These conditions also aim at incentivising DLH and its owners to buy out the shares owned by the State as soon as the economic situation allows.
  • Prohibition of cross-subsidisation and acquisition ban: To ensure that DLH does not unduly benefit from the recapitalisation aid by the State to the detriment of fair competition in the Single Market, it cannot use the aid to support economic activities of integrated companies that were in financial difficulties prior to 31 December 2019. Moreover, until at least 75% of the recapitalisation is redeemed, DLH is in principle prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
  • Commitments to preserve effective competition: DLH will benefit from a recapitalisation measure above €250 million and holds a significant market power on the relevant markets on which it operates. Before the coronavirus outbreak, its hub airports of Munich and Frankfurt were congested, meaning that landing and take-off slots were in short supply. Therefore, in line with requirements of the Temporary Framework, additional measures to preserve effective competition are necessary. 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. These measures would enable a viable entry or expansion of activities by other airlines at these airports to the benefit of consumers and effective competition.
  • Public transparency and reporting: DLH will have to publish information on the use of the aid received, including on how the use of the aid received supports the company’s activities in line with EU and national obligations linked to the green and digital transformation.

The Commission concluded that the recapitalisation measure will contribute to manage the economic impact of the coronavirus outbreak in Germany: the measure aims at restoring the balance sheet position and liquidity of DLH in the exceptional situation caused by the coronavirus pandemic, while maintaining the necessary safeguards to limit competition distortions. It is necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State, in line with Article 107(3)(b) TFEU and the general principles as set out in the Temporary Framework.

On this basis, the Commission approved the measure under EU State aid rules.

Background

The Commission has adopted a Temporary Framework to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the coronavirus outbreak. The Temporary Framework, as amended on 3 April and 8 May 2020, provides for the following types of aid, which can be granted by Member States:

(i) Direct grants, equity injections, selective tax advantages and advance payments of up to €100,000 to a company active in the primary agricultural sector, €120,000 to a company active in the fishery and aquaculture sector and €800,000 to a company active in all other sectors to address its urgent liquidity needs. Member States can also give, up to the nominal value of €800,000 per company zero-interest loans or guarantees on loans covering 100% of the risk, except in the primary agriculture sector and in the fishery and aquaculture sector, where the limits of €100,000 and €120,000 per company respectively, apply.

(ii) State guarantees for loans taken by companies to ensure banks keep providing loans to the customers who need them. These state guarantees can cover up to 90% of risk on loans to help businesses cover immediate working capital and investment needs.

(iii) Subsidised public loans to companies (senior and subordinated debt) with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs.

(iv) Safeguards for banks that channel State aid to the real economy that such aid is considered as direct aid to the banks’ customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks.

(v) Public short-term export credit insurance for all countries, without the need for the Member State in question to demonstrate that the respective country is temporarily “non-marketable”.

(vi)   Support for coronavirus related research and development (R&D) to address the current health crisis in the form of direct grants, repayable advances or tax advantages. A bonus may be granted for cross-border cooperation projects between Member States.

(vii)  Support for the construction and upscaling of testing facilities to develop and test products (including vaccines, ventilators and protective clothing) useful to tackle the coronavirus outbreak, up to first industrial deployment. This can take the form of direct grants, tax advantages, repayable advances and no-loss guarantees. Companies may benefit from a bonus when their investment is supported by more than one Member State and when the investment is concluded within two months after the granting of the aid.

(viii)  Support for the production of products relevant to tackle the coronavirus outbreak in the form of direct grants, tax advantages, repayable advances and no-loss guarantees. Companies may benefit from a bonus when their investment is supported by more than one Member State and when the investment is concluded within two months after the granting of the aid.

(ix) Targeted support in the form of deferral of tax payments and/or suspensions of social security contributions for those sectors, regions or for types of companies that are hit the hardest by the outbreak.

(x) Targeted support in the form of wage subsidies for employees for those companies in sectors or regions that have suffered most from the coronavirus outbreak, and would otherwise have had to lay off personnel.

(xi) Targeted recapitalisation aid to non-financial companies, if no other appropriate solution is available. Safeguards are in place to avoid undue distortions of competition in the Single Market: conditions on the necessity, appropriateness and size of intervention; conditions on the State’s entry in the capital of companies and remuneration; conditions regarding the exit of the State from the capital of the companies concerned; conditions regarding governance including dividend ban and remuneration caps for senior management; prohibition of cross-subsidisation and acquisition ban and additional measures to limit competition distortions; transparency and reporting requirements. Recapitalisations above the threshold of €250 million are subject to separate notification and, if they benefit companies with significant market power on at least one of the relevant markets in which they operate, Member States must propose additional measures to preserve effective competition in those markets, in the form of structural or behavioural commitments.

The Temporary Framework enables Member States to combine all support measures with each other, except for loans and guarantees for the same loan and exceeding the thresholds foreseen by the Temporary Framework. It also enables Member States to combine all support measures granted under the Temporary Framework with existing possibilities to grant de minimis to a company of up to €25,000 over three fiscal years for companies active in the primary agricultural sector, €30,000 over three fiscal years for companies active in the fishery and aquaculture sector and €200,000 over three fiscal years for companies active in all other sectors. At the same time, Member States have to commit to avoid undue cumulation of support measures for the same companies to limit support to meet their actual needs.

Furthermore, the Temporary Framework complements the many other possibilities already available to Member States to mitigate the socio-economic impact of the coronavirus outbreak, in line with EU State aid rules. On 13 March 2020, the Commission adopted a Communication on a Coordinated economic response to the COVID-19 outbreak setting out these possibilities. For example, Member States can make generally applicable changes in favour of businesses (e.g. deferring taxes, or subsidising short-time work across all sectors), which fall outside State Aid rules. They can also grant compensation to companies for damage suffered due to and directly caused by the coronavirus outbreak.

The Temporary Framework will be in place until the end of December 2020. As solvency issues may materialise only at a later stage as this crisis evolves, for recapitalisation measures only the Commission has extended this period until the end of June 2021. With a view to ensuring legal certainty, the Commission will assess before those dates if it needs to be extended.

The non-confidential version of the decision will be made available under the case number SA.57153 in the State aid register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

More information on the Temporary Framework and other action the Commission has taken to address the economic impact of the coronavirus pandemic can be found here.

2 COMMENTS

  1. […] He explained the structure of the package: the government would get a 20% equity for 300 million euros, plus a non-convertible silent participation (I) for 4.7 billion. The silent participation (II)  of 1 billion euros in convertible debt instrument would only be activated in case of a hostile takeover bid and would give the government an additional shareholding of 5% plus one share, thus a blocking minority. That part of the package totalling 6 billion euros, financed by the Economic Stabilisation Fund has been approved by the European Commission. […]

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.