State Aid May be Limited to Undertakings with Close Links with the National Economy (Part I)

State aid may be used to compensate airlines licensed by domestic authorities for losses incurred as a result of national travel restrictions.

Introduction

The European Commission acted swiftly to adopt a fairly accommodating and wide-ranging “Temporary Framework” to regulate State aid for the purposes of counter-acting the impact of covid-19. The Temporary Framework was welcomed by both Member States and businesses. However, soon afterwards it became clear that the vast amounts of State aid granted on the basis of the Temporary Framework were bound to cause controversy.

Indeed, barely a year later, the General Court delivered two judgments on cases brought by Ryanair against Swedish and French measures for the support of their airlines. Both judgments were delivered on 17 February 2021 and both rejected Ryanair’s applications for annulment of the corresponding Commission decisions authorising the aid. The judgments were in case T‑238/20, Ryanair v Commission[1] concerning the Swedish measure SA.56812 and T-259/20, Ryanair v Commission[2] concerning the French measure SA.56765. The legal basis for the aid in the Swedish case was Article 107(3)(b), while in the French case it was Article 107(2)(b).

The judgments are important. They are the very first to consider covid-19 related aid and the 2020 Temporary Framework. More significantly, they interpret the appropriateness and proportionality of aid granted on the basis of Articles 107(2)(b) and 107(3)(b). Past judgments concerning Article 107(2)(b) focused largely on the nature of the alleged exceptional occurrence and on the link between the exceptional occurrence and the damage incurred, while judgments concerning Article 107(3)(b) in the context of the 2008 financial crisis dealt mostly with the notion of “serious disturbance” and the extent of the discretion of the Commission. The two judgments also examined whether aid could be limited to airlines licensed in Sweden or France without violating the principle of non-discrimination.

It is reasonable for Member States to want to limit their aid to undertakings which are linked to or operate in their territories. But at the same time, they may not discriminate against undertakings from other Member States. The judgments provide some guidance in this respect, but as will be explained, the reasoning of the General Court is weak. It ignores other possible means by which the two countries could have delivered the aid, by addressing the damage and the serious economic disturbance more directly and causing less distortion of competition.

Because this article deals with two judgments, it is unavoidably long and for this reason it is divided in two parts. Part I, which is published this week, reviews the judgment in case T‑238/20, Ryanair v Commission (SA.56812). Part II will be published next week and will review the judgment in case T-259/20, Ryanair v Commission (SA.56765).

Part I: T‑238/20, Ryanair v Commission (SA.56812) [Sweden][3]

The Swedish measure provided guarantees for loans taken by airlines that were either holding licences in Sweden or carrying out their main business in Sweden.

Ryanair put forth four pleas. First, it alleged infringement of the principles of non-discrimination on grounds of nationality and of free movement of services. Second, it contended that the Commission failed to weigh the beneficial effects of the aid against its adverse effects on trade. Third, it argued that its procedural rights under Article 108(2) TFEU were violated. Fourth, it claimed that the Commission failed to provide reasons for its decision.

Infringement of the principles of non-discrimination and the free provision of services

The General Court began its analysis by interpreting the concepts of licence and registration of airlines. “(25) Firstly, the term ‘Swedish licence’ refers to a licence issued under Article 3 of Regulation No 1008/2008 by the Swedish authorities.” “(26) Secondly, under Article 2(26) of Regulation No 1008/2008, the ‘principal place of business’ is defined as the head office or registered office of an EU air carrier in the Member […] The notion of a principal place of business, in practice, corresponds to the registered office of that carrier […] It is therefore true, as the applicant maintains, that for a given legal entity that regulation permits the establishment of only one principal place of business and, consequently, the issuing of only one licence by the authorities of the Member State on whose territory that principal place of business is located. It is nevertheless open to an airline, […] to acquire a number of licences by creating a number of separate legal entities, for example by setting up subsidiaries.” “(27) Thirdly, […] one of the eligibility criteria for the aid scheme at issue is the holding of a Swedish licence as at 1 January 2020, that is to say, before the Covid-19 pandemic was recognised.”

Then the General Court recalled that State aid may not violate any other EU principles. “(29) It is clear from the general scheme of the Treaty that the procedure under Article 108 TFEU must never produce a result which is contrary to the specific provisions of the Treaty. Therefore, the Commission cannot declare State aid, certain conditions of which contravene other provisions of the Treaty, to be compatible with the internal market. Similarly, State aid, certain conditions of which contravene the general principles of EU law, such as the principle of equal treatment, cannot be declared by the Commission to be compatible with the internal market”.

A question often asked by public authorities is “how can I ensure that aid goes only to companies that contribute to the national economy?” Since discrimination on the basis of nationality of ownership or place of registration is not allowed, it is very important for Member States to design their measures explicitly to address a market failure in their economy or territory. In this way, they can objectively and legally limit the aid to undertakings that have a link with the country and can contribute to remedying the market failure. Any restrictions on eligibility must be objectively justified by the purpose of the aid. This is easy for some kinds of aid, such as regional investment aid which may be granted only for investments in eligible regions, but tricky for other kinds such as aid for risk finance or R&D. For this kind of aid, Member States may not go beyond requiring aid applicants to have local presence. But the form of the local presence must be left to undertakings to decide [e.g. representative office, fully capitalised subsidiary, etc].

In this connection, the General Court went on to note that “(30) in the present case, it has to be said that one of the eligibility criteria, that of holding a Swedish licence, results in a difference in treatment for airlines whose principal place of business is in Sweden, so as to be able to benefit from a loan guaranteed by the State, and for those whose principal place of business is in another Member State and which operate in Sweden, to Sweden and from Sweden under the freedom to provide services and the freedom of establishment, which are not so entitled.”

“(31) Even if, […] that difference in treatment may amount to discrimination within the meaning of the first paragraph of Article 18 TFEU, it should be made clear that, under that provision, any discrimination on grounds of nationality is prohibited within the scope of application of the Treaties ‘without prejudice to any special provisions contained therein’. Therefore, it is important to ascertain whether that difference in treatment is permitted under Article 107(3)(b) TFEU, which is the legal basis for the contested decision. That examination requires, first, that the objective of the aid scheme at issue satisfies the requirements of that provision and, secondly, that the conditions for granting the aid do not go beyond what is necessary to achieve that objective.” [The General Court did not cite any case law on this point.]

“(32) That scheme thus aims to remedy the serious disturbance in the Swedish economy caused by the Covid-19 pandemic, […] which corresponds to one of the situations covered by Article 107(3)(b) TFEU, by securing Sweden’s connectivity. The aid scheme at issue, […] ensures that airlines ‘with a Swedish license that are important to secure connectivity in Sweden’ have sufficient liquidity and those airlines ‘that have a link with Sweden and play a role in securing the connectivity of Sweden’ are indeed defined by the fact that they hold a Swedish licence, but also, as the Commission and the Kingdom of Sweden point out, by the fact that they operate regular flights in Sweden, to Sweden and from Sweden.”

In the paragraph above, the Court quoted the text of paragraph 43 of the Commission’s decision. The aim of the limitation of aid to airlines licensed or having their principal place of business in Sweden was to ensure a link with the economy for the purposes of ensuring connectivity.

But there is a logical weakness in this approach. A contribution to connectivity can also be made by an airline not licensed or having its principal place of business in Sweden. Of course, if the aid measure were opened to any airline flying to/from or within Sweden, there would be a problem of how the guaranteed loans supported only flights to/from or within Sweden. But, as I will explain below, that is a design problem, not a legal problem.

The General Court ignored that logical weakness and went on to find that, “(33) since the existence both of a serious disturbance in the Swedish economy as a result of the Covid-19 pandemic and of the significant adverse effects it has had on aviation in Sweden, and therefore on air services in the territory of that Member State, has been established to the requisite legal standard in the contested decision, the objective of the aid scheme at issue satisfies the conditions laid down in Article 107(3)(b) TFEU.”

With respect to the requirement that the aid does not go beyond what is necessary to achieve the objective of the aid scheme, the Court made the following observations.

The Court first referred to the provisions of the Temporary Framework on guarantees and agreed with Sweden that “(37) the aid scheme at issue intended to introduce an incentive measure aimed at the banking sector, in line with paragraph 5 of the Temporary Framework, by issuing a State guarantee for new loans”.

Ryanair counter-argued that the Commission decision had not indicated that it was necessary to grant the aid only to those airlines holding a Swedish licence. The Court rejected that argument.

“(40) First, with regard to the appropriateness of the aid scheme at issue, bearing in mind the fact that that scheme takes the form of State guarantees which make it possible for banking institutions to grant loans for a maximum period of six years, it is normal for the Member State concerned to seek to ensure that the airlines eligible for the guarantee have a stable presence, in order for them to be present on Swedish territory to honour the loans granted, so that the State guarantee is used as little as possible. The criterion of holding a Swedish licence, in so far as it requires the principal place of business of the airlines to be on Swedish territory, ensures at least the administrative and financial stability of the presence of those airlines, so that the authorities of the Member State granting the aid may control the manner in which that aid is used by the recipients, which would not have been the case if the Kingdom of Sweden had adopted another criterion allowing the eligibility of other airlines operating on Swedish territory as mere service providers, like the applicant, which service provision, by definition, could cease at very short notice, if not immediately.”

The reasoning of the Court in paragraph 40 is problematic. First, as a matter of fact, Ryanair is in a better financial health than any Swedish airline. Second, there is no obvious or logical connection between presence in Sweden and ability to honour the loans. Third, there is also no obvious or logical connection between holding a Swedish licence and administrative and financial stability. Fourth, I hasten to acknowledge that it was in Sweden’s interests to ensure that the guaranteed loans supported flights to/from or within Sweden and the continuity of flight services in its territory. But it seems to me that that legitimate objective could be secured by imposing an obligation on beneficiary airlines, first, to show how the loans were used exclusively to support Swedish-related services and, second, to require them to maintain their services for the duration of the pandemic. Of course, these requirement could have increased the administrative complexity and cost of the measure, but EU law does not allow Member States to discriminate simply because it is administratively convenient or cheaper to do so.

“(41) Secondly, those conditions for granting the aid reflect the possibility and the obligation for the Swedish authorities to carry out financial checks of the recipients. Such a possibility and such an obligation exist only for those airlines which hold a Swedish licence, because the Swedish authorities alone are competent to monitor the financial situation of those airlines in accordance with the obligations arising, in particular, under Article 5 and Article 8(2) of Regulation No 1008/2008, as was stated in paragraph 43 of the contested decision. However, the Swedish authorities have no power under that regulation to monitor the financial situation of airlines which do not have a Swedish licence.”

The reasoning in this paragraph conflates the responsibilities of Sweden as an air transport regulator and as an aid grantor. For the latter role, the monitoring by the lenders or through regularly submitted certified accounts could have been sufficient. After all, this is how the correct use of aid is ensured across the EU. The Commission, in decision 2010/2013 concerning risk finance, prohibited a German measure limiting aid only to investors headquartered in Germany, which is equivalent to the place where airlines are licensed. The German authorities claimed that the limitation was necessary in order for them to be able to monitor the financial situation of the investors. The Commission argued that the financial situation of investors established in other Member States could be verified through i) voluntary submissions, ii) independent audits, or iii) information obtained from other regulators in the context of mutual assistance which is very well possible in EU-wide networks of regulators.

“(42) Thirdly, while it is true that the Court considered that, in practice, the concept of principal place of business corresponded to that of a registered office (see paragraph 26 above) and that a change of registered office could be made relatively quickly, it should not be forgotten that Article 2(26) of Regulation No 1008/2008 contains other details, in particular in relation to the fact that continued airworthiness management must be carried out from the location of the principal place of business, that is to say, in the present case, in Sweden. […] Those provisions create reciprocal regulatory obligations between airlines holding a Swedish licence and the Swedish authorities, and thus a specific, stable link between them that adequately satisfies the conditions laid down in Article 107(3)(b) TFEU, which require that the aid addresses a serious disturbance in the economy of the Member State concerned.”

Once more, the Court conflates regulatory functions with aid-granting responsibility.

Nonetheless, the Court concluded that “(44) by limiting eligibility for the aid to only those airlines which hold a Swedish licence, to the exclusion of those operating charter flights, as a result of the stable reciprocal links which tie them to the Swedish economy, the aid scheme at issue is appropriate for achieving the objective of remedying the serious disturbance in the economy of that Member State.”

Then the Court examined whether the measure was proportional. It, first, “(45) noted that, in order to secure Sweden’s connectivity, the double requirement of a Swedish licence and air services in Swedish territory through regular flights is the most appropriate for guaranteeing that the presence of an airline on that territory is permanent, by ensuring that, as a result of that licence, the principal place of business of that airline will be in that territory and that it will intend to stay there, bearing in mind the regular air routes mentioned above.”

Please note that there is no requirement in EU law that an airline must carry out business or substantial business in the country of its registration. Article 2(26) of Regulation 1008/2008 states: “‘principal place of business’ means the head office or registered office of a Community air carrier in the Member State within which the principal financial functions and operational control, including continued airworthiness management, of the Community air carrier are exercised”. In other words, the place of registration is where control is exercised, not where an airline mostly operates. Ryanair, for example, carries out the bulk of its operations outside Ireland which is the country of its registration.

But the Court also made the following important observation. “(46) The airlines which hold a Swedish licence were responsible for 98% of the domestic passenger traffic and 84% of the domestic freight transport in 2019, which is a key piece of information bearing in mind the size and geography of that Member State. With regard to the share of passenger air traffic within the European Union going to Sweden and coming from Sweden, in 2019, 49% of that was carried out by operators holding a Swedish licence.”

I think that these statistics show that had the measure been properly designed to require beneficiaries to demonstrate how the loans supported Swedish services and connectivity in Sweden, it would have been as effective without having to rely on the discriminatory condition of holding a Swedish licence. For this reason, this condition of eligibility violates the principle of proportionality, as there can be less distortionary means of ensuring stability of service. “The conditions for granting the aid” did “go beyond what is necessary to achieve that objective”.

In this connection, however, the Court stated that “(53) according to the case-law, it is not for the Commission to make a decision in the abstract on every alternative measure conceivable since, although the Member State concerned must set out in detail the reasons for adopting the aid scheme at issue, in particular in relation to the eligibility criteria used, it is not required to prove, positively, that no other conceivable measure, which by definition would be hypothetical, could better achieve the intended objective. Although that Member State is not under any such obligation, the applicant is not entitled to ask the Court to require the Commission to take the place of the national authorities in that task of normative prospecting in order to examine every alternative measure possible”.

Indeed, the case law does not require proof that no other less restrictive measure exists. But the Commission is obliged to ask Member States to demonstrate that the eligibility criteria are appropriate for the objectives of the aid measure in question. What is the link between holding a Swedish licence and ensuring continuity of service?

The Court concluded that “(56) the Commission therefore approved an aid scheme which actually aims to remedy the serious disturbance in the economy of a Member State and which, under its conditions for granting the aid, does not go beyond what was necessary to achieve the objective of that scheme.” “(57) The objective of the aid scheme at issue satisfies the requirements of the derogation laid down in Article 107(3)(b) TFEU and that the conditions for granting the aid do not go beyond what is necessary to achieve that objective.”

Restriction of the free provision of services?

The General Court also examined and rejected the claim of Ryanair that the aid measure constituted a barrier to free provision of services.

The Court observed that “(64) although it is true that, owing to the definition of the scope of the aid scheme at issue, the applicant is deprived of access to loans which benefit from the State guarantee granted by the Kingdom of Sweden, it does not demonstrate how that exclusion discourages it from providing services from Sweden and to Sweden, especially when it is apparent from the documents in the file that, independently of the aid scheme at issue and for purely commercial reasons, the applicant progressively reduced its activity on the Swedish market, both in respect of the destinations served and the number of aircraft present […] In particular, the applicant fails to identify the elements of fact or law which cause the aid scheme at issue to produce restrictive effects that go beyond those which trigger the prohibition in Article 107(1) TFEU, but which, […] are nevertheless necessary and proportionate to remedy the serious disturbance in the Swedish economy caused by the Covid-19 pandemic, in accordance with the requirements of Article 107(3)(b) TFEU.”

Infringement of the obligation to weigh the beneficial effects of the aid against its adverse effects on trading conditions and the maintenance of undistorted competition

The General Court referred to the text of Article 107(3)(b) and the differences from the text of Article 107(3)(c). “(67) Under Article 107(3)(b) TFEU, ‘the following may be considered to be compatible with the internal market: […] aid to […] remedy a serious disturbance in the economy of a Member State’. It follows from the wording of that provision that its authors considered that it was in the interests of the European Union as a whole that one or other of its Member States be able to overcome a major or possibly even an existential crisis which could only have serious consequences for the economy of all or some of the other Member States and therefore for the European Union as a whole. That textual interpretation of the wording of Article 107(3)(b) TFEU is confirmed by comparing it with Article 107(3)(c) TFEU concerning ‘aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’, in so far as the wording of the latter provision contains a condition relating to proof that there is no effect on trading conditions to an extent that is contrary to the common interest, which is not found in Article 107(3)(b) TFEU”.

“(68) Thus, in so far as the conditions laid down in Article 107(3)(b) TFEU are fulfilled, that is to say, in the present case, that the Member State concerned is indeed confronted with a serious disturbance in its economy and that the aid measures adopted to remedy that disturbance are, first, necessary for that purpose and, secondly, appropriate and proportionate, those measures are presumed to be adopted in the interests of the European Union, so that that provision does not require the Commission to weigh the beneficial effects of the aid against its adverse effects on trading conditions and the maintenance of undistorted competition, contrary to what is laid down in Article 107(3)(c) TFEU. In other words, such a balancing exercise would have no raison d’être in the context of Article 107(3)(b) TFEU, as its result is presumed to be positive. Indeed, the fact that a Member State manages to remedy a serious disturbance in its economy can only benefit the European Union in general and the internal market in particular.”

The Court also pointed out that a balancing test “(70) obligation does not appear in the Temporary Framework.”

Infringement of the duty to state reasons

The Court rejected the claim of Ryanair that the Commission failed to explain its decision. It cited several paragraphs from the Commission decision.

Infringement of the procedural rights under Article 108(2) TFEU

Ryanair claimed that its procedural rights were violated by the Commission’s failure to initiate a formal investigation procedure. The Court found the claim to be groundless as it was not based on any argumentation that was independent of previous pleas.

Since the General Court rejected all four of Ryanair’s pleas, it dismissed in its entirety its application for annulment of Commission decision SA.56812.


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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=237881&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=612039

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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=237882&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=612190

[3] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition/state_aid/cases1/202016/285407_2147916_112_2.pdf


Photo by Fotis Christopoulos 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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