Dispute over Lufthansa sell-off

Date: 22/07/1999

By Renée Cordes

ACTING Internal Market Commissioner Mario Monti will next week try to persuade his colleagues to launch an unprecedented legal challenge to German airline Lufthansa's restrictions on foreign ownership.

But he will face staunch opposition from fellow Commissioners, led by acting transport supremo Neil Kinnock, who argues that the move could discourage airline privatisations at a time when several carriers including Spain's Iberia and Air France are being floated on the stock market.

The controversy surrounds an option the German government has to buy back shares in the country's national carrier. Echoing the privatisation of other airlines such as British Airways and KLM Royal Dutch Airlines, when Bonn completed the sale of Lufthansa shares in October 1997, it constructed the sell-off so that 50.97% of them remained in domestic hands.

Lufthansa has 20% foreign ownership in the carrier but, if this rises above 40%, the airline has the right under German law to buy back shares. If foreign ownership exceeds 50%, the company has the right to force shareholders to sell shares at their original purchase price or declare the stock void.

Monti argues that such restrictions contravene EU rules guaranteeing the free movement of capital. But he has so far been unsuccessful in winning enough support from his colleagues to launch infringement proceedings. "This would be the first case of its kind," said a Monti aide. "Legally, it would be a breakthrough."

While insisting that the action was a "crucial priority" for the man nominated to take over the competition portfolio in the autumn, the aide acknowledged that it was not yet clear whether Monti could persuade colleagues to back his tough stance next week.

An aide to Kinnock said a decision on whether to go ahead with the case should be put off until incoming President Romano Prodi's new team takes over in the autumn, given the controversial nature of the move.

He added that it would make more sense for the institution to publish a 'communication' first setting out clear-cut rules governing airline privatisations to prevent similar controversies in future.

The aide said that if the Commission wanted to encourage privatisation of the airline industry, it had no choice but to offer member states the option of being able to buy back shares as a fall-back position in case of a hostile foreign bid. "If this goes through it could send shock waves through the airline industry," he said, adding that Kinnock was fairly optimistic that he could win support from the required majority to force a postponement.

A spokesman for Lufthansa in Brussels said that it would be inappropriate for the Commission to single out the company rather than scrutinising the industry as a whole.