Regulatory and other factors

The Lufthansa Group and its business segments are subject to numerous legal and regulatory influences. This became apparent in a negative way in the reporting year with Germany’s air traffic tax putting huge one-sided pressure on German airlines and also with the unexpected imposition of a temporary ban on night-flights in Frankfurt. In many other cases too, there is still a need for clarification and correction in order to avoid solutions that distort competition.

Inefficient security concepts

Since 11 September 2001 the security standards in the airline industry have been tightened sharply. Between the competing interests of security, customer satisfaction and cost-effectiveness, the reactive response to every new security incident means that our customers are being inconvenienced by checks that are often inefficient, repeated and disagreeable. Over the years this has pushed the current security concept to its limits. A broad exchange of views is therefore now taking place between airlines and airports and at international government level in order to adapt future security design to these new requirements and to growing passenger numbers. A holistic approach is being sought to passenger and cargo security, which is intended to establish customer service and efficiency as central concerns, alongside an undiminished level of security. Important components of this future security concept are uniform global security specifications, government-sponsored “Trusted Traveller” programmes that are independent of the class of travel, and the implementation of new technologies.

Regional regulation instead of effective climate protection

The subject of climate protection remains a high priority for the airline industry. It is the first industry in the world to have set itself targets for reducing CO2 emissions – based on the comprehensive four-pillar strategy that Lufthansa helped to elaborate. This IATA Global Approach represents a global attempt at a solution to a global problem.
The EU Emissions Trading Scheme for air transport that began on 1 January 2012 also aims to protect the climate. It offers, however, only a regional regulatory approach and could lead to the distortion of competition and inefficiencies. A direct flight from Frankfurt to a long-haul destination is subject to EU emissions trading at 100 per cent, for instance, whereas the same flight with a stopover outside the EU is only charged for the first flight segment.

To avoid having to pay these additional costs, airlines offering intercontinental transfers will find themselves obliged to shun connections via Europe in the interests of their customers. This weakens the value creation function of the European airline industry and is ecologically counter-productive, because it implies considerable diversions and additional CO2 emissions.

To prevent competitive distortions it must be ensured that all non-EU states also join the emissions trading scheme. However, at the Council meeting of the International Civil Aviation Organisation held in November 2011, 26 of the 36 Council member states (including USA, China, Russia and India) signed a declaration against the EU’s unilateral action on emissions trading. At the same time, the EU and its member states are being called upon to cooperate with the international community to find a global solution to reduce CO2 emissions from air traffic. On the basis of current regulation and national legislation, the EU member states could ultimately be forced to prevent airlines from non-participating countries from entering their airspace. Any such action would presumably not remain without effects on flights by European airlines to the corresponding countries.

Furthermore, there is no uniform system of reporting. The ten companies in the Lufthansa Group affected by emissions trading have to report to five different national authorities, with different formats and different requirements in each case. This produces considerable extra costs for the companies, on top of many other individual expenses. Despite the difficult operating environment, all companies in the Lufthansa Group are preparing for emissions trading.

Competitive neutrality in emissions trading in the airline sector, as described by the German federal government in its coalition agreement, is therefore indispensable for the Lufthansa airline group.

The ambitious targets of the IATA Global Approach are our yardstick in the search for a global solution. They aim for an annual improvement of 1.5 per cent in the fuel and CO2 efficiency of global air transport by 2020. From 2020 emissions are to remain constant despite forecast traffic growth and by 2050 are even to be reduced by 50 per cent compared with 2005. It is the responsibility of national governments, particularly those of the USA, China, India, Russia and Brazil, and those in the European Union to take this promising approach further.

Laborious progress achieved on the way towards a Single European Sky

Cross-border organisation of airspace management by air traffic control is a vital pillar of a comprehensive climate and sustainability policy. In 2004 the EU adopted the Single European Sky (SES) initiative for this very purpose, but its implementation is still very slow. In 2009 the EU passed a regulation revising SES (SES II), which is intended to expand the scope of SES and expedite its realisation. From 2012 national air traffic control authorities are subject to binding performance targets for punctuality, flight efficiency and cost effectiveness. Most EU states – including Germany – are finding it very difficult to draw up performance plans that are compatible with these targets, however. The international treaty establishing the Functional Airspace Block Europe Central (FABEC) signed in December 2010 by Germany, Belgium, France, Luxembourg, the Netherlands and Switzerland is currently in the process of ratification and implementation. In a number of stages, FABEC is intended to make European airspace management considerably more efficient. If this succeeds, for Lufthansa it will mean more airspace capacity, fewer delays, more stable flight plans, lower air traffic control fees and considerable savings in fuel and emissions. Monopolies, national pride and the defence of vested interests are nevertheless hindering a thorough and swift reform of the fragmented European airspace management system.

Airport extension and restrictions to flight operations in Frankfurt

There is no doubt that the long awaited realisation of the approved extension plans for Frankfurt Airport was and is enormously important for Germany in terms of air transport. The rulings and judgements handed down in connection with the operating framework have nevertheless resulted in excessive restrictions on flight operations. The operating regulations that formed part of the planning approval do not meet the capacity requirements applied for by the Lufthansa Group companies. They enforce a restriction on the number of night-flights between 11 p.m. and 5 a.m. to 17, which are intended to be used mainly by airlines based at Frankfurt Airport and solely for cargo flights.

The limitation of night-flights was the main subject of the law suit brought by Deutsche Lufthansa AG and Lufthansa Cargo AG before the administrative court in Kassel. The objections were dismissed in a ruling on 21 August 2009, however. The court considers that the flight movements permitted in the planning approval document do not give sufficient weight to the statutory right to peace and quiet during the night. In fact, it sees no scope for permitting any scheduled flights during this period. Both the opponents of the expansion and the federal state as respondent were given leave to appeal against the ruling concerning the annulment of the night-flight regulations, but Lufthansa was not.

The federal state has appealed against the ruling. Lufthansa is attempting to obtain leave to appeal by initiating the appropriate legal proceedings. At present it is not possible to predict the outcome of the proceedings with any degree of certainty.

Flight operations at Frankfurt Airport were restricted further shortly before the new runway was opened. In rulings dated 10 October 2011 the Kassel administrative court reinstated of its own accord the suspensive effect of appeals by various residents against the planning approval, altering its rulings from 2009 accordingly, to the extent that the planning approval document permitted scheduled flights between 11 p.m. and 5 a.m. This had the effect of imposing a surprising ban on night-flights immediately before the winter flight plan began. There are no legal remedies against these decisions. The current restrictions affect freight and passenger operations equally. Technical delays extending to just a few minutes after 11 p.m. have resulted in aircraft that were already on their way to the runway having to return to the gate and several hundred passengers having to stay overnight in Frankfurt – an intolerable situation for an international aviation hub. A decision by the Federal Administrative Court on the restriction of night-flights at Frankfurt Airport is expected at the end of March 2012. If the current regulations are not suspended, Lufthansa will be faced with considerable restrictions to its flight operations and massive economic losses of a mid two-digit million euro amount.

European Commission revises slot regulation

At the end of the year the European Commission presented a proposal for the revision of the current regulation on the allocation of landing and take-off slots and the current directives on ground handling services and noise-related operating restrictions at airports. The proposal on allocating slots acknowledges “grandfather rights” for historic slots, which is important for Lufthansa, and formalises the sale of slots between airlines, which has been tolerated for some time. However, it tightens the conditions an airline must meet for maintaining its entitlement to an allocated slot in the next flight plan period, which is to the detriment of the established network carriers. In future the Commission also intends to authorise local procedures for allocating slots and to allow airports to charge a fee for reserving slots under defined conditions. The proposals also contain stricter standards for particularly noisy aircraft. A decision still has to be taken by the European Parliament and the Council of Ministers.

Ineffective developments in consumer protection

Consumers are protected by numerous regulations. It is laid down for instance that ticket prices must show all costs clearly and that price discrimination between customers in Europe is not permitted.

The internet also provides price transparency and therefore increases the influence of the consumer. For Lufthansa this means continuing to reinforce our market position as a quality provider with tailored products and excellent service for different customer groups.

In response to litigation by the federal consumer protection agency (vzbv), the German courts have investigated the clause in the general terms and conditions commonly used in the industry specifying that flight tickets may only be used in full and in the order originally booked, otherwise losing their validity. In April 2010 the Federal Court of Justice ruled that this clause was invalid. The court’s reasoning nevertheless opened up the possibility of making transport dependent on payment of a surcharge based on the actual route. A new suit by the federal consumer protection agency against the clause as revised in accordance with the ruling by the Federal Court of Justice has now been filed with the Cologne County Court.

In December 2008 the European Court of Justice (ECJ) ruled that only in exceptional cases can technical problems exonerate an airline for cancelling a flight. If the airline cannot exonerate itself, it must pay denied boarding compensation (DBC) of EUR 250 to EUR 600 per passenger. According to a ruling by the ECJ in November 2009, airlines are also obliged to pay this compensation if arrival is delayed by more than three hours. The ruling is legally disputed as the court interpreted the DBC regulation (Regulation (EC) 261/2004) in a way contrary to its wording, which constitutes interference in the powers of the legislature. This is made worse by the fact that the interpretation has a retroactive effect, which is against the principle of legality. No appeals are possible against the ruling. The High Court in London referred the matters in dispute back to the ECJ in summer 2010. Six cases relating to this area have now been referred back to the ECJ.

Claims for compensation for delays will not be heard in the United Kingdom following the referral. Otherwise, most national courts now apply the regulation in the event of delays as well. Whether the ECJ will change its ruling is impossible to predict.

The situation is exacerbated by the fact that increasing public pressure has led the German Federal Aviation Authority to treat every breach of regulation (EC) 261/2004 as an administrative offence for which a fine of up to EUR 25,000 can be imposed. Contrary to general legal understanding, the regulation gives the German Federal Aviation Authority the opportunity of using the laws on administrative offences to enforce civil law claims.

Following the principle of “no penalty without a law”, no administrative proceedings have yet been started on this charge of non-payment of denied boarding compensation in the event of delays (ECJ ruling). Particularly given the ECJ ruling, it is not possible to say how the number of cases will develop and to what extent Lufthansa will be able to defend itself successfully against the German Federal Aviation Authority or by seeking judicial review from the courts.

Regulation of over-the-counter derivatives trading

In both Europe and America various efforts are being made to regulate over-the-counter (OTC) derivatives. As a company exposed to fluctuations in oil prices, exchange rates and interest rates in its core business, Lufthansa uses over-the-counter derivatives as part of its risk management. They are used for hedging and form an essential part of risk management by offsetting fluctuations in fuel expenses or the costs of aircraft financing for example. To date, Lufthansa has been able to carry out these transactions directly with its business partners. Current draft regulation, which has not yet been finally adopted, includes EMIR (European Market Infrastructure Regulation), MiFID (Markets in Financial Instruments Directive) and CRD4 (Capital Requirements Directive). This is part of the Basel III reform package, which aims to make the use of central counterparties or capital requirements mandatory for real transactions such as commodity price hedges as well. These endeavours would result in a drain on the Company’s liquidity and also make the majority of derivatives much more expensive. Lufthansa continues to lobby for a specific set of rules for companies that are not part of the financial sector and only use derivatives to hedge the underlying exposure from their industrial businesses.