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State aid and the aviation sector

10 July 2020

Few businesses have been affected as severely by the COVID-19 pandemic as airports and airlines.  In this article, we look into recent state aid approvals in the sector and provide an update on Ryanair's challenges. 

The aviation sector has faced significant challenges during the COVID-19 pandemic resulting from having an intrinsically high cost base and suffering an almost total interruption to services.The sector has traditionally been one of high risk in terms of State aid scrutiny and challenge anyway, which has only been intensified by the current pandemic. 

In a previous article we discussed the record breaking aid being provided to the bolster the aviation sector. Since our article, there has since been a number of substantial rescue packages announced, including recapitalisation packages worth €6 billion for Lufthansa and €250 million for airBaltic and a €3.4 billion package to KLM. Our article also looked into statements by Ryainair CEO Michael O'Leary that he would use competition law to challenge these subsidies.  Since our article, he has stayed true to his word and launched actions. 

Lufthansa benefits from €6 billion recapitalisation aid 

On 25 June 2020, the European Commission approved a German notification for a recapitalisation package for Deutsche Lufthansa AG ("DLH", the parent company of Lufthansa Group). The measure was approved under the State aid Temporary Framework adopted by the Commission on 19 March 2020,.

Executive Vice-President of the Commission Margrethe Vestager stated: "This substantial amount of aid will help Lufthansa weather the current coronavirus crisis, which has hit the airline sector particularly hard". 

The approval comes with a set of conditions, including to ensure the State is sufficiently remunerated as well as further measures to limit distortions of competition. For example, Lufthansa has committed to relinquishing up to 24 of its take-off slots per day and related assets at its Frankfurt and Munich hub airports, in order to give competing carriers the opportunity to enter those markets, ensure fair prices and increase choice for European consumers. Further, until the State has exited the company in full, DLH is subject to bans on dividends and share buybacks and, until at least 75% of the recapitalisation is redeemed, there are strict limitations to management remuneration including a ban on bonus payments.

airBaltic benefits from €250 million recapitalisation aid

On 3 July 2020, the Commission also approved a €250 million Latvian measure to recapitalise airBaltic to "weather the crisis". As the largest airline in Latvia, airBaltic's main shareholder is the Latvian State, which currently holds c. 80% stake in the company. After the recapitalisation, which will be carried in July 2020, this will increase to above 96%. The approval also comes with a set of conditions, similar to those detailed above for Lufthansa. 

€3.4 billion support for KLM

On 26 June 2020, Dutch airline KLM secured a €3.4 billion support from the Dutch government to help it survive the COVID-19 crisis.  The measure comprises of a combination of loans (approved via a notification under Article 107(3)(b) of the Treaty on the Functioning of the European Union to remedy a "serious disturbance" to a Member State's economy), and guarantees in line with the Temporary Framework

Dutch Minister for Finance Wopke Hoekstra stated “this package is necessary to ensure that KLM and Air France can continue to fulfil the important role they play in our economies”. 

In return for the support, there are a number of conditions. It is reported that the airline must:

  • cut the number of night flights by 20%;
  • take steps to encourage rail travel and half CO2 emissions by 50% per passenger by 2030;
  • halt dividend payments and impose a restructuring plan that will involve some redundancies and pay cuts;
  • not pay out any dividends to shareholders or bonuses to management until the state’s investment is repaid in full; and
  • implement further cost-cutting measures worth 15%.

The KLM deal takes the total State aid measures to continental airlines up to nearly €25 billion. In our previous article, we consider the UK government's position on public funding for airlines and airports. We also discuss environmental considerations in the form of conditions imposed on rescue packages similar to KLM's requirement to cut CO2 emissions. 

Ryanair launches State aid complaints

On 12 May 2020, O'Leary pledged to use State aid law to overturn multiple awards of State aid, pledging that "by the end of the summer, Ryanair would have filed between 10 and 15 cases with the Court of Justice".  

MLex report that Ryanair has lodged two challenges against the EU's approval of Covid-19 loan guarantees given to Scandinavian Airlines by Denmark and Sweden. The guarantees to SAS, each worth €137 million, were approved by the European Commission as compensation for damages arising in exceptional circumstances. A further appeal from Ryanair against the EU’s approval of a €600 million loan guarantee to Finnair from the Finnish government is expected to be filed in the coming days. 

Ryanair is also understood to be planning a second front in its regulatory campaign against Lufthansa by preparing to file a cartel complaint against the German airline’s subsidiary Air Dolomiti (again reported by MLex).  In a letter to the European Commission, Ryanair has accused rival German airline Lufthansa of a "price-fixing cartel", involving subsidies being used to reduce the price of its flights, to the detriment of its competitors, including Ryanair, EasyJet and British Airways. O’Leary also accused the German government of using “the pretext of Covid-19” to prop up Lufthansa and has vowed to challenge the aid in the European Court of Justice.

Such rhetoric has also been used by Ryanair's Michael O'Leary in respect of State aid to KLM which was described as "subsidy doping".  Michael O'Leary stated this is  "bad news for competition and consumer interests as it will further delay the necessary reforms at the bloated Air France-KLM.  For this €200 KLM subsidy, every Dutch man, woman and child could buy 5 flights with Ryanair, instead of paying for the failure and inefficiency at Air France-KLM.  O'Leary claims the deal will further reduce competition and consumer choice in the Dutch and French markets. 

On 3 July 2020, Ryanair also declared its intention to challenge an investment by the Portuguese government in the airline TAP, arguing that it is “illegal state aid”. This follows an announcement by the Portugese government on 2 July 2020, that it had sealed a final deal with private shareholders of TAP to increase its stake to 72.5% from 50%. Infrastructure Minister Pedro Nuno Santos told a news conference "TAP is too important for the country for us to accept the risk of letting such a company fall". 

Conclusion

The COVID-19 pandemic has had an enormous impact upon airports and airlines.  Many people will support Governments stepping in to provide financial support for carriers and the European Commission for quickly approving such measures.  Whether Ryanair's opposition is borne from principle or pragmatism, competitors have the right to seek to challenge awards of State aid which affect their business.  It is expected that the European Commission will have covered its tracks carefully when issuing the relevant approvals however, hence provided the Commission has respected the law, Ryanair's challenges may prove ultimately unsuccessful.  Ryanair's position as an aggressive would-be challenger every time probably is likely, at the very least, to focus minds on being particualry careful. 

DWF has the largest State aid law team in UK private practice as is able to draw upon market leading experts in our UK, Brussels and other international offices.  Our experience in this area includes working within the European Commission, Central Government, Local Government and with private sector bodies receiving funds. Therefore, we are on hand if it would be useful to discuss the issues raised in this Article or any other element of State aid law.  

Further Reading

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