Lufthansa’s bailout during COVID illegal according to the courts: what collateral damage for the sector?

The European Court of Justice ruled that the aid granted by the German government to Lufthansa during the COVID was illegal and that the European Commission had not properly checked the conditions of its validity. Even though COVID is now behind us, this decision could have dramatic consequences in the future.

We thought we were done with the COVID and its economic consequences for the airline industry, but a decision by the European Court of Justice (CJEU) has just come back like a boomerang, calling into question the aid that the States provided to the airlines during the pandemic.

A contested rescue plan

Like a number of airlines, Lufthansa received support from its government to get through the COVID period, including a government loan through Germany’s Economic Stabilization Fund, its economic arm. Lufthansa was slow to accept this aid, fearing that it would be accompanied by too much state interference in its affairs, but finally accepted it after negotiating the conditions.

Since then, Lufthansa has repaid these aids and we thought the story was behind us, but a decision of the CJEU has suddenly caused trouble, not only at the level of the German airline but possibly in the whole sector.

Indeed, at that time, Ryanair had filed a complaint with the CJEU, challenging the validity of the aid received and the CJEU has just ruled in its favor.

The conditions of the Lufthansa bailout poorly verified

The CJEU criticizes the European Union for not having sufficiently verified whether these aids, and in this case the loan, were compatible with European law, even in the context of a relaxation of these rules in the specific context of COVID.

Indeed, for a State loan to a business to be valid, it must not resemble disguised aid, which would be contrary to competition law. In this case, it must be granted under the same conditions that the airline would have found by approaching other market players (banks, private investors, etc.).

During this period, some governments helped the airlines by lending them money directly on the grounds that, given the economic context, it was impossible for them to finance themselves otherwise. In the case of Lufthansa, the commission argued that the airline did not have enough collateral to give to potential investors to borrow money from them.

What the CJEU criticizes is that it ruled in this way without having sought to evaluate the amount of collateral that Lufthansa could provide to finance itself otherwise (such as the value of its aircraft, for example).

The court also criticized Lufthansa for not repaying the German state as soon as it was possible.

In the end, it considered that this aid was anti-competitive because it allowed Lufthansa to continue to operate routes that it would not have been able to operate otherwise and maintained or even gained market share against the plaintiff airlines (Ryanair, Condor…)

Lufthansa not the only one in the CJEU’s sights

Although this is another decision, it should also be noted that the court also cancelled the aid received by SAS Scandinavian Airlines on the grounds that the recapitalization plan did not include incentives for the Danish and Swedish governments to exit as soon as possible.

Little impact in the present, considerable impact in the future?

How significant is this ruling? Weak, you will say, since all this is behind us and Lufthansa repaid its aid. It is not going to be asked to return aid that it has already repaid!

Yes, but this decision, if it becomes a precedent, could have considerable consequences in the future by preventing a State from helping a business or a whole sector if such exceptional circumstances with such important consequences as the COVID-19 pandemic were to occur again. And we’re not just talking about the airline industry, but any business or economic sector in general!

If such a crisis were to happen again tomorrow, should we fear a total collapse of the sector?

The relative scope of the CJEU ruling

It would be dangerous to draw hasty conclusions from these decisions of the CJEU and to believe that Ryanair and its allies have won a decisive victory that will set a precedent.

In no way did the court condemn the principle of aid, whether in the case of Lufthansa or SAS, it only condemned the procedure for verifying the conditions for granting it.

It was the commission that was condemned for a procedural error, not the aid itself. And the CJEU does not say that the conditions were not met (i.e. the possibility for Lufthansa to be able to finance itself otherwise), it just says that the Commission used this argument without having taken the trouble to verify by itself the existence of sufficient collateral.

Ditto for SAS: what is criticized is that the plan did not encourage the States to exit as quickly as possible.

This has nothing to do, for example, with the case of Alitalia that the Commission itself has condemned to repay € 400 million of aid received from the state in 2019. Here it was indeed the aid as such that was illegal and the decision testifies to this:

Italy did not act like as a private operator would have done, as it did not assess in advance the probability of repayment of the loans, plus interest, but aimed at ensuring the uninterrupted service of Alitalia’s domestic and international flights

So in our opinion there is nothing to worry about in the future: what is at issue is not the fact that a state can lend money provided that it does so under market conditions by behaving like a private operator, but the fact that the commission is rigorous in its verification of the conditions of legality of this aid and its argumentation.

Were other solutions possible?

However, it seems interesting to us to look at the heart of the matter: was it possible to proceed otherwise! Because, as we saw at the time, some airlines managed to do it without using public funds!

Let’s start with the commission’s argument about the lack of sufficient collateral to obtain a loan in the marketplace. The court did not say, let us recall, that these guarantees existed but that the commission did not sufficiently prove that it had sought their existence.

What is the value of the Lufthansa fleet?

So of course the Lufthansa fleet has a value and could have been used as a collateral. But to what extent?

First thing to check: does Lufthansa own its fleet or does it do like many airlines that lease the planes they operate. I don’t have the figures at the time, but in 2022, according to the information it publishes, if at the Lufthansa Group level there is a fleet of 710 aircraft, only 68 are leased, which is low. So the rest is owned by the airline and the numbers must have been similar at the time.

But what would its value have been? Let’s put ourselves in the shoes of a bank in 2020: the world is in crisis, the sector is in crisis, airlines are going bankrupt and at the time nobody expected the airline industry to recover so soon and so strongly.

What is the value of an airplane in a world where people are flying less, or not at all, and where there are fewer buyers to resell them to? Low. It is like using insalubrious buildings located in an area subject to a high risk of natural disaster as collateral.

From there to think that no bank or investor would have accepted the fleet as a guarantee, there is only one step that we will gladly take. Let’s also add, still putting ourselves in the shoes of a bank, that in this period of crisis an airline is a much too risky client given the context. We are not talking about 100 million euros but 6 billion.

A loyalty program that is not powerful enough

But why talk about a loyalty program when we’re talking about a financial rescue? Making the connection between the two is much more obvious than you think and will help us prove that no bank would have taken the Lufthansa fleet as collateral.

What did the American airlines do to get through the COVID period? They received $25 billion in government loans. This is a lot, but on the scale of the sector in the country it is not much.

So they raised money in the markets. But with what collateral? Not their planes, but their loyalty programs, which are worth more than the airlines themselves (and therefore their planes). Because let’s not forget that there were times when an airline like American Airlines was only making money because of its program and that overall, during the pandemic, these programs were a much stronger source of revenue than their core business.

Could Lufthansa have done the same? No, for the reasons we have explained in the past: the business model for loyalty programs is different in Europe and the US, the said loyalty programs allowing airlines to make a lot of money provided that they are backed by the issuance of credit cards that generate significant interest, system that does not work the same way in Europe.

So we saw with the American airlines that the planes were not a sufficient collateral and since Miles&More is not the same cash machine as a US loyalty program, they had to find something else.

But what could this other thing be?

The secured loan: a very good idea

In the good ideas series, we can look at the rescue plan of Air France KLM, which does not seem to be targeted by a similar complaint.

If the French state has brought money directly to the group, it is in the form of a shareholder loan, which is legal (the German state is not a shareholder of Lufthansa) and it is a minimal amount compared to the overall package.

For the rest, the money was provided by private banks, the State being present only as a guarantee if Air France KLM defaulted, which is totally different.

Recourse to a sovereign wealth fund? Complicated

Some airlines have been helped by sovereign wealth funds, such as Singapore Airlines, in addition to obtaining bank credit lines.

However, the same thing does not really exist in Germany (or in France….), there are rather public investment organizations such as Germany’s Economic Stabilization Fund (or the BPI in France) but it is still public money! So not possible.

And why did it go well in Singapore? The fund is public, but so is the airline, so it is a legal shareholder loan.

And by the way, why didn’t Ryanair sue the US airlines or others like Singapore Airlines? It has no interest, they are not competitors. And try to get Singapore Airlines, a state-owned airline, which received money from the state, convicted by a Singaporean court. Good luck.

No, in all honesty we do not see how Lufthansa could have financed itself otherwise and the only problem in this story is that the European Commission, instead of considering that it was obvious, should have proved that the airline could not provide the necessary collatera.

The big winner of the story is not the one you think

When a government uses public funds to help a business, some see it as a necessity to maintain jobs, others see it as a waste. Depending on the context, the truth is somewhere in between, and while we are not fans of states helping poorly run businesses, here it seemed necessary.

However, the German taxpayer can be happy with the operation and congratulate his government for its economic sense. Because the great beneficiary of the rescue of Lufthansa is the German state and indirectly the taxpayer: the state took a 300 million euro stake in the Lufthansa Group and sold its shares for more than a billion euros. This means a net profit of 700 million euros for an investment of less than half.

The pot calling the kettle black

We could not end this article without underlining a point that has nothing to do with this specific case and therefore could not be invoked in defense by the commission but such a complaint coming froman airline that lives on public subsidies in order to accept to serve this or that secondary airport is hypocritical to say the least…

Bottom line

The European Court of Justice has ruled that the European Commission did not go far enough in its investigations and arguments to validate the German government’s rescue plan for Lufthansa. This does not call into question the principle of aid or the fact that in the future a government may come to the aid of a sector or a business, but it reminds the commission to follow the procedures properly.

What about you? What do you think of the way the sector was saved during COVID? Do you find this legitimate?

Image : Lufthansa headquarters by Wirestock Creators via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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