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.
Please Gary. RyanAir has gotten subsidy after subsidy. It’s akin to Southwest/Air Tran fettibg preferential treatment at the expense of the Big 6 (at the time airlines).
Maybe the argument should be that airlines should be nationalized and/or treated as a public utility. Deregulation has clearly failed. Startups are routinely given preferential treatment. The largest carriers require corporate welfare. And the cheap airlines have lousy maintenance (eg Southwest). But we can leave that for another blog.
The bottom-line is that the low-cost carriers are grifters too. The system has been broken for years.
Come on. Just be straight with your reporting and don’t distort the facts.
1. European Commision demanded LH to give some slots + corresponding aircraft to competitions. Ultimately, they do – in a smaller number but they do.
2. The hubs FRA and MUC only work as Hubs. Germany is decentralized. People and economic power are in many places. Therefore, point-to-point doesn’t really work. Tell me instanced where Intra-Germany the market allowed competition. FRA and MUC only work in a hub-and-spoke System.
3. Longhaul already offers competition on various carriers. Short-haul Cross-border offers alternatives and most intractable-German flights have high speed trains as competition (something that the US doesn’t have).
4. Many other European carriers have received subsidies. FR through the airports they fly to and instead of their bad Labour conditions. AZ many times until now. AF just recently multiple billions. LO money to take over Condor now rerouted into COVID-protectionism. Many more examples.
Not even started about US airlines…
Open your eyes. What about this is anywhere close to protectionism and what is German protectionism?
I think this article is a spot-on assessment of the situation. The German government has worked with Lufthansa for decades to keep competition out of the German market. Lufthansa has some competition for short-haul routes but almost no competition for the lucrative long-haul routes favored by corporate customers. This is especially true given the demise of Air Berlin.
A country the size of Germany should have 2-3 major carriers competing on routes like FRA -> NYC, or offering options like BER -> NYC (conveniently operated by its partner United).
Also absent from the news is any mention of customer refunds. I’m sure refunds will happen, but it’s crazy that the German government is investing in a business that has defrauded millions of consumers.
Sorry, but FR NEVER received a state cash injection! Yes, they negotiate with airports and local governing authorities about WAIVERS. Yes, local authorities close deals with Ryanair to promote their region as a destination. Yes, Ryanair finance themselves going to the financial markets where rules apply to all and the same resources are available to all. State cash injections never happened.
Negotiating locally and ad-hoc doesn’t cause distortion in the market.
Regarding the article, spot-on.
LH is protected for sure and abuses this but they are being forced into some sacrifice. Good. The EU has been excellent in general for competition and prices. Compare to fares in 2000 ex Germany and today. FRA also worked in market principles last year and allowed Ryanair preference prices on slots for first few years. LH threw a tantrum and moved aircraft to MUC. FRA held its nerve. Fact is that nobody wants to compete on MUC NYC or ORD because they are happy in their home base eg who is going to fly out of MUC to ORD ? Ryanair? Al Italia? There are scale economies to having a base. LH Will not fly ORD CDG. Common sense. That said, happy LH has to make some concessions.