Austrian Airlines has warned that it should the proposed takeover by Lufthansa fell through because of European Commission red tape it would need €1bn in new funds to ensure its survival.

Chairman Peter Michaelis told a shareholder meeting yesterday that if the transaction fell through the airline would need “more than twice” the €500m pledged by the government in Vienna as part of the purchase by Lufthansa.

The European competition watchdog has demanded that Lufthansa give up certain flights in and out of Austria – a move Lufthansa claims will make the deal uneconomical.

Regulators recently launched an investigated into the take-over, saying the deal could reduce choice and hike fares for passengers on some routes.

The European Commission said it had “serious doubts” that the takeover could proceed without the airlines making some changes to eliminate antitrust concerns. It said the new company could become too powerful on flights from Vienna to other European cities.

Lufthansa is Germany’s biggest airline and Austrian Airlines dominates routes out of Austria.

Lufthansa has already offered to make some changes but the EU said these were “not sufficient” to approve the deal at this stage and it wanted more time to look at the problems and possible solutions.

Regulators can now take an extra 90 days to examine the deal. Lufthansa has the right to pull out of the takeover if EU approval doesn’t come through by July 31.

Antitrust EU officials are separately looking into whether the Austrian government is selling Austrian Airlines at a fair price to Lufthansa. They launched an investigation in February, saying they believed that the price could be too low and may be an illegal state subsidy.

Late year Lufthansa bought the Austrian government’s 42 percent stake in Austrian Airlines.

Austrian Airlines lost more than €400m last year and increased its debt to €1bn, although half of this would in effect be absorbed by the government.

Michaelis on Tuesday told Austrian Airlines’ shareholders that the proposed deal was facing undeniable difficulties, but added: “If all parties want it, the transaction can be closed in time.”

Peter Malanik, the carrier’s co-chief executive, warned that the failure of the deal would result in the need for a huge capital injection and be followed by a radical downsizing of the airline – which would then still need a strong partner.