The European Commission yesterday conditionally approved Lufthansa's takeover of Austrian Airlines saying the German flag carrier must make promised changes to resolve competition concerns.
Lufthansa has offered remedies to concerns voiced by Brussels that the deal could leave consumers with reduced choice and higher prices on five routes, most of them between Vienna and German cities.
A source close to the talks told AFP earlier that Lufthansa had offered to give up 19 take-off and landing slots in Vienna to encourage greater competition in order to get the EU Commission's vital backing.
The reduction in capacity will be accompanied by a cap on post-takeover growth for Austrian Airlines.
"This case shows that consolidation in the airline sector is possible with proper remedies to safeguard consumers' interests," European Competition Commissioner Neelie Kroes said.
Lufthansa signed a deal last year to acquire a 41.6 per cent stake in loss-making AUA from the Austrian state holding company OeIAG for a symbolic one euro cent per share - or just over €366,000 in all.
The Austrian state pledged to absorb €500 million - or just over a third - of AUA's debts to facilitate the takeover given Lufthansa's concerns over the airline's high level of debt.
The commission announced that the structure of the deal in this way was compatible with EU state aid rules which have been eased during the economic crisis to allow for the "rescue and restructuring of firms in difficulty."
The EU executive recognised that "without the state recapitalisation, Lufthansa will not buy Austrian Airlines."
Under the Brussels' approved deal, AUA's capacity will be reduced by 15 per cent from its January 2008 level by the end of 2010.
Thereafter its growth will be capped at the average of the rate at other European airlines until end-2015 or until AUA reaches operational break even, whichever comes first.
"This decision is yet another step taken favouring the consolidation of the airline sector. It will lead to a market that is undistorted by state aid, with an ultimate benefit for passengers," European Transport Commissioner Antonio Tajani said.
However, Niki Lauda, former Formula One racing great and owner of AUA subsidiary Lauda Air line, has described the Lufthansa takeover as "the biggest catastrophe (for Austria) since World War II".
"It takes no skill to give away an airline and then still pay €500 million on top of that," he said earlier this month.
Struggling AUA flew deeper into trouble in the first half of the year, reporting a net loss of €166.6 million.
In January, AUA unveiled emergency measures, including short-term work for staff, to cut costs and cope with the collapse in demand.
Lufthansa is the largest German airline and also controls Swiss, Air Dolomiti, Eurowings and Germanwings. The German carrier recently acquired British Midland and SN Brussels Airlines.
AUA is Austria's largest airline. Its subsidiaries include Lauda Air and Tyrolean Airways.
Both parties are members of the Star Alliance.