On the plus side, it looks like Lufthansa will be getting up to €9 billion in aid from Germany. Unfortunately for Lufthansa, the airline also has to agree to give up a significant number of slots at mega-hubs in Frankfurt and Munich.
In this post:
Lufthansa giving up slots in Frankfurt & Munich
The Lufthansa Executive Board has agreed to accept the EU Commission’s conditions for accepting the bailout money from the Economic Stabilization Fund (WSF) of the Federal Republic of Germany.
As the Lufthansa Executive Board views it, the EU Commission’s requirements have been reduced in comparison to initial indications.
What exactly is Lufthansa agreeing to here?
- Lufthansa will have to transfer to one competitor each at Frankfurt and Munich up to 24 take-off and landing slots (for example, that translates to three takeoffs and landings per aircraft per day, for up to four aircraft)
- For 1.5 years, this option is only available to new competitors at the airports
- If no new competitors make use of this option, it will be extended to existing competitors
- The slots will be allocated in a bidding process, and can only be taken over by a European competitor that has not itself received any substantial state recapitalization as a result of the current pandemic
Lufthansa will have to give up slots in Frankfurt & Munich
While Lufthansa is very focused on maintaining market share in Frankfurt and Munich, ultimately this shouldn’t be too bad for the airline:
- Airlines will be shrinking rather than growing in the next couple of years, and I can’t imagine that many airlines will be choosing to grow in Germany
- These slots are initially only available to airlines that don’t currently operate in the markets, which at least initially excludes EasyJet in Frankfurt and Munich and Ryanair in Frankfurt, which Lufthansa seems most concerned about
Lufthansa is very concerned about ultra low cost carriers
The basics of Lufthansa’s government aid package
We first learned about the details of the agreement between Lufthansa and the German government earlier this week:
- The airline will be receiving a total of up to €9 billion EUR in grants and loans
- Up to €3 billion will come in the form of credit facilities with the participation of private banks, for a term of three years
- Up to €6 billion will come in the form of the government taking a stake of up to 20% in the airline
- Lufthansa was concerned about the government meddling in the airline, so the government will take a hands-off approach
The problem has been with the EU Commission approving this deal. The EU Commission wanted Lufthansa to give up slots in exchange for the aid, which the Lufthansa Executive Board didn’t agree with. Then again, Lufthansa had no other option, so coming to an agreement was the only choice.
Lufthansa has finally agreed to EU Commission terms
Bottom line
It looks like the deal between Lufthansa and Germany will be approved by the EU Commission, as Lufthansa gives up slots in Frankfurt and Munich.
While Lufthansa presumably isn’t thrilled about this, the reality is that there are quite some restrictions on what airlines can get these slots, so it doesn’t seem like it will pose that much of an issue for the airline.
Oh, and Lufthansa also didn’t really have another viable path to survive…
@Tom:
"How is 24 slots out of well over 1000 they control ‘significant’?"
Your question is quite valid. But Lufthansa's business model is based on slots at attractive times of the day, as it does not only offer point-to-point connections as with low-cost airlines.
In order to fill a long-haul aircraft (B-747, A-380) so that it can fly profitably, up to 60 feeder flights have to be carried out in advance. Lufthansa now...
@Tom:
"How is 24 slots out of well over 1000 they control ‘significant’?"
Your question is quite valid. But Lufthansa's business model is based on slots at attractive times of the day, as it does not only offer point-to-point connections as with low-cost airlines.
In order to fill a long-haul aircraft (B-747, A-380) so that it can fly profitably, up to 60 feeder flights have to be carried out in advance. Lufthansa now lacks these 24 slots in its hub-and-spoke concept to fill its long-haul flights.
Originally, the EU had required the waiver of 80 slots, Lufthansa had offered 6 slots. The agreement on 24 slots is now probably a compromise that both parties can live with without losing face.
The political pressure from Germany on the EU is certainly not negligible in this decision - especially against the background that Air France-KLM and Alitalia received government aid without any conditions.
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From an environmental point of view, it would of course make sense to replace domestic flights by rail. However, Munich Airport does not have a long-haul railway station. And then again, competition wouldn't be fair as people would rather fly from their city with let's say Air France via Paris then travelling to Munich by train and then by metro to the airport to fly with Lufthansa.
Firstly, I think Lufthansa will open a third hub at Berlin Brandenburg.
Secondly, with EU open skies signed with Qatar, UAE etc among others to come into effect just in time - soon - this will allow Germany and Lufthansa to get away by managing competition.
Thirdly, the incoming competition will be beneficial for Lufthansa because industry analysts are all predicting the decline of point to point travel, and this is critical for Lufthansa routes...
Firstly, I think Lufthansa will open a third hub at Berlin Brandenburg.
Secondly, with EU open skies signed with Qatar, UAE etc among others to come into effect just in time - soon - this will allow Germany and Lufthansa to get away by managing competition.
Thirdly, the incoming competition will be beneficial for Lufthansa because industry analysts are all predicting the decline of point to point travel, and this is critical for Lufthansa routes to tier 2 cities east of Moscow.
Obviously LH managed without any damage from the EC. Otherwise they would have had to look around for a new hub. All current ones are ridiculously close (within a few hundred km) from each other anyway. What is probably needed is an Asian hub like HEL in OneWorld. HEL allows 24 h return flights to China, Japan, Korea with a single machine. Probably the only other airport to allow this is TLL that is 80...
Obviously LH managed without any damage from the EC. Otherwise they would have had to look around for a new hub. All current ones are ridiculously close (within a few hundred km) from each other anyway. What is probably needed is an Asian hub like HEL in OneWorld. HEL allows 24 h return flights to China, Japan, Korea with a single machine. Probably the only other airport to allow this is TLL that is 80 km south from HEL which has the longest runway in the Baltic countries. SFO, ANC and even HNL could be reached from there with direct flights.
@Sam - you could make a film about Munich's 3rd runway. The airport started to plan for one in 2005. Since then it has been blocked due to noise issues, protection of local birds and a referendum to name a few. Last I heard is that further poltical discussions are on hold until 2023.
Well I am laughing about it, very small slots to give away, of course the Lufthansa board were acting as they really enjoy this benefits from the EU. The European Commission is run by the Germans. Also it looks like (as always) the all matter stinks. Just to remind everyone that the diesel scandal was done by the Germans, all included, starting from VW group, then Mercede and BMW. Now with the airline industry, history...
Well I am laughing about it, very small slots to give away, of course the Lufthansa board were acting as they really enjoy this benefits from the EU. The European Commission is run by the Germans. Also it looks like (as always) the all matter stinks. Just to remind everyone that the diesel scandal was done by the Germans, all included, starting from VW group, then Mercede and BMW. Now with the airline industry, history repeats itself, then they talk bad against ALITALIA. Shame on them.
I was initially surprised to read that Munich Airport has slot restrictions, but then looked up the airport configuration and realized that they only have two runways! Compare that to Pittsburgh, St. Louis, Cincinnati, and Charlotte, which all have four runways--including three parallel runways.
Munich should get to building a third runway soon, so that they can get rid of slot restrictions by the time travel picks back up.
Am I the only one hoping there will be a quality competitor rather than simply competing on price? I don’t want Wizzair or Ryanair - not just because they have horrible products, but also the way they offer poverty wages and refuse to abide by local laws.
How is 24 slots out of well over 1000 they control 'significant'?
This requirement is almost a complete joke and undermines all the hard work over an extended period to create within the EU what is one of the world's most competitive and consumer friendly aviation markets. These are the two least competitive major airports in Europe and Lufthansa is barely going to notice this measure.
Correct that Lufthansa didn't have 'another viable path to...
How is 24 slots out of well over 1000 they control 'significant'?
This requirement is almost a complete joke and undermines all the hard work over an extended period to create within the EU what is one of the world's most competitive and consumer friendly aviation markets. These are the two least competitive major airports in Europe and Lufthansa is barely going to notice this measure.
Correct that Lufthansa didn't have 'another viable path to survive' here, which is why it's so shameful the EU Commission has caved in to Lufthansa and backed off from their original proposal when what they proposed was already fairly mild considering the situation and they held all the cards. $10bn in exchange for a small handful of slots (that also can't go to any serious competitor due to the way this is set up) sounds like a pretty dream deal to me if I were an LH Board Member.
My money is also on wizz. Germany is huge for markets as Bosnia and there are no viable direct flights.
Ryanair also isn't eligible for the slots as they've been flying MUC-DUB and aren't a new competitor at the airport.
Wizz air is the only substantial airline that could start at MUC.
And the slots are not going to be given up immediately but when 'things return to normal' after corona -That's just been clarified by the EU's Margrethe Vestager.
Still a drop in the ocean for LH.
Hi Ben - Nice summary. Small correction - EasyJet do not operate from Frankfurt anymore as far as I know, so they should be eligible.
Also btw IATA published a nice summary of the government aid being given to airlines. Also as percentage of their ticket revenue. You really get a feeling how unbalanced it all is.
https://www.iata.org/en/iata-repository/publications/economic-reports/government-aid-and-airlines-debt/
What a stupid requirement. Makes LH and government look good for nothing.
1. transfer to one competitor
2. only available to new competitors for 1.5 years
3. a European competitor that has not itself received any substantial state recapitalization
I can't think of a single airline on top of my head that can and will afford FRA or MUC who fit the rest of the description. All I see is smaller ambitious airline...
What a stupid requirement. Makes LH and government look good for nothing.
1. transfer to one competitor
2. only available to new competitors for 1.5 years
3. a European competitor that has not itself received any substantial state recapitalization
I can't think of a single airline on top of my head that can and will afford FRA or MUC who fit the rest of the description. All I see is smaller ambitious airline coming to go out of business at the LH hub.
This is like government promising to give the entire FY2022 defense budget to Space Force if they landed on Mars by 2021. Makes you look good but never gonna happen.
Love lufthansa , but using Ryanair could jeopardize Lufthansa good name and reputation!
If I am Lufthansa I rather deliberately let star alliance airlines like Croatia Airlines or Aegean Airlines to open a subsidiary to get those slots
@Jordan Lauda itself also serves Palma de Mallorca from FRA so good enough, no they can't
Wizzair or Easyjet? Can Ryanair get around the rule by having Lauda take over the slots?
Good outcome! Lufthansa is a very fine company and deserves all the help it can possibly get to overcome this crisis!
I agree it seems like a good deal and frankly the only sensible decision considering the alternatives