Another Case of Rescue Aid to an Airline

An undertaking does not have to be nationally “important” in order to qualify for rescue aid.

Introduction

The pandemic has been hard on airlines. For some of them, however, the pandemic simply exacerbated their already existing problems. On 18 May 2022, in case T‑577/20, Ryanair v European Commission, the General Court had to examine the case of State aid to Condor, the German low-cost carrier, which was close to the brink of bankruptcy despite the fact that itself seemed to be profitable.[1] The reason for this conundrum was that its owner, Thomas Cook, had collapsed under heavy debt.

Ryanair appealed against Commission decision SA.55394 authorising rescue aid that had been granted to Condor by Germany. The Commission found the aid compatible with the Rescue and Restructuring Aid Guidelines [RRG] without opening the formal investigation procedure.

The rescue aid was in the form of a loan of EUR 380 million accompanied by a guarantee of 50% provided by the Land of Hessen and of 100% by the German federal government.

Ryanair argued that, by not opening the formal investigation procedure and giving it the opportunity to submit its comments, the Commission violated its procedural rights and an interested party. Therefore, the task of the General Court was to determine whether the Commission should have had serious doubts about the compatibility of the aid that should have merited the launch of the formal procedure.

Legal standing of competitors

The General Court, first, recalled that “(15) in the light of Article 1(h) of Regulation 2015/1589, an undertaking competing with the beneficiary of an aid measure is without doubt an ‘interested party’ for the purposes of Article 108(2) TFEU”.

“(16) In the present case, it is indisputable that there is a competitive relationship, albeit limited, between the applicant and the intervener.” “(17) The applicant is therefore a party concerned with an interest in safeguarding the procedural rights available to it under Article 108(2) TFEU.”


[1] The full text of the judgment can be accessed at:

CURIA – Documents (europa.eu)


“(20) The applicant can, in order to demonstrate infringement of its procedural rights on account of the doubts that the measure at issue should have raised as to its compatibility with the internal market, rely on arguments aimed at demonstrating that the Commission’s finding as to the compatibility of that measure with the internal market was incorrect, which, a fortiori, is such as to establish that the Commission should have had doubts regarding its assessment of the compatibility of that measure with the internal market.”

Then the General Court summarised the relevant principles.

“(25) Where the Commission is unable to reach a firm view, following an initial examination in the context of the procedure under Article 108(3) TFEU, that a State aid measure either is not ‘aid’ within the meaning of Article 107(1) TFEU or, if classified as aid, is compatible with the FEU Treaty, or where that procedure has not enabled it to overcome the serious difficulties involved in assessing the compatibility of the measure under consideration, the Commission is under a duty to initiate the procedure provided for in Article 108(2) TFEU, without having any discretion in that regard”.

With respect to notified aid, “(26) it is the presence or absence of ‘doubts’ as to the compatibility of that measure with the internal market that enables the Commission to decide whether or not to initiate the formal investigation procedure at the end of its preliminary examination.”

“(27) The concept of doubts set out in Article 4(3) and (4) of Regulation 2015/1589 is an objective one. Whether or not such doubts exist requires investigation of both the circumstances under which the contested measure was adopted and its content. That investigation must be conducted objectively, comparing the grounds of the decision with the information available to the Commission when it decided on the compatibility of the disputed aid with the internal market. It follows that judicial review by the General Court of the existence of doubts will, by its nature, go beyond consideration of whether or not there has been a manifest error of assessment”.

“(28) The onus is on the applicant to prove the existence of doubts”.

The meaning of intrinsic difficulties

Ryanair claimed that the Commission infringed point 22 of the RRG which states that “a company belonging to […] a larger business group is not normally eligible for aid under these guidelines, except where it can be demonstrated that the company’s difficulties are intrinsic and are not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself.”

Condor was indeed a member of a larger company group. Ryanair argued that the Commission should have examined whether Condor’s difficulties were intrinsic and also that they were not the result of an arbitrary allocation of costs. By contrast, the Commission had considered that Condor’s difficulties were intrinsic because they were not caused by an arbitrary allocation of costs.

The General Court “(41) noted that in many language versions, the syntax of the subordinate phrase, ‘except where it can be demonstrated that the company’s difficulties are intrinsic and are not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself’, has a two-part structure, sometimes separated by a comma, as follows: ‘except where it can be demonstrated that [first condition], and that [second condition].’ The repetition of the subordinate conjunction ‘that’ shows that two conditions are thus involved, the first one, positioned after the first ‘that’, relating to the fact that the beneficiary’s difficulties are intrinsic and are not the result of an arbitrary allocation of costs within the group, and the second one, placed after the second ‘that’, relating to the fact that those difficulties are too serious to be dealt with by the group itself. That first condition thus appears to be one and the same condition. That syntactical structure can be seen, inter alia, in the Czech, English, French, Croatian, Italian, Maltese, Dutch, Polish, Portuguese, Romanian, Slovak and Slovenian versions.”

“(42) Next, it should be noted that the German version expressly states that difficulties that are not the result of an arbitrary allocation within the group are considered to be ‘intrinsic’ […] The Greek and Bulgarian versions also point in that direction.”

“(43) Those examples show that, according to the wording in many language versions of point 22 of the Guidelines, a beneficiary’s difficulties must be regarded as being intrinsic if they are not the result of an arbitrary allocation of costs within the group.”

“(45) As regards the context and objectives of the rules of which point 22 of the Guidelines forms part, it should be recalled that the objective of the rule set out in that point is, inter alia, to prevent a group of undertakings from having the State bear the cost of an operation for the rescue or restructuring of one of the undertakings belonging to the group, when that undertaking is in difficulty and the group itself has created those difficulties owing to an arbitrary allocation of costs within it”.

“(46) By contrast, the objective of that point is not to exclude an undertaking belonging to a group from the scope of rescue aid solely on the ground that its difficulties originate in the difficulties faced by the rest of the group or by another company in the group, in so far as those difficulties have not been created artificially or allocated arbitrarily within that group.”

And, the General Court concluded that “(48) point 22 of the Guidelines merely sets out one and the same condition which is to be interpreted as meaning that the difficulties of an undertaking belonging to a group must be regarded as being intrinsic if they are not the result of an arbitrary allocation of costs within that group.”

Were Condor’s difficulties intrinsic?

Then Ryanair argued that Condor’s difficulties were extrinsic rather than intrinsic, in that they were entirely attributable to internal organisation of the Thomas Cook group, the owner of Condor, that had gone bankrupt.

Ryanair claimed that Condor did generate profits which, however, were channelled to Thomas Cook. In response the General Court observed that “(51) the pooling of cash within a group is a common and widespread practice within groups of companies. The pooling functions like an intra-group bank in that the various companies within a group obtain intra-group loans from the fund, in the event of liquidity needs, and deposit funds with the cash-pool, in the event of surplus liquidity, in return for a receivable in respect of that cash, that is subject to interest.” However, the “(53) cash-pool system was not the source of [Thomas Cook’s] difficulties. Those difficulties were the result, inter alia, of a very high level of indebtedness stemming from acquisitions and operating losses, weak business in the British market reinforced by the discussions on Brexit, negative media coverage of the group’s restructuring, and structural deficits in the organisation of the group.”

Were Condor’s difficulties too serious to be addressed by the group?

Ryanair submitted that the Commission failed to examine whether the Thomas Cook group was incapable of dealing with Condor’s difficulties.

The General Court responded that “(60) the Thomas Cook group, [Condor’s] sole shareholder, was in a very poor financial state when the contested decision was adopted. The group ceased trading with immediate effect on 23 September 2019 and was subsequently placed in compulsory liquidation with debt equivalent to approximately 1.7 thousand million pounds sterling (GBP) (approximately EUR 1.91 thousand million).” “(61) It must therefore be found, as did the Commission, that the Thomas Cook group did not have the capacity to deal with its subsidiary’s difficulties since it was itself in liquidation and had ceased trading.”

Would the bankruptcy of Condor cause social hardship or severe market failure?

Ryanair claimed that the Commission did not assess properly point 44 of the RRG according to which Member States must demonstrate that the exit from the market of the aided undertaking would cause serious social hardship or severe market failure.

Interestingly, the General Court for the second time in a month [the first time was in its judgment of 4 May 2022 in case T‑718/20, Wizz Air Hungary v European Commission] returned to the landmark judgment of the Court of Justice in case C-594/18 P, Austria v Euroepan Commission [Hinkley Point C]. In the Austria v Commission judgment, the Court of Justice held that State aid authorised under Article 107(3)(c) TFEU did not have to serve the common interest. The problem, however, is that the RRG do require that aid is in the common interest. For this reason in the Wizz Aid judgment and now in the present judgment, the General Court inferred that the reference to common interest could be assimilated to “development of a certain economic activity” which is one of the two conditions of compatibility laid down in Article 107(3)(c); the other being the absence of undue distortion of trade and competition.

“(68) As a preliminary point, the Court, having regard to the judgment of 22 September 2020, Austria v Commission (C‑594/18 P, EU:C:2020:742), considers it necessary to point out that it is apparent from point 43 of the Guidelines that, in order to be declared compatible with the internal market on the basis of the Guidelines, a State aid measure must pursue an objective of common interest. According to that same point, that requirement takes the form of the condition that such a measure must be one that ‘aims to prevent social hardship or address market failure’. That is confirmed by point 44 of those guidelines, according to which Member States must demonstrate that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure. The wording of that requirement is thus related to the condition laid down in Article 107(3)(c) TFEU, according to which the aid measure must be intended to facilitate the development of certain economic activities or of certain economic areas”.

“(69) It follows that the actual substance of the requirements laid down in points 43 and 44 of the Guidelines is not contrary to Article 107(3)(c) TFEU, […], and that, in imposing that requirement, the Guidelines have not improperly reduced the scope of that provision as regards the examination of the compatibility of a State aid measure in terms of the judgment of 22 September 2020, Austria v Commission (C‑594/18 P, EU:C:2020:742). In addition, it is apparent from paragraphs 66 and 67 of that judgment that the fact that the planned aid enables a market failure to be remedied may be a relevant factor for assessing the compatibility of that aid under Article 107(3)(c) TFEU.”

“(70) Point 44(b) of those guidelines provides that Member States must demonstrate that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure, in that ‘there is a risk of disruption to an important service which is hard to replicate and where it would be difficult for any competitor simply to step in (for example, a national infrastructure provider)’.”

Then the General Court noted that “(74) the Guidelines do not provide any definition of the concept of ‘important service’.”

“(75) Nevertheless, point 44 of the Guidelines contains a non-exhaustive list of circumstances in which the Commission would consider that the failure of the beneficiary would be likely to involve serious social hardship or severe market failure. Some of those examples relate to the risk of ‘serious social hardship’, including sub-point (a), which takes into account the unemployment rate, or (g), which refers to ‘similar situations of severe hardship duly substantiated’. The other examples relate rather to the risk of severe market failure. Such is the case of sub-point b), at issue in the present case, and also (c), which refers to the exit of an ‘undertaking with an important systemic role in a particular region or sector’, and (d), which refers to the risk of interruption to the continuity of provision of a service of general economic interest (SGEI). It follows that, in order for the service to be regarded as ‘important’, there is no requirement for the undertaking that provides that service to play an important systemic role for the economy of a region of the Member State concerned, or that it be entrusted with an SGEI, those two latter situations being covered respectively by point 44(c) and (d) of the Guidelines.”

“(76) Furthermore, […] the mere fact that point 44(b) refers ‘for example’ to ‘a national infrastructure provider’ does not in any way mean that the scope of that point is limited to services that are of importance at the national level.” “(77) Accordingly, the applicant’s argument that a service is ‘important’ only if it is of importance for the entire economy of a Member State must be rejected.”

It is true that the RRG do not require proof that the aid recipient is important for the entire economy. But they do require proof that the exit of the aid recipient is “likely to involve serious social hardship or severe market failure”. In this connection, it should be noted that the the Commission concluded that Condor was “important” on the basis of two factors: “(72), the difficulty in organising the repatriation by other airlines of [Condor’s] passengers that were still abroad and, second, it being impossible for those airlines to replicate in the short term the service provided by [Condor]”. Do these two factors correspond to point 44(b) of the RRG that refers to “risk of disruption to an important service which is hard to replicate”?

Nevertheless, the General Court went on to examine the “(79) the question of whether the services provided by [Condor] were hard to replicate, within the meaning of point 44(b) of the Guidelines, it is apparent from paragraphs 82 and 85 of the contested decision that other, competitor, airlines could not have carried out at short notice the immediate repatriation of the intervener’s passengers who were still abroad.”

“(84) It is important to note that point 44(b) of the Guidelines does not require that it is impossible to replicate an important service; it is sufficient that it is ‘hard’ to do so.”

“(87) In those circumstances, it must be concluded that the extent, complexity and urgency of the repatriation operations that would have had to be carried out in circumstances impacted by the simultaneous occurrence of extraordinary events justify by themselves the finding that the intervener’s exit from the market would have led to a risk of disruption to an important service which it would have been hard to replicate in the particular circumstances of the present case.”

It is mentioned in paragraph 79 of the judgment that there were about 200,000 to 300,000 passengers abroad that would need to be repatriated. Given that the rescue aid was a loan of EUR 380 million, it meant that the German authorities committed EUR 1300-1900 per passenger they repatriated. That is a pretty hefty amount.

Ryanair’s claim that the Commission carried out an incomplete and insufficient examination of the one time, last time condition for aid laid down in point 74 of the RRG was also rejected by the General Court.

Given that none of the pleas of Ryanair was successful, the application was dismissed in its entirety.

[1] The full text of the judgment can be accessed at:

CURIA – Documents (europa.eu)

Tags

About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Leave a Reply

Related Posts

28. Jun 2022
State Aid Uncovered by Phedon Nicolaides

Individual Aid to Counter the Effects of Serious Economic Disturbance Is Legally Possible, but Is it Appropriate?

Individual aid need not be capable itself to remedy serious economic disturbance in the economy of a Member State. It is sufficient that it contributes to that effect. Introduction On 22 June 2022, in case T‑657/20, Ryanair v European Commission, the General Court confirmed once more that Member States have a right to grant State aid to the undertakings of […]
17. May 2022
by Phedon Nicolaides

Rescue Aid

Member State must demonstrate that rescue or restructuring aid aims to prevent social hardship or address market failure. The Temporary Framework is coming to an end The European Commission announced on 12 May 2022 that the Temporary Framework will be abolished on 30 June 2022, with the exception of the two types of support that were inserted in the Temporary […]
25. Jan 2022
State Aid Uncovered by Phedon Nicolaides

Duplication of Infrastructure Does not Promote Regional Development

A private investor is not interested in regional development. A private investor recoups its investment in infrastructure from revenue from the operation of that infrastructure. Duplication of infrastructure does not contribute to regional development. Introduction In 2015 the European Commission caused a buzz in the State aid community when it decided that investment aid granted to a small Polish airport […]
02. Nov 2021
State Aid Uncovered by Phedon Nicolaides

Market Economy Operator

Comparing prices charged by different airports is not a suitable method for detecting the existence of selective advantages. Introduction Airports enter into complex agreements with airlines. When airports are in public ownership or operate under a mandate by the state, their agreements with airlines may contain State aid. It is, however, very difficult to detect State aid in these agreements […]
17. Aug 2021
State Aid Uncovered by Phedon Nicolaides

The Problem of Multiple Awards of Aid to the Undertaking and to the Same Group

Multiple awards of aid to the same undertaking are allowed as long as they cover different costs. Multiple awards of aid to the same group are allowed as long as aid does not leak from one undertaking in the group to another. Introduction In the first half of 2021, the General Court ruled in ten cases of appeal lodged by […]
06. Jul 2021
State Aid Uncovered by Phedon Nicolaides

Disentangling the Impact of Covid-19 from other Business Problems

State aid may only compensate for the direct damage caused by covid-19. Introduction Aid that compensates for damage caused by natural disasters or exceptional occurrences is declared by Article 107(2)(b) TFEU to be compatible with the internal market. That is why Article 1(4)(c) of the GBER does not exclude, as is normally the practice, undertakings in difficulty from schemes that […]
22. Jun 2021
State Aid Uncovered by Phedon Nicolaides

Is State Aid for Locally Established Undertakings Compatible with the Internal Market?

Limitation of State aid to companies which have a durable link with the local economy can be compatible with the internal market. Introduction By prohibiting barriers to free movement and establishment in the internal market, the EU seeks to make the choice of location of a company largely irrelevant. All companies should be treated the same regardless of where they […]
15. Jun 2021
State Aid Uncovered by Phedon Nicolaides

State Aid to Group of Companies

In assessing the compatibility of State aid with the internal market, the Commission must also consider previous awards to a legally distinct but related company. In assessing the need for rescue/restructuring aid, the Commission must also consider whether the recipient is a member of a group that can provide internal funding. Introduction Paragraph 11 of the Commission’s Notice on the […]
27. Oct 2020
State Aid Uncovered by Phedon Nicolaides

The Common European Interest and the Environmental Impact of State Aid: The Case of Nuclear Power

I am grateful to Peter Staviczky for comments on an earlier version. The possible negative impact of State aid on the environmental is taken into account when the aid measure violates directly the relevant EU law. The Commission protects the interests of other Member States by ensuring that the negative effects of State aid are kept to the minimum possible. […]
14. Apr 2020
State Aid Uncovered by Phedon Nicolaides

Errors in State aid Procedures Need not Result in Annulment of a Commission Decision

Interested parties have a right to know how the compatibility of aid with the internal market is assessed. Temporary Framework developments As of 13 April 2020, the European Commission had authorised 51 measures adopted by 23 Member States. According to the statement of the Eurozone finance ministers of 9 April 2020, Member States had provided liquidity in the form of […]