Etihad must “respect” EU law when signing equity deals, says Lufthansa CEO

Authorities have probed various deals by Abu Dhabi airline to buy minority stakes in a number of European flag carriers
Etihad must “respect” EU law when signing equity deals, says Lufthansa CEO
By Shane McGinley
Mon 23 Mar 2015 09:38 AM

Abu Dhabi’s Etihad should “respect” European laws and engage in more due diligence in order to avoid clashing with the EU in relation to its purchase of equity stakes in European airlines, the CEO of Lufthansa, Europe’s largest airline group, said in an interview with Arabian Business.

The European Commission in April 2014 launched an investigation into Etihad’s investments in European airlines as part of a wider examination into whether foreign ownership of European airlines complies with EU airline licensing rules.

The regulation at the centre of the probe was Article 4 of Regulation No 1008/2008, which states that a condition of obtaining and maintaining an operating license in the EU is that a Member State and/or nationals of the Member States own more than 50 percent of the airline and effectively control it.

As part of its rapid global expansion, Etihad has bought minority stakes in several international airlines, including a 29.2 percent of Germany’s Air Berlin, 33.3 percent of Darwin Airline (which was rebranded as part of Etihad Regional), 49 percent of Air Serbia, 4.1 percent of Ireland's Aer Lingus and 49 percent of Alitalia.

The investigations launched by EU authorities into such deals is something which should be welcomed, believes Carsten Spohr, CEO of the Lufthansa Group and an outspoken critic of the Gulf carrier’s rapid expansion into Europe.

“In Germany and Europe we believe in the law and whatever the law allows to be done shall be done, like it or not…if it’s illegal it shall not be done,” Spohr told Arabian Business in an interview in Dubai.

“I think there are two levels here: is there foreign ownership and control, which the governments and authorities are looking at. And the second issue: are the bilateral frameworks - in this case the UAE and Germany - are they allowing certain things or are they not allowing certain things?”

In October last year, German authorities threatened to veto 34 codeshare agreements between Air Berlin and Etihad for the winter 2014 period. Around the same time Etihad reportedly agreed to relinquish a role in the appointment of top executives at Darwin Airline, in order to secure approval for the deal, while it was also said to have made some concessions in a bid to win EU antitrust approval to acquire 49 percent of Alitalia.

“When it came to the codeshare, not even by our own work, but someone else’s - the European Commission [EC] - it turned out that there was a, let’s say, illegal codeshare in place which, in our view, has to come to an end as it is not allowed by the bilateral agreement,” Spohr said.

“They were given an extension, in the case of Berlin another half a year, and we agreed to it as you should try to protect the consumer’s interest as well. But that is the situation and at Alitalia there are some issues about slot usage at Linate [airport] in Milan, which the commission is looking into [to see] if that is something which is against European law. Again, in these situations we believe in the law being applied and that’s what the European system is built on,” he added.

That said, the Alitalia deal was still rubberstamped in November and Germany’s Federal Aviation Office this month approved the summer flight schedule between Etihad and Aer Berlin, including all codeshares that had been submitted. The only issue at present is the Darwin Airline deal, which is still being examined by Swiss authorities.

“Our commitment to work with Darwin Airline remains strong and will not be compromised by the aggressive actions of competitors,” Etihad president and chief executive officer James Hogan said in a statement in October in response to a report by Swiss-German newspaper 20 Minuten, which claimed the partnership was struggling in the face of strong competition from rival Swiss International Air Lines (SWISS), Lufthansa’s sister airline and part of the Lufthansa Group.

“If you respect the legal system of a country you are doing business in you better check that legal situation before you act,” Spohr said in relation to the Darwin Airline deal. “There was an expectation that things would sort out one way or another, but that is not how a German or a Swiss legal system works... I would have looked at that before... If you had looked carefully into the legal system before you invested you would have known you could not do this.”

You can see why Spohr is not in favour of Air Berlin and Darwin feeding more capacity from Europe to Abu Dhabi. In October, Lufthansa announced it would not fly between Abu Dhabi and Frankfurt in the summer of 2015 because overcapacity on the route meant it had become uneconomical. It pointed the blame squarely at Etihad and Air Berlin for the overcapacity on routes to Abu Dhabi and declared that their codesharing arrangement was “unjustified.”

However, Spohr’s view isn’t one which is shared by all his fellow European airline bosses. Willie Walsh, CEO of IAG, the parent company of flag carriers British Airways and Spain’s Iberia, last year hit out at European authorities’ scrutiny of Etihad’s deals.

“I have no issue with Etihad investing in these airlines, from a principle point of view I would say I’m fine with it. My view is very simple, I believe ownership and control restrictions should be removed and I think it is nonsense,” Walsh told Arabian Business in an exclusive interview in London.

“I have argued for as long as I have been a CEO. I argued it at Aer Lingus that we shouldn’t have ownership and control restrictions in the airline industry and I have consistently argued that position while I have been at British Airways and IAG. Does it matter whether Etihad controls Alitalia? I can’t understand why it would matter… Our industry would benefit from the removal of these restrictions and I can’t understand why they still apply. They may have had a role 50 years ago and I can understand that at a period in time countries felt that they needed to have a national flag carrier to ensure connectivity. I don’t think you need that today.”

Walsh pointed to the example of Malév Hungarian Airlines, which was the flag carrier of Hungary and operated out of to 50 cities using a fleet of 22 aircraft before it went bust in February 2012. Within six days of the collapse of Malév, its base airport had recovered over 60 percent of its traffic as rival carriers flooded back into the market.

“The evidence is quite clear that where you have had former carriers and former flag carriers that have failed the market will replace the capacity that disappeared and replace it almost overnight,” Walsh said, adding to his argument that ownership regulation is irrelevant in the modern aviation world.

Saj Ahmad, the chief analyst at UK-based Strategic Aero Research agreed with Walsh's stance. “I agree. The EU needs to take a good hard look at the regressive aviation policies they have and examine the forward looking ones developed by the likes of the UAE which allow greater aerodrome freedom. On ownership, EU flag carriers are saddled with legacy costs like a noose. To prevent the likes of the Etihad's of this world from investing ultimately condemns these ailing airlines to death row and job losses. Rather than continually whine about ownership, the EU needs to break off the blinkers and look at policy more openly.”

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