The German government’s bail-out of Lufthansa is on hold amid a growing confrontation between Berlin and Brussels over EU state aid rules.

Germany’s Economic Stablisation Fund (WSF) approved a €9 billion aid package for Lufthansa on May 25 comprising a credit facility and loans which will see the state-backed fund take a minimum 20% stake in the company.

But the package is on hold after Lufthansa’s supervisory board failed to agree to the conditions the European Commission wants attached to the aid.

The EC expects Lufthansa to relax its grip at hub airports Frankfurt and Munich where the group holds two-thirds of take-off and landing slots.

In a statement, the group’s board noted the conditions “would lead to a weakening of the hub function at Lufthansa’s home airports”.

The impact on the company and “on the planned repayment of the stabilisation measures” would need to be “analysed intensively”, it said.

Yet the Lufthansa board noted the WSF aid remains “the only viable alternative for maintaining solvency”.

The issue led Lufthansa to delay an extraordinary general meeting required to win shareholders’ agreement to the package which will see the state fund take a 20% stake in the company and two places on the supervisory board.

The agreement allows for this equity stake to increase to 25% to block any hostile takeover bid.

The Lufthansa Group, which includes Swiss, Austrian Airlines, Brussels Airlines and Eurowings, also holds about 60% of slots at Zurich and Vienna, where Ryanair has an increasingly large operation.

Ryanair confirms legal challenge

Ryanair called on Merkel’s government to abandon the deal, condemned Lufthansa’s refusal to hand over slots and confirmed it would mount a legal challenge, arguing the bail-out would “strengthen Lufthansa’s monopoly-like grip on the German air travel market”.

Chief executive Michael O’Leary declared: “Whenever there is a crisis, Lufthansa’s first reflex is to put its hand in the German government’s pocket.

“How can airlines like Ryanair be expected to compete with Lufthansa in the short-haul market to and from Germany now that it has €9 billion worth of German government subsidies?”

However, the German government appears in no mood to bow to the EC on the issue.

Leaders of the governing party, the CDU, accused Brussels of “over-regulation” and the deputy chairman of the CDU/CSU group in the German parliament, Ulrich Lange said: “The hubs of Frankfurt and Munich must not be weakened in relation to Paris and Amsterdam.”

Bavarian prime minister Markus Soder, a coalition partner of Chancellor Merkel, warned against slots going to “low-cost providers” such as Ryanair.

And Wolfgang Steiger, secretary general of the CDU’s economic council, said the crisis “must not be used as a lever to permanently change the framework conditions” for airport and airline employees.

Workers’ representatives, the German pilots’ union and Lufthansa investors have also opposed the EC’s conditions.

Brussels loosened rules due to Covid-19

Lufthansa, the biggest airline group in Europe, has warned it is haemorrhaging cash at a rate of €1 million an hour although analysts suggest the losses could be higher at more than €1 billion a month.

The group reported in late April it had €4.4 billion available in cash and credit to see it through the crisis.

The WSF, the German government and Lufthansa struck the aid deal on Monday following weeks of negotiations.

The €9 billion package comprises a €5.7 billion grant, of which €4.7 billion is classed as an equity stake.

Lufthansa will pay 4% annual interest on this in 2020 and 2021, with the rate then rising annually to reach 9.5% in 2027.

The WSF will provide an additional €300 million to acquire shares to take a 20% stake, rising to 25% from 2024 if Lufthansa fails to repay the money and the fund has not already acquired a 25% holding.

However, the WSF would sell its shareholding by December 31, 2023, subject to Lufthansa making a full repayment.

The package also provides a credit facility of up to €3 billion, provided by the state-owned bank KfW and a consortium of private banks, which is available for three years.

The agreement is subject to the approval of Europe’s competition commissioner.

Under EU law, member states are prohibited from providing financial aid to companies under the Treaty on the Functioning of the EU (TFEU).

However, Brussels loosened the regulations on March 12, stating the Covid-19 crisis qualifies as an “exceptional occurrence” for the purpose of the state aid rules.

It noted: “With regard to the transport sector . . . the assessment of support will be made on a case-by-case basis.”