Subsidies : Skeletons in the Commission's closet

Last week, several airlines announced record results. They are now taking off - thanks to the generous transitional public subsidies of recent years. They can weather the economic and energy crisis more easily than others. However, behind the scenes, a violent dispute is raging over the legality of this State aid. The Commission acts as if it had nothing to do with it. It is pretending that it has not opened the floodgates to arbitrary public funding. But some people do not seem entirely comfortable. Margarethe Vestager is not the first to seek a new position.

German airline Lufthansa presented its quarterly results this week. These amounted to almost 1.1 billion euros - more than three times the figure for the same quarter of the previous year. Management forecasts a total profit of 2.6 billion euros for the year (all figures are before interest and tax).

The German newspaper Handelsblatt called this "one of the most spectacular turnarounds in German economic history".[1] This is probably due to the fact that the once proud "crane" (visible on the logo) was more of a lame duck. In 2020, the Federal Republic, Switzerland, Austria and Belgium released nine billion euros to save the group from bankruptcy. This amount included loans that Lufthansa had already repaid. On the other hand, equity capital that made the Federal State a co-owner of around 20 per cent in 2020. The state-owned economic stabilisation fund, which had paid 306 million euros for the equity stake, earned 760 million euros when it was sold to financial investors in autumn 2022.

The Commission under pressure
While Lufthansa and other airlines are now celebrating their good quarterly results, violent conflicts are raging in the background. In May, the EU General Court in Strasbourg declared the European Commission's approval of billions of euros in aid to Lufthansa null and void. The Court found that "the Commission committed a number of errors, in particular by considering that Lufthansa was unable to finance all its needs on the markets".[2] The complaint had been lodged by Ryanair DAC and Condor Flugdienst, which considered that they had been placed at a competitive disadvantage by the State aid authorised by Brussels in favour of Lufthansa. Lufthansa has appealed this ruling to the ECJ, taking the conflict into a higher gear.

The European Commissioner for Competition, Margarethe Vestager, has always defended this regulation. This is a delicate matter. After all, it involves authorising a massive distortion of competition, since state aid is granted to recapitalise companies. Private airlines such as Ryan Air are talking about massive political pressure being exerted on the Commission by Member States such as Germany. After years of market concentration and falling prices, the former flagship carrier of the Federal Republic of Germany was, along with SWISS, Austrian Airlines and Brussels Airlines, a turnaround case with 138,000 employees. The group put 87,000 of them on short-time working in April 2020.

But Lufthansa is not the only one to have been supported by huge public funds. For its rival Air France-KLM, the Commission approved a package worth seven billion euros in spring 2020. Here too, Margrethe Vestager said that France had demonstrated that all other possibilities for raising funds on the financial markets had been examined and exhausted. Here again, the State aid consisted of guarantees for bank loans and a loan of three billion euros directly from the government. Here again, the group's key role in the French economy and the threat to more than 40,000 jobs were mentioned. Here again, Ryanair filed a complaint. Here again, it won its case in the Court of First Instance of the European Union, at least as far as the Dutch aid was concerned.[3]

As the group announced at the end of July, operating profit more than doubled in the second quarter to a record 733 million euros.[4] Air France-KLM's turnover increased by 14% compared to the second quarter of the previous year, to reach 7.6 billion euros.

Run for your lives
In spring 2020, the Commission relaxed its competition rules. As a result, Member States have been given the option of providing companies with sufficient liquidity through substantial State aid. Airlines are among the biggest beneficiaries of these rules. However, the quarterly results of Lufthansa, Air France-KLM and others should not obscure the fact that other problems lie ahead. After the extensive strikes last spring, Lufthansa is currently engaged in lengthy collective bargaining. The airline is offering its pilots significant pay rises. Including the lump sums already promised last year and the inflation compensation bonus, the result would be an increase of at least 25% for captains and between 33% and over 50% for co-pilots.[5] The aim is to avoid strikes during peak periods.

The relaxation of competition rules is just one of the skeletons that the Commission is hiding in its closet. It is not yet clear what the outcome of the many legal proceedings currently under way will be. However, it is clear that the first rats are trying to leave the sinking ship. Margarethe Vestager has been nominated by the Danish government as a candidate for the presidency of the European Investment Bank. If her candidacy is successful, she will have to resign before the end of her term as Commissioner. Perhaps this will spare her some very unpleasant consequences - but perhaps not.

This analysis was first published in: Le Courrier des Stratèges on August 4th, 2023
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