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

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

[In case you have missed part I, you can access it here.]

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 II: T-259/20, Ryanair v Commission (SA.56765) [France][4]

The French measure, similarly to the Swedish measure, was limited to airlines licensed in France. However, it differed from the Swedish measure in two respects. First, instead of loan guarantees, it granted aid in the form of deferral of the payment of civil aviation tax and solidarity tax on airline tickets during the period from March to December 2020. Second, its purpose was to compensate airlines for losses they had incurred as a result of travel restrictions and, for this reason, it was based on Article 107(2)(b), instead of Article 107(3)(b).

Ryanair put forth the same four pleas as in the Swedish case: infringement of the principles of non-discrimination and free provision of services, violation of the principle of proportionality, infringement of its procedural rights and failure of the Commission to explain its reasoning.

Principle of non-discrimination

The General Court began be recalling the relevant case law. “(23) As provided in Article 107(2)(b) TFEU, ‘the following shall be compatible with the internal market […] (b) aid to make good the damage caused by natural disasters or exceptional occurrences’. It is clear in that regard from the case-law that that provision covers aid which is, in law, compatible with the internal market, provided that it satisfies certain objective criteria. It follows that the Commission is bound, where those criteria are satisfied, to declare such aid compatible with the internal market, and that it has no discretion in that regard.”

“(24) 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”.

The General Court found that “(26) in the present case, it is indisputable that the Covid-19 pandemic constitutes an exceptional occurrence within the meaning of Article 107(2)(b) TFEU […] There is therefore an unbroken causal link between the exceptional occurrence and the damage.”

Then the General Court proceeded to examine whether the limitation of aid to airlines holding a French licence was discriminatory, making the aid incompatible with the internal market. It followed the same line of reasoning as in the Swedish case and sought to ascertain “(32) whether that difference in treatment is permitted under Article 107(2)(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.”

“(33) With regard to the objective of the aid scheme at issue, it should be stated that, in accordance with the wording of Article 107(2)(b) TFEU, it is, in general, to make good the damage in the air transport sector resulting from the exceptional occurrence in question. Consequently, the specific purpose of the aid scheme at issue is not the overall preservation of the structure of the aviation sector, […] but rather, […] to alleviate, by the grant of a deferral, the financial burden of airlines hit hard by the travel restrictions and lockdown measures taken by the French Republic in order to deal with the Covid-19 pandemic”.

“(34) The Court considers that, […] the objective of the aid scheme at issue satisfies the conditions laid down in Article 107(2)(b) TFEU.”

“(35) With regard to ensuring that the conditions for granting the aid do not go beyond what is necessary to achieve the objective of the aid scheme at issue and to satisfy the conditions laid down in Article 107(2)(b) TFEU, the following observations should be made.”

“(37) The compensation for the damage is not made by taking the nationality of the victims of the damage as the chief factor for allocation as such, but in fact requires an institutional link with the place where the damage caused by the travel restrictions and lockdown arose, namely the principal place of business, since the criterion to be eligible for the aid scheme in question is the issuing of a French licence, which presupposes that the airline’s principal place of business is in France. […] The criterion of holding a French licence, in so far as it requires the principal place of business of the airlines to be on French 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 French Republic had adopted another criterion allowing the eligibility of other airlines operating on French territory under a licence delivered by another Member State”.

It is very unclear why and how “administrative and financial stability” is linked to the damage that airlines suffered and how French authorities could “control the manner in which that aid is used by the recipients” apart from ensuring that the aid compensated the operating losses from the lockdown. For this purpose, aid granting authorities check information on costs. This does not correspond to the place of licence.

“(38) Secondly, the conditions for granting the aid, which are in the nature of a tax measure, reflect the possibility and the obligation for the French authorities to carry out financial checks of the recipients. Such a possibility and such an obligation exist only for those airlines which hold a French licence because the French 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” […], the French authorities have no power under that regulation to monitor the financial situation of airlines which do not have a French licence.”

Once more, we see the Court conflating regulatory powers with aid-granting tasks. The problem of monitoring can be overcome with submission of certified accounts by the airlines.

“(39) Regulation No 1008/2008 […] create[s] reciprocal regulatory obligations between airlines holding a French licence and the French authorities and thus a specific, stable link between them that adequately satisfies the conditions laid down in Article 107(2)(b) TFEU, which require that the aid address the damage caused by exceptional occurrences.”

Article 107(2)(b) requires that the aid applicant demonstrates that it has suffered a loss as a result of the pandemic and the restrictions on air travel. Being licensed in France is irrelevant to proving loss. For example, a freight airline may not have suffered any significant loss as demand for certain air services has increased due to the exponential growth of online shopping. This means that that freight airline cannot be eligible for compensation since it cannot prove it suffered any loss. Since the requirement for holding a French licence does not provide proof, it only excludes potential aid recipients.

“(40) The French Republic sought, in essence, to ensure a permanent link between it and the airlines benefiting from the deferral”. “(41) By limiting eligibility for the aid only to those airlines which hold a French licence, as a result of the stable reciprocal links which tie them to the French economy, the aid scheme at issue is appropriate for achieving the objective of making good the damage caused by an exceptional occurrence within the meaning of Article 107(2)(b) TFEU.”

It is indeed reasonable for France to compensate French airlines and not airlines of other nationalities. The problem is how to do that on the basis of objective criteria. And indeed, it is possible to do so with a better designed measure. Since the aim of the measure was to compensate for losses so as to prevent bankruptcy, France could have limited eligibility to those airlines that derived a certain percentage of their income from the French market and which, as a consequence, suffered losses above a certain threshold from restrictions imposed by the French government. This establishes a direct link, as Article 107(2)(b) requires, between the pandemic and the restrictions, on the one hand, and the operating losses, on the other. Since it falls within the discretion of Member States to define the extent of the damage they want to compensate, foreign airlines whose operations in France would correspond to a small part of their overall activities would not be eligible for compensation. Interestingly, when the Court dealt with the issue of proportionality immediately below, it attached significance to the extent of airline losses in France without realising that perhaps that line of reasoning undermined the logic of limiting the aid only to airlines licensed in France. Although in practice being licensed in France probably correlates with the extent of operations of an airline in France, there is no inseparable link between the two.

Proportionality

When the Court turned its attention to the condition of proportionality, it “(43) found that, in applying the criterion of a French licence, the Member State concerned, taking into account, […] the fact that the Member States do not have unlimited resources, reserved the benefit of the aid scheme at issue to the airlines which were most severely affected by the travel restrictions and lockdown measures adopted by that Member State, which took effect, by definition, on its territory.” [This paragraph also contains data on the operations of various airlines in France.]

“(44) Those figures establish that the eligible airlines are proportionately much more severely affected than the applicant”.

So the use of actual data was possible to determine which airline would need to be compensated.

Then the Court repeated the same reasoning as in the Swedish case that it was not for the Commission to make a decision in the abstract on every alternative measure conceivable, nor were Member States required to prove that no other conceivable measure could achieve the intended objective better or more effectively. But as argued earlier, the Commission is obliged to examine the link between the eligibility criteria and the objective of the measure in order to prevent unnecessary discrimination or unnecessary distortion.

The General Court concluded that the “(49) aid scheme […] actually aims to make good the damage caused by the exceptional occurrence constituted by the onset of the Covid-19 pandemic and the travel restriction and lockdown measures adopted by the French Republic in reaction to the pandemic, and […] under its conditions for granting the aid, does not go beyond what was necessary to achieve the objective of that scheme. It must therefore be held that […], the consequences of that scheme, in that the French authorities limited its scope to airlines which hold a French licence, do not infringe the first paragraph of Article 18 TFEU solely because the scheme favours airlines which have their principal place of business on French territory.” “(50) The aid scheme at issue satisfies the requirements of the derogation laid down in Article 107(2)(b) TFEU”.

The Court went on to reject the pleas of Ryanair concerning infringement of the freedom to provide services, of the obligation of the Commission to state reasons and of Ryanair’s procedural rights, for the same reasons as in the Swedish case.


[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

4] The text of the Commission decision, in French, can be accessed at:

https://ec.europa.eu/competition/state_aid/cases1/202017/285237_2150596_52_7.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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