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 make good the damage from natural disasters.

Since the outbreak of the pandemic, the European Commission has authorised about 67 schemes and individual measures to compensate undertakings for losses they have suffered as a result of the covid-19 related closures. The air transport sector has been hit particularly hard with the collapse of travel and tourism. About half of those measures provided support to airlines and airport operators.

In these cases damage is quantified by measuring the loss of revenue. The loss is determined by comparing revenue earned during the pandemic and revenue during a reference period. The reference period is a certain period before the pandemic during which normal transactions took place. But what happens when in the period before the pandemic an undertaking was already experiencing financial difficulties some of which possibly continued after the outbreak of the pandemic? It is obvious that the two sources of problems must be separated in order to calculate the damage that is caused directly by the pandemic.

In its judgment of 9 June 2021, in case T‑665/20, Ryanair v European Commission, the General Court examined whether the Commission had shown clearly the damage caused by covid-19 to the German airline Condor and the damage caused by other commercial difficulties encountered by the airline in 2019 and concluded that the Commission did not provide sufficient information.[1]

Ryanair applied for annulment of Commission Decision SA.56867 concerning compensation granted by Germany to Condor for the damage it suffered from cancellation of flights as a result of the covid-19 pandemic.

Condor’s problems started before the pandemic. It was owned by Thomas Cook Group which went bankrupt in September 2019. Soon afterwards Condor also entered into insolvency proceedings. Germany then granted Condor a rescue loan of EUR 380 million backed by a state guarantee. In April 2020, Germany notified the Commission of another award of individual aid to Condor in the form of two loans which it guaranteed with subsidised interest rates. This was the compensation for the damage caused by flight cancellations, which was approved by the Commission on the basis of Article 107(2)(b) TFEU.

As the second largest airline in Germany operating at 14 German airports, Ryanair argued that the aid harmed it and distorted competition.

The General Court considered that the appeal of Ryanair was admissible on the grounds that, by not opening the formal investigation procedure, the Commission deprived Ryanair of the opportunity to put forth its views as an “interested party”. Therefore, the crucial question was whether the Commission should have had serious doubts as to the compatibility of the aid with the internal market.

In this case the Commission was faced with the difficult task of differentiating between three possible causes of damage: the initial financial problems of Condor, the effect of the downturn in air travel caused by the pandemic and the loss of income from flight cancellations as a result of travel restrictions.

Normally, damage is calculated by comparing the actual performance of a company immediately after the exceptional occurrence with the performance in a different but comparable period. Since before the outbreak of the pandemic, Condor was not doing well, it must have not been easy for the Commission to identify the appropriate comparable period or the length of such a period.

Ryanair claimed that the Commission did not explain how the compensation of Condor was proportional to the direct damage from covid-19.

The principles on damage compensation

The General Court, first, recalled that “(42) under Article 107(2)(b) TFEU, which constitutes the legal basis of the contested decision, aid to make good the damage caused by natural disasters or exceptional occurrences is compatible with the internal market. Since this is an exception to the general principle, stated in Article 107(1) TFEU, that State aid is incompatible with the common market, Article 107(2)(b) TFEU must be interpreted narrowly. Therefore, only economic damage caused by natural disasters or exceptional occurrences may be compensated for under that provision. There must be a direct link between the damage caused by the exceptional occurrence and the State aid and as precise an assessment as possible must be made of the damage suffered”.

Then the Court added that “(43) the Commission must, subsequently, examine whether or not the aid measures at issue are of a kind as to be useful in the making good of damage caused by exceptional occurrences and ban general measures unconnected with the damage allegedly caused by such occurrences […] The Member State concerned must also limit the amount of the compensation to what is necessary to make good the damage suffered by the beneficiaries of the measure at issue.”

“(44) It follows that aid likely to exceed the damage suffered as a direct result of the occurrence at issue is not covered by Article 107(2)(b) TFEU”.

“(45) Thus, the occurrence giving rise to the damage, as defined in the contested decision, must be the determining cause of the damage which the aid at issue is intended to remedy and must be directly responsible for causing it. A direct link will only exist where the damage is the direct consequence of the occurrence in question without being dependent on the interposition of other causes.”

What damage?

Covid-19 has had two related but different kinds of impact on air travel both of which resulted in loss of revenue: reduction in the number of passengers over the whole of the pandemic period and travel restrictions during certain lengths of time in the pandemic. The relevant damage had to be identified in the objective of the measure as designed by the German authorities.

This is what the General Court examined next. “(46) In the present case, […] the objective of the aid at issue is to compensate Condor for ‘the direct damage suffered due to the cancellation or re-scheduling of its flights as a result of the imposition of travel restrictions linked to the COVID‑19 outbreak, and in particular the lockdown measures’. Paragraph 84 of the contested decision expressly confirms that objective of the aid at issue.”

“(48) The Commission also explains that the method used in the contested decision to estimate the damage at issue does not include ‘other sources of damage’, ‘apart from travel restrictions’.”

“(49) It is therefore clear that, […], the aid measure at issue is intended to compensate Condor for the damage directly caused by the cancellation and rescheduling of its flights as a result of the travel restrictions imposed in the context of the COVID‑19 pandemic, and not for any other damage more generally linked to that pandemic.”

“(50) Accordingly, […], it is necessary to examine whether, in the contested decision, the Commission set out to the requisite legal standard the reasons which led it to consider, inter alia, that the additional costs incurred by Condor as a result of the extension of the insolvency proceedings, to which the applicant refers, were directly caused by the cancellation and rescheduling of Condor’s flights as a result of the travel restrictions imposed in the context of COVID‑19 pandemic.”

“(51) It is for the Commission, […], to ascertain whether such a causal link exists.”

Amount of damage and “additional” costs

The next step was to calculate the amount of the direct damage. “(52) In the present case, in order to assess the amount of the damage which the aid measure at issue seeks to make good, the Commission relied, in essence, on the difference between the forecasts of profits before taxes (‘EBT’) for the period from March to December 2020, made before and after the announcement of travel restrictions and lockdown measures. That difference was assessed at EUR 259.7 million. In addition, the Commission considered that it was ‘legitimate’ to add to that amount additional costs incurred by Condor due to the extension of the latter’s insolvency proceedings, which were not foreseeable when the EBT forecast after the COVID‑19 pandemic had been made (paragraph 79 of the contested decision). The amount of those additional costs was assessed at EUR 17 million. The total amount of the damage for which Condor was deemed to be compensated was thus increased to EUR 276.7 million.”

“(53) The origin of the additional costs was explained in paragraphs 18 to 21 of the contested decision, from which it is apparent, in essence, that, since September 2019, that is to say, well before the travel restrictions due to the COVID‑19 pandemic were imposed, Condor had been in insolvency proceedings and that the restructuring plan drawn up in the context of those proceedings provided, inter alia, for its sale to a new investor. However, that sale was aborted when that investor announced its decision to withdraw from the proposed transaction towards the end of March 2020. According to paragraph 21 of the contested decision, the ‘failure of sales efforts will result in a prolonged insolvency procedure’, which generates the additional costs, estimated at EUR 17 million.”

“(54) It appears from the passages of the contested decision cited above that the additional costs in question result from the failure of the efforts to sell Condor. The consequence of that failure was that the insolvency proceedings, which had been ongoing since September 2019, could not be closed according to the original schedule, but had to be extended, which resulted in additional costs associated with those proceedings.”

“(55) However, the contested decision does not explain how the additional costs incurred in connection with the extension of Condor’s insolvency proceedings were directly caused by the cancellation or rescheduling of its flights as a result of the travel restrictions imposed in the context of the COVID‑19 pandemic.”

“(56) First, it must be pointed out that the Commission merely stated, in paragraph 79 of the contested decision, that it considered it ‘legitimate’ to add the additional costs incurred as a result of the extension of Condor’s insolvency proceedings to the damage claimed, since they were not foreseeable at the time when the EBT forecast after the outbreak of COVID‑19 pandemic had been made. However, the fact that those costs were or were not foreseeable at that time does not demonstrate that they were directly caused by the cancellation and rescheduling of Condor’s flights as a result of the travel restrictions imposed in the context of the COVID‑19 pandemic. Similarly, it is not sufficient to state, in the contested decision, that it is ‘legitimate’ to add those costs, without explaining, in a sufficiently clear and precise manner, the reasons why the Commission found that the decisive cause of those costs was the cancellation and rescheduling of flights mentioned above.”

“(57) Second, the contested decision also fails to explain the reason for the failure of Condor’s sale. There is nothing in the contested decision to indicate that that sale was aborted due to the cancellation and rescheduling of Condor’s flights as a result of the travel restrictions imposed in the context of the COVID‑19 pandemic.”

“(58) Third, […] the insolvency proceedings, which were initiated in September 2019, were started because of the financial difficulties faced by Condor following the liquidation of its parent company, and not because of the difficulties associated with the COVID‑19 pandemic. Those proceedings and the associated costs therefore arose before the occurrence of that pandemic. Accordingly, it was incumbent on the Commission to examine with particular care whether the cancellation and rescheduling of Condor’s flights as a result of the travel restrictions imposed in the context of the COVID‑19 pandemic were in fact the decisive cause of the additional costs incurred by Condor as a result of the extension of the insolvency proceedings, and to set out the reasons for its decision on that point to the requisite legal standard.”

“(60) Fourth, the Commission also failed to explain, in the contested decision, how the additional costs arising from the extension of the insolvency proceedings were assessed or what type of costs were involved. Furthermore, the Commission did not indicate whether all or only a part of those costs were considered to be directly caused by the cancellation and rescheduling of Condor’s flights.”

Suspended enforcement of annulment

On the basis of the above reasoning, the General Court annulled the contested Commission decision. However, like in other recent cases in which Ryanair was successful in appealing against a Commission decision, the General Court suspended for two months the effect of its judgment.

“(71) In the present case, the Court considers that there are overriding considerations of legal certainty justifying the limitation of the temporal effects of the annulment of the contested decision. First, the immediate calling into question of the receipt of the sums of money provided for by the aid measure at issue would have harmful consequences for the German economy in an economic and social context already marked by the adverse effects of the COVID‑19 pandemic. Second, account must be taken of the fact that the cause of the annulment of the contested decision is the inadequacy of its reasoning.

“(73) For those reasons, the effects of the annulment of the contested decision are to be suspended pending the adoption of a new decision by the Commission. Having regard to the speed with which the Commission acted following the pre-notification and notification of the measure at issue, those effects are to be suspended for a period of no more than two months from the date of delivery of the present judgment if the Commission decides to adopt such a new decision under Article 108(3) TFEU, and for a reasonable further period if the Commission decides to initiate the procedure under Article 108(2)”.


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

CURIA – Documents (europa.eu)


Photo by Jan Rosolino on Unsplash

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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 presently holds positions at the College of Europe and the University of Maastricht. 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.

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