The German government’s 9 billion-euro (US$9.8 billion) bailout of Deutsche Lufthansa AG may cost the stricken carrier some valuable assets: Key flight slots at airports in Frankfurt and Munich.

The European Commission wants Lufthansa to surrender the slots out of concern the aid will give the carrier unfair advantage over competitors, people familiar with the matter said.

After weeks of talks, Germany on Monday offered Lufthansa a package of loans and equity investment to keep the carrier aloft through the coronavirus storm.

Officials in Brussels are concerned the deal will distort competition and fuel lawsuits from competitors like Ryanair Holdings Plc, the people said.

Approval of the deal could take several weeks, they said, asking not to be named discussing confidential deliberations.

To compensate for the state help, the European Union’s executive arm also would like the airline to decrease the number of aircraft based in Germany, the people said.

German Chancellor Angela Merkel told a meeting of conservative lawmakers the government would fight for Lufthansa to keep key slots, people familiar with the matter said.

“The discussions with the European Commission are continuing at full speed,” German Economy Minister Peter Altmaier said Monday at a news conference in Berlin.

“So far, we have managed to get approval from Brussels for all our aid requests during the corona crisis. How long it will take I cannot say, but the main point for us is that we want to achieve a good result.”

Shares Gain

Lufthansa shares advanced on Tuesday, building on Monday’s 7.5 per cent gain in the wake of the deal. As of 2:33 p.m. in Frankfurt, the stock was up 6 per cent. Still, it remains down 44 per cent for the year.

Analysts at Deutsche Bank AG said that while some of the terms of the German government deal were less punitive than expected, it would leave Lufthansa with high debt levels.

Still, the cost of protection against a default by Lufthansa touched its lowest level in a month, according to Bloomberg data. Bonds were mixed, with a hybrid note due in 2075 rising 3.4 cents to 79.3 cents, while the senior note maturing in 2024 fell 1.9 cents to 91.6 cents.

“Lufthansa still faces huge challenges, including the right-sizing of the company and difficult labor talks,” Societe Generale analysts Michael Kuhn and Sumit Mehrotra wrote in a note to clients. In addition to potential snags for the deal in Brussels, “the main profit driver, intercontinental traffic, will take a long time to recover.”

Slots’ Value

Airport slots are a crucial currency for airlines, providing them with the ability to operate flights at popular times and to coveted destinations.

It’s a commodity that EU regulators have often asked carriers to cede to smaller rivals when seeking approval for mergers, including during Lufthansa’s 2017 takeover of a unit of Air Berlin.

While airport capacity is being under-used while Lufthansa and other airlines focus on survival, they will be back in demand once travel starts to recover.

Like airlines the world over, Lufthansa has been struggling to stay afloat after the coronavirus punctured a decades-long aviation boom.

The company plans to operate fewer aircraft when flights resume and is closing discount arm Germanwings to resize for what it warns could be years of depressed demand.

The EU press office said it had no comment on the Lufthansa plan and was “in constant contact” with governments.

It defended the need for “additional commitments to preserve effective competition” that are required for recapitalizations of more than 250 million euros to a company, according to an emailed statement.

“This is important to preserve the level playing field in the single market post-coronavirus crisis to the benefit of all European consumers and companies,” the EU said.

The Lufthansa package will be the first recapitalization to be weighed by the EU after it loosened rules this month that usually prevent governments from pumping money into favored firms.

EU approvals for aid can be challenged and potentially overturned in the EU courts where Ryanair is also suing previous EU orders to allow airline aid.

Ryanair vowed to carry out Chief Executive Officer Michael O’Leary’s threat to challenge the German bailout, saying it could “further strengthen Lufthansa’s monopoly-like grip” on the German air travel market.

“Lufthansa can use this latest 9 billion euro subsidy from the German government to engage in below-cost selling on its short haul intra-EU routes and its long haul routes,” the company said in a statement.

“How can airlines like Ryanair, EasyJet and Laudamotion be expected to compete with Lufthansa in the short-haul market to and from Germany?”

EU officials are aware of the need for speedy approvals, said Margrethe Vestager, the bloc’s antitrust chief.

Officials have been “working seven days a week around the clock” and at night “in order to make sure that things can be processed as fast as possible,” she told EU lawmakers on Monday.

Austria, Belgium

The German aid package unveiled on Monday involves taking an initial 20 per cent stake in Lufthansa that could rise to a blocking minority of 25 per cent plus one share in the event of a hostile takeover.

The support also includes a 5.7 billion-euro investment via a so-called silent participation -- a debt-equity hybrid instrument that wouldn’t dilute shareholder voting rights. The state will also back a three-year loan of 3 billion euros.

As well as approval from the European Commission, the plan needs sign-off from Lufthansa’s supervisory board, and shareholders will have to vote on the capital increase at a special meeting, likely to be held in late June.

Lufthansa is also poised to receive some 2 billion euros in aid from Austria, Belgium and Switzerland, where the airline owns units.

Swiss state credit guarantees worth 1.28 billion francs (US$1.3 billion) have already been agreed.

Spohr is set to speak with Austrian Chancellor Sebastian Kurz this week to finalize an aid deal totaling about 600 million euros, equally split between loans and equity, according to people familiar with the matter.

The Belgian package will be about half the size of the Austrian, plan, according to local reports.

The German package represents the biggest corporate rescue in the country during the pandemic crisis. It’s also the only one that involves a direct investment by Merkel’s government, but more may be coming.

The government set up the 100 billion-euro fund to buy stakes in stricken companies as part of its effort to stabilize Europe’s largest economy.

--With assistance from Matthias Wabl, Vivianne Rodrigues, Richard Weiss and Siddharth Philip.