The European Commission said an injection of €6 billion by Berlin to keep the company afloat was allowed, but that Lufthansa would have to give up prized slots at the Frankfurt and Munich airports to ensure fair competition.
The overall rescue comes to €9 billion with Lufthansa also receiving €3 billion in public loan guarantees.
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“This substantial amount of aid will help Lufthansa weather the current coronavirus crisis, which has hit the airline sector particularly hard,” EU competition commissioner Margrethe Vestager said.
The plan is part of an overall rescue that became a reality on Wednesday, after a billionaire shareholder reversed course and backed the plan.
Heinz Hermann Thiele, who owns 15.5 percent of Lufthansa's stock, had repeatedly voiced scepticism about the deal — to the dismay of Lufthansa management, employees and unions.
But on the eve of the make-or-break vote, Thiele told the Frankfurter Allgemeine Zeitung he would back the plan that will dilute his shareholding.
He said an insolvency had to be avoided even if he still had doubts about
the bailout, in a nod to his concerns about the government climbing on board.
“It is in the interest of all Lufthansa employees that management can quickly begin talks about the necessary restructuring,” Thiele said.
Dozens of Lufthansa employees rallied at Frankfurt airport early on Thursday, many wearing the carrier's high-visibility yellow vests and face masks to curb the spread of the virus.
“Lift us up where we belong, vote yes!” read one sign carried by a demonstrator, while another said “We are Lufthansa, we are family”.
Even with the government aid, Lufthansa has warned it may have to slash thousands of jobs as travel demand is expected to stay below pre-pandemic levels for years.
But in more good news for the beleaguered group, it struck a deal with German flight attendants' union UFO late Wednesday to cut €500 million in costs by 2023 while avoiding cabin crew layoffs.
The savings will be achieved through measures including pay freezes, reduced flight hours, early retirement and unpaid leave, both sides said.
The deal still needs to be approved by union members but UFO spokesman Nicoley Baublies said it “brings urgently needed job security” for Lufthansa's 22,000 flight attendants.
The powerful Verdi union meanwhile urged other shareholders to follow Thiele's lead and “end an existential threat for almost 140,000 employees globally and their families”.
Shareholders representing just 38 percent of Lufthansa's capital have registered to participate in Thursday's special meeting.
Because of the low turnout, a two-thirds majority will be needed to pass or block the rescue package.
German Finance Minister Olaf Scholz urged investors to support the plan, painstakingly hammered out in weeks of talks between ministers and Lufthansa
“The offer on the table is a good one and Lufthansa shareholders should take it,” he said.
As part of its okay, the European Commission said Lufthansa would have to make room for rivals at the Frankfurt and Munich airports to ensure fair competition.
It also put limits on any acquisitions of Lufthansa rivals and banned dividends until the state aid is repaid.
Nevertheless, rival carrier Ryanair immediately announced it would challenge Lufthansa's state aid in an EU court.
Lufthansa's climb out of the coronavirus storm promises to be long and arduous as countries emerge from lockdown and air travel slowly resumes.
By September, the group expects its timetable to remain 60 percent below pre-pandemic levels.
Further into the future, around 100 of Lufthansa's present fleet of 763 aircraft will likely be surplus to requirements.
Elsewhere in the group, Vienna granted subsidiary Austrian Airlines aid totalling €450 million, while Swiss and Edelweiss received loans totalling €1.2 billion from Bern.
Talks continue with the Belgian government over Brussels Airlines, which plans to shed 1,000 jobs.