State aid revisited December 2001

From a legal perspective there would appear to be ways in which state aid could be granted to Europe’s airlines. But the European Commission is still holding firm to its non–interventionist policy. These issues were discussed at a seminar held by the European Aviation Club in Brussels on November 20.

John Balfour, a leading aviation lawyer at Beaumont and Co, provided an overview of the state aid position. The basic rule can be found in Article 87(1) of the Treaty of Rome:

“Save as otherwise provided by this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings … shall, insofar as it affects trade between member states, be incompatible with the common market”.

But there is what John Balfour describes as a “mandatory exemption” — “aid to make good the damage caused by natural disasters or exceptional occurrences” is compatible with the common market.

Then there are “discretionary exemptions” — “aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State”, and “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”. Such aid may therefore may be considered to be compatible with the common market providing it does not change the overall competitive position of the market.

In 1994 the Commission issued guidelines on state aids in the aviation sector.

For airlines that remain in total or partial state ownership the EC established the “market economy investor principle” (MEIP). MEIP allows the state to make a capital injection if accompanied by significant injection by private investors under the same terms. Such a capital injection would be expected to produce an expectable rate of return over a reasonable time frame. The capital injection should also take into account the general economic environment of industry. Any difference from normal market conditions for a loan (including the effect of a loan guarantee) would constitute state aid.

When permitting state aid the EC has imposed these conditions:

• A viable restructuring plan;
• A ban on airline acquisitions;
• A “one time, last time” stipulation;
• Capacity restrictions or reductions;
• A “normal” shareholder relationship between government and airline;
• No preferential behaviour on traffic rights;
• Restrictions in terms of price leadership; and
• Divestment of non–core assets.

The EC is not permitted by the Treaty of Rome to rule on ownership questions and hence has not been able to insist on privatisation. This is probably one of the basic reasons for the failure of so many airline turnaround plans.

Rescue and restructuring aid

The relative buoyancy of the airline industry in the past few years, and the “one time, last time” stance taken by the EC, has meant that there has been no state applications since August 1997. There is now , however, possible assistance in the form of rescue aid, which is not aviation–specific.

The three important definitions behind rescue aid are as follows:

• “Firm in difficulty” — a firm unable, through its own resources or with funds from shareholders or creditors, to stem losses which, without outside public intervention, will almost certainly condemn it to go out of business in the short or medium term;
• Rescue aid — temporary, one–off assistance intended to keep an ailing firm afloat for the time needed to work out a restructuring or liquidation plan (normally a maximum of six months); and
• Restructuring aid — based on plan to restore long–term viability, not for making good past losses without tackling the reasons for them. The guidelines for applying rescue aid are that it must:
• Consist of liquidity support in the form of loans or loan guarantees on commercial terms;
• Be linked to loans to be reimbursed over no more than 12 months;
• Be warranted on grounds of serious social difficulties;
• Have no unduly adverse spill–over effects;
• Be restricted to the amount needed to keep the company in business for the period of the aid; and
• The member state must within six months provide the Commission with a restructuring plan or liquidation plan.

It was under these guidelines that on October 17 that the €125m bridging loan offered to Sabena by the Belgian government was constituted as rescue aid and was approved by the Commission. The Commission affirmed that rescue aid is temporary, and is intended to keep an ailing company afloat for the time needed to work out a restructuring or liquidation plan. It is different from restructuring aid, which is only permitted once.

The EC's policy stance

Ben van Houtte, Head of Unit DG TREN at the European Commission outlined the technical actions taken by the EC since the events of September 11 (see box below), and the discusses the wider EC stance on the airline industry. This is essentially pro–consolidation, with the EC preferring to see takeovers and mergers but accepting bankruptcies.

As the central plank of its policy, the EC is continuing to seek a mandate to negotiate air service agreements with third party states on behalf of all the member states. On the assumption that the UK will sign an “open skies” agreement with the US in the first quarter of 2002, the likelihood is that the EC will receive such a mandate later on in the year.

But the fact that the EC has yet to receive such a mandate has allowed the Commission to take a swipe at member states regarding the aid packages being offered to US carriers. With no negotiating mandate, the EC has been not able to discuss with US authorities the concern that some observers have that US carriers may dump spare capacity on the North Atlantic market. The EC is seeking to apply a Code of Conduct for carriers on the North Atlantic to prevent unfair competition and is in discussions with relevant US authorities.

In its communication of October 10, the EC emphasised that the events of September 11 must not undermine Commission policy or be used as a pretext for governments to use the pretext of “exceptional measures” to grant their flag carriers financial support. If any member state were even contemplating offering aid to its flag–carrier, then the Commission had to be notified.

But then, the question arises as to whether the Commission, by allowing a relaxation of its rules on slot usage, has implicitly recognised that the September 11 impact should not just be regarded as a four day impact (when US airspace was closed) but as a longer term disaster.

As the full realisation of long–term impact of September 11 on their finances begins to sink in, a perceptible mood swing is taking place. Whereas most of the major carriers, like Lufthansa, initially applauded the EC for its tough stance on compensation, a growing number are now reconsidering the situation.

So far the Commission has not received any state aid applications, and if it does receive any applications that they would have to be dealt with on a case by case basis. Given the stance taken on allowing carriers to protect their slots, it would seem likely that some struggling carriers may be tempted to make state aid applications. They will presumably argue that the “exceptional occurrence” stated under Article 87 should not just be applicable to the four days closure of US airspace. Instead, given that the impact has been far more wide–reaching, as reflected in the stance on slots, compensation (state aid) could be allowed at a far greater level.

If the Commission is to take a more pro–consolidation stance, it has some interesting possible test cases on which to make judgements in the near future. Among these will be:

• The BA/AA anti–trust immunity application;
• New merger and acquisition activity (perhaps BA–KLM, and Air France–Alitalia):
• The UK government bailing out the National Air Traffic Services business which is partly owned by a consortium of UK airlines;
• easyJet’s application for slots at Paris Orly;
• Unliateral actions on the part of Southern European member states to support their flag–carriers;
• Ryanair’s deal with Charleroi airport which is, perversely, being interpreted as an illegal subsidy from the state of Wallonia; and
• DAT’s use of Sabena’s bridging loan.