Lufthansa’s Austrian Airlines purchase probed by EU

European Union regulators began an in-depth investigation into whether Austria’s restructuring and sale of Vienna-based Austrian Airlines AG to Deutsche Lufthansa AG conform to EU rules on state subsidies.

The European Commission, which decides whether government aid distorts competition, has doubts that the price to be paid by Lufthansa “reflects the market price for what is being sold,” it said in a statement today. The Brussels-based regulator said it doubted whether the Austrian state acted in the same manner as a private investor.

The government needs EU approval to take on 500 million euros ($647 million) of Austrian Airlines’ debt as part of a Dec. 5 agreement for Cologne, Germany-based Lufthansa, Europe’s second-biggest carrier, to buy the state’s 42 percent stake.

Lufthansa is buying the government holding for 366,268 euros and in December said it plans to offer 4.49 euros a share for freely traded Austrian Airlines stock at the end of February. In addition, the Austrian government will receive a debtor warrant, which may lead to an additional payment, the commission said.

“We think that it will be very tough for Austrian Airlines and the Austrian state to present arguments underlining their positions,” Martina Valenta, an analyst at Erste Group Bank AG in Vienna, wrote in a note to investors, cutting her recommendation on the carrier to “sell” from “hold.”

‘Airline’s Competitors’

“The points the commission has mentioned are the main complaints of the airline’s competitors,” said Anita Bauer, a spokeswoman for Austria’s state asset agency, which manages the country’s stake in the carrier. She said the commission’s probe isn’t a surprise and “is part of the standard process.”

The Vienna-based agency said in an e-mailed statement today that it “continues to expect a successful outcome of the probe.”

Air France-KLM Group, which was among the companies looking to buy Austrian Airlines, filed a complaint to the European Commission on Dec. 11, alleging that conditions under which Lufthansa emerged as the sole bidder were unfair. It said the government’s assumption of part of the Austrian carrier’s debt may be a form of state aid.

Ryanair Holding Plc, Europe’s largest low-cost airline, on Nov. 18 described the plan to cancel the debt as “blatantly unlawful” state aid.

‘Working Closely’

“Lufthansa is working closely with the EU to resolve the open questions,” said Stefanie Stotz, a spokeswoman for Lufthansa in Frankfurt, declining to comment further.

Austrian Airlines, which had 903.8 million euros of net debt as of Sept. 30, may report a full-year loss of as much as 475 million euros on writedowns, plane and tax issues, and investment reevaluations, the carrier said Nov. 28. The projected deficit is wider than the 125 million-euro loss forecast earlier following a decline in bookings. The carrier is scheduled to report 2008 earnings on March 19.

Austrian Airlines shares fell 3 cents, or 0.8 percent, to 3.60 euros in Vienna, the lowest level since Dec. 22.

The commission said it also has doubts whether the sale was “truly open, transparent and unconditional.”

EU investigators will use the “market economy investor” test, which will study whether Austria’s sale terms are similar to what would be offered by a private investor.

The commission said it will also investigate whether Austria’s restructuring plan “will restore the long-term viability” of the carrier.