Vol 1 (2004) - Issue 5

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Plane Talk Aids Recovery: EU Law on State Aids to Airlines

Introduction

In the financially troubled world of aviation, recent European Commission and national court decisions have highlighted the difficulties faced by airlines seeking to navigate a safe course through the EU rules on state aid. The Commission’s (generally) tough policy, recently demonstrated with Ryanair – albeit in stark contrast with its even more recent approval of a EUR 400 million loan by the Italian Government to aid to Alitalia, which has done nothing to clarify, and plenty to obscure, EU state aid policy - comes at a time when many loss-making airlines around the world are banking on state aid to stave off financial disaster. While governments may be more than willing to give financial backing to airlines to keep them in the air, advisors to airlines in the EU should be fully aware of the peril of crossing the line into illegal state aid. The risk is the potentially fatal financial penalty of an order to refund the grants (plus interest) advanced.

A cursory glance at the press or European Commission press releases, however, shows the large amounts of government aid being approved, so the possibility of seeking government aid for rescue, restructuring or other emergency situation should not be written off. Awareness of the law on EU state aid therefore enables airlines legitimately to tap into state aid and, conversely, to be alert to the opportunities to challenge illegal grants which may be giving rival carriers an unfair competitive advantage.

Advisors to non-EU airlines should also be aware of the dangers of subsidies being used to the detriment of their EU competitors as a result of a Regulation which came into force in May this year. This now makes it possible for EU airlines to challenge US or other non- EU airlines (no longer just EU airlines) who may be damaging their business with the use of reduced fares which are funded by government subsidies.

This article will outline (1) how to assess whether grants to airlines are legal or illegal; (2) exceptions where aid is permitted; (3) procedure - the duty to notify aid to the Commission; (4) the exposure to challenges before national courts as well as the European Commission and (5) the possibility of third country airlines being ordered to pay duties if they use government subsidies to undercut EU airlines.

(1) How to assess whether grants are legal or illegal

As outlined in a previous issue of International Corporate Rescue, under EU law there are strict rules in force on the circumstances in which state aid can be granted to public and private companies. Article 87(1) EC Treaty (which applies in national law in the same way as an Act of Parliament) prohibits aid in any form whatsoever which may distort competition by favouring certain undertakings to the detriment of others. ‘Aid’ is a broad concept which covers not only a cash injection or subsidy, but other advantages such as tax exemptions including deferral of tax or other payments to state, consultancy advice, or the sale of land or property at a discount, for example - specifically in the aviation context - discounts on ground handling charges, reduced or nil rent on space on the airport complex, as well as contributions to the cost of marketing the route and the recruitment and training of local ground staff.

Whether ‘aid’ will be illegal will be determined, broadly speaking, according to the ‘market economy investor principle’ - whether or not the company would have been able to obtain the funds (or other advantage) on the same basis from private capital markets.