Lufthansa's access to a multi-billion euro state aid is now clear. The EU managed to sign off its approval for a key component of that package. Image Credit: Reuters

Brussels, Frankfurt: Deutsche Lufthansa AG won European Union approval to receive a 6 billion euro ($6.75 billion) recapitalization from the German government, hours before shareholders vote on the rescue package that will dilute their stakes.

The European Commission said in a statement that Germany's plan to take a 20 per cent stake in Europe's largest airline is in line with strict state-aid rules. The EU approval covers Germany's 300 million euro equity participation, a 4.7 billion euro silent participation with features of a non-convertible equity instrument and a 1 billion euro silent participation with the features of a non-convertible debt instrument.

Germany's bailout for Lufthansa overcame one major roadblock when the airline's biggest stockholder said he'd vote in favor of the rescue package at a special shareholder meeting. He had earlier criticized a steep discount being granted to the German government on a 20 per cent stake, and held the votes to single-handedly stop the share sale.

The EU approval comes with tight conditions to ensure the aid is repaid swiftly and Lufthansa doesn't use taxpayer funding to expand its business. Ryanair Holdings has already threatened legal action against the aid it says unfairly helps Lufthansa over other rivals in Germany.

The aid approval doesn't cover a 3 billion euro state loan guarantee that the EU says it will handle separately.

Lufthansa wins over a billionaire

Billionaire Heinz Hermann Thiele earlier confirmed he'd support the government aid package at Thursday's special shareholder meeting, ending days of frenzied speculation about his intentions.

With Thiele's support, the state rescue appears likely to secure the two-thirds backing required for approval. Because only 38 per cent of shareholders registered for the meeting, Thiele's 15.5 per cent stake translates into about 41 per cent of the votes.

Lufthansa needs to win about half of the rest for the share sale to pass. It's only part of the larger bailout package that also includes state loans and a so-called silent participation.

Approval of the deal would bring the curtain down on weeks of high-stakes drama that's buffeted Lufthansa's stock and bonds and forced it to examine insolvency. It would also thrust the state back into the heart of a company that was nationalized with fanfare two decades ago.

Key backers

Unions, many investors and proxy advisory firms recommend shareholders back the deal. While stockholders will see their holdings diluted, it's not clear what the rationale for blocking the package would be without a major investor proposing an alternative.

"A government-orchestrated bailout is better than insolvency," said Patrick Schuchter of Union Investment, holder of a 0.12 per cent stake. He plans to vote for the rescue, despite the drawbacks for shareholders. "Investors need to choose the lesser evil or sell their shares."

Securing the bailout would allow Lufthansa's management to turn their attention to negotiating a restructuring package with the company's powerful labor unions. The company this week missed a June 22 deadline to reach agreement with worker representatives, underscoring the challenge Lufthansa faces in downsizing for what CEO Carsten Spohr predicts will be years of depressed travel demand.

While Lufthansa earlier this month said it needed to slash around 22,000 jobs, Spohr said equivalent cost savings could be achieved by other means.

"One idea is that not a fifth of employees has to go, but that for example everyone reduces working hours and salary by a fifth," Spohr said.