Lufthansa has a government-granted stranglehold on Frankfurt and Munch airports. The European Union said that in exchange for allowing the German government to inject $9.8 billion into the airline group, Lufthansa would have to give up some slots – the right to takeoff and land – at the two congested hubs. If Germany was going to prop up one airline, others should be able to compete.
The prospect of having greater competition was such a non-starter for the airline that they were willing to play chicken with the bailout. Their board rejected the terms.
Fewer slots and more competition would make Lufthansa less valuable. The German government, by the way, as at least 20% owner of the airline, gets a brand new incentive to keep protecting the carrier. It’s akin to what happened when tobacco companies settled lawsuits with U.S. state governments, those governments needed to keep competition out of the market to ensure tobacco industry profits – and therefore the steady stream of settlement dollars.
This bail out was going to happen. Politicians had to find a way to give money to Lufthansa while also continuing to protect it from competition. But the E.U. would also have to save face, appearing to look out for consumers. A solution was found.
- Lufthansa has to relinquish slots, but a smaller number – 24 at Frankfurt and Munich.
- But for the next 18 months the slots have to go to new competitors at the airports, so Lufthansa is protected from low cost carriers easyJet and Ryanair which serve Munich and Frankfurt already respectively.
- It’s a long shot that a new airline not already serving these airports is going to want to do so in the COVID era. So if there’s competition, it comes later.
- After 18 months the slots will become available to incumbent carriers at the airports if there aren’t any new airlines entering the market. However, the slots can only be auctioned off to European airlines that didn’t receive a state recapitalization (as we know what constitutes a subsidy in aviation is something that will likely be debaed – and even litigated – into the future).
Lufthansa was given slots at congested airports – a huge government subsidy. Those slots were made perpetual property rights of the airline. That’s a barrier to competition (use of slots for a period of time should be auctioned). The E.U. has rules against subsidies. To waive them, and allow Germany to provide a $9.8 billion injection into the airline, they wanted competition, but they’re unlikely to get it.
Government-granted airline privileges are a driver of industry consolidation. The primary reason Alaska Airlines acquired Virgin America was for access to gates and slots at congested airports. Badly run carriers, that provide poor passenger experience, are protected from market discipline because more innovative startups aren’t permitted to compete and incumbents can continue earning off inferior products because passengers lack other options.