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Germany duels with EU over US$9.9b bailout for Lufthansa

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The German government bristled at the European Commission's antitrust demands on its 9 billion euro (S$14.02 billion) bailout of Deutsche Lufthansa, in a sign of rising tensions over the stalled aid package.

[FRANKFURT] The German government bristled at the European Commission's antitrust demands on its 9 billion euro (S$14.02 billion) bailout of Deutsche Lufthansa, in a sign of rising tensions over the stalled aid package.

The insistence by officials in Brussels that Lufthansa ditch some of its takeoff-and-landing slots in Frankfurt and Munich is unfair, German Transport Minister Andreas Scheuer told Germany's Bild newspaper late Wednesday.

"The European Commission doesn't do this with other airlines," Mr Scheuer said in comments to the newspaper, citing Italy's plan to nationalise Alitalia as an example.

Concerns that European Union (EU) requirements would hit Lufthansa's business led the airline's supervisory board to unexpectedly hold off on accepting the German lifeline on Wednesday, throwing the rescue plan into turmoil after weeks of talks. The labour-heavy board sees a threat that jobs would be lost and the market would shift toward discount airlines that pay less.

The stalemate has taken Lufthansa's crisis to a new level of urgency, with Germany's government trying to square clear-cut EU rules with governance dynamics at the airline. In the balance is the arrival of much-needed funds. Chief executive officer Carsten Spohr warned employees Wednesday that the airline would struggle to pay wages in June if it can't get hold of the bailout cash, according to a person familiar with the matter.

AID TERMS

The German aid package unveiled on Monday involves the state taking an initial 20 per cent stake in Lufthansa that could rise to a blocking minority of 25 per cent plus one share in the event of a hostile takeover. The support also includes a 5.7 billion euro investment via a so-called silent participation, and a three-year loan of 3 billion euros.

The prospect of Germany becoming Lufthansa's biggest investor has raised concerns in Brussels that the airline, backed by such a powerful shareholder, would increase its dominance over the aviation market.

The EU defended tougher conditions for the recapitalisation than for a loan. The capital infusion "it does not increase the debt exposure of the company and ensures that the company is supported by a strong shareholder", the EU said on Wednesday.

German government officials concede in private that Lufthansa will need to give up a sizable amount of capacity in Germany to secure the European Commission's blessing. Lufthansa could also be asked to cut back 20 planes in Germany, a person familiar with the matter said Wednesday.

Lufthansa, along with its subsidiaries, dominates slot allocation at the two Frankfurt and Munich hubs. Germany's DLR aerospace centre has estimated the group has a two-thirds share of the nation's commercial aviation market.

SHAREHOLDER VOTE

The airline opted against immediately calling a shareholder vote and said the proposal will be reviewed, citing a need to analyse the economic hit, the repayment of the aid and possible alternative scenarios. Lufthansa's employee representatives, holders of half the votes on the supervisory board, are also fiercely opposed to the EU demands on slot disposals.

"The 140,000 jobs at Lufthansa cannot be endangered through nonsensical and competition-distorting demands," Markus Wahl, president of the VCI pilots' union, said in an emailed statement.

Still, the bailout remains "as the only viable alternative for maintaining solvency", according to the board. But the holdup underscores the political tensions underpinning the effort to stabilise Europe's largest airline in the midst of a historic collapse in travel.

The delay comes with Lufthansa severely weakened by the coronavirus crisis. The carrier has just weeks of liquidity remaining before it runs out of cash, according to people familiar with the matter. The proposed bailout requires shareholder and EU approval before the funds can be distributed, a process that could take several weeks even without the new delay.

The supervisory board is expected to meet again to discuss the package once it has more information on the slots matter. The airline can call a meeting at short notice, meaning it could still approve the deal this week.

Germany is separately seeking EU assurances that any deal put to shareholders is compliant with state-aid rules, the people said. It wants a so-called comfort letter from regulators to offer legal clarity on financial aspects before the EU approves the deal, one person said. That would not cover the dispute over slots.

Ms Merkel said Wednesday that talks regarding Lufthansa are ongoing. Spokespeople at the airline and in Germany's Economy Ministry declined to comment.

'UNGRATEFUL LUFTHANSA'

Ryanair Holdings, Europe's largest low-cost carrier, criticised Germany's rescue effort as an "illegal state aid scheme, which the ungrateful Lufthansa has clearly rejected".

A decision by the German airline to hand over slots in Frankfurt and Munich would boost competition, Ryanair said in a statement.

"If the German government is serious about restarting air travel to and from Germany, then this state aid should be replaced with a different scheme, which would reduce air travel taxes for all airlines operating in Germany for the next 24 months," Dublin-based Ryanair said.

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