State aid: following appeals by Ryanair, the General Court of the EU annuls the Commission's decisions approving aid for SAS, Deutsche Lufthansa and Italian airlines

On 11 May 2023, the General Court of the EU cancelled two European Commission decisions authorizing State aid in the form of capital injections for the airlines SAS and Deutsche Lufthansa, in particular because there was no mechanism for increasing the remuneration of the Swedish and German States' shareholdings and because of the modalities of the exit of the State. On 24 May 2023, the General Court of the EU annulled the Commission's decision of 22 December 2020 authorizing a compensation scheme for airlines holding a licence given by the Italian authorities due to a failure to state reasons. The companies covered by the aid scheme were Neos SpA, Blue Panorama Airlines SpA and Air Dolomiti SpA.

State aid instruments:  two recapitalization tools and a compensation fund

In the Deutsche Lufthansa case, the European Commission authorized on 25 June 2020 an aid from Germany to Deutsche Lufthansa totalling EUR 6 billion, granted in the form of recapitalization tools, namely a capital holding, silent participation and a convertible bond. Following Ryanair's appeals against this decision before the General Court of the EU, the Commission adopted a corrective decision on 14 December 2021.

In the SAS case, the Commission approved on 17 August 2020 an aid from Denmark and Sweden of approximately EUR 1 billion granted to SAS in the form of recapitalization tools, in this case a hybrid holding and a subscription for new ordinary shares in equity.

On 22 December 2020, the European Commission approved EUR 130 million of aid via a compensation fund, which consisted of subsidies given by Italy to some airlines holding an Italian licence. This aid measure was intended to repair the damage suffered by these airlines as a result of the travel restrictions and other containment measures taken during the Covid-19 pandemic on the basis of Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU). The legal basis for this measure was therefore different from that for the aid granted to SAS and Deutsche Lufthansa, as explained above.

In accordance with one of the eligibility conditions of the Italian measure, in order to benefit from it, the airlines not only had to hold an Italian licence but also had to remunerate their employees based in Italy, as well as the employees of third party companies involved in their activities, at a level equal to or higher than the minimum remuneration level set by the national collective agreement applicable to the air transport sector, concluded by the employer and trade union organizations considered to be the most representative at national level.

Ryanair's appeals

On 22 January 2021, 4 May 2021 and 18 May 2021, Ryanair brought actions against these three Commission decisions before the General Court of the EU. Condor airline is also the applicant in the Deutsche Lufthansa case.

Ryanair's actions were based on several grounds:

1. The Commission misapplied its Temporary Framework and misused its powers by deciding that Deutsche Lufthansa AG was eligible for aid, without investigating other possible measures that were more appropriate and less damaging, by deciding that the amount of recapitalization was proportionate, by failing to apply the appropriate conditions to the State's exit, by failing to impose sufficient slot divestitures and by failing to effectively prohibit any aggressive expansion by the beneficiary.
2. The Commission misapplied Article 107(3)(b) TFEU by considering that the aid remedies a serious disturbance in the German economy, by disregarding its obligation to balance the beneficial effects of the aid against its adverse effects on market conditions and the maintenance of free competition ("the balancing test") and by requesting the late submission of a restructuring plan.
3. The Commission disregarded the general principles of non-discrimination, freedom to provide services and freedom of establishment.
4. The Commission failed to open a formal investigation procedure despite serious difficulties and disregarded the applicant's procedural rights.
5. The Commission failed to fulfil its obligation to state reasons for its actions.

As regards its first plea in law in the SAS and Deutsche Lufthansa cases, Ryanair contested the compatibility of the aid with the Temporary Framework to support the economy in the context of the Covid-19 outbreak because it was not accompanied by a mechanism for increasing remuneration (step up). According to Ryanair, the Commission had also not imposed an alternative mechanism with an equivalent incentive effect on the State's exit from the capital and with an overall impact on the State's remuneration similar to that of a remuneration increase mechanism. The Temporary Framework to support the economy in the context of the Covid-19 outbreak, adopted by the European Commission in March 2020 and amended on several occasions to extend its scope and duration until 30 June 2022, in fact provided for a long list of conditions for authorizing recapitalization measures. With regard to the remuneration and exit of the State, it required a mechanism to be put in place to gradually encourage the beneficiary concerned and the other shareholders to repay the recapitalization aid granted by the States in the context of the Covid-19 pandemic. These recapitalization measures were intended to be temporary. To this end, the Framework provided that the remuneration of the recapitalization measure should be increased in line with market prices.

In the case of the Italian airlines, Ryanair pointed out that the Commission's decision lacked a proper state of reasons and that it should have opened the a formal procedure to examine further the aid measure. The company also challenged before the Court the fact that the Commission had examined the compatibility with EU law of the minimum remuneration requirement solely in the light of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Roma I) (OJ 2008, the "Roma I Regulation"), and not in the light of the European general principles of non-discrimination and the freedom to provide services provided for in the Treaties.

The EU General Court's assessment

The SAS and Deutsche Lufthansa cases

In the SAS case, the Court ruled that the measure, which consisted of two instruments (hybrid aid and equity aid), must nevertheless be regarded as a single recapitalization measure. Thus, according to the Court, because of the closely linked nature of those two measures, annulling the part of the Commission's decision relating to the equity recapitalization instrument should lead to annulling the whole decision, despite the fact that the hybrid instrument was held to comply with the Temporary Framework.

Application of the requirements of the Temporary Framework to hybrid aid instruments

In the SAS case, the General Court of the EU upheld the Commission's reasoning that the Temporary Framework only requires a remuneration increase mechanism for equity instruments and that this condition is not applicable to hybrid instruments that are not convertible into shares, such as the State's hybrid securities in this case. The Framework only provides for a remuneration increase mechanism after the conversion of the hybrid instrument into equity. Thus, as the general principle of increasing the remuneration of recapitalization instruments does apply to hybrid instruments, by virtue of the Temporary Framework which provides that the hybrid instruments are remunerated by an increasing rate of interest until they are converted into equity instruments, this is the case here because the measure includes a system of compound interest in the event of default. As a result, the remuneration of the State's hybrid securities increases over time, providing an incentive for the State to exit. The Court therefore upheld the legality of the alternative mechanism put in place by the Member State in respect of the hybrid instrument.

The Court applied the same reasoning in the Deutsche Lufthansa case. In this case, the Temporary Framework provided for the application of variable rates for the remuneration of hybrid instruments until their conversion into equity. The French State had proposed a system providing for the application of fixed rates of remuneration. The Court approved the Commission's approach, which validated this alternative mechanism for increasing remuneration on the grounds that a result similar to that sought by the Temporary Framework as regards the incentive effects on the State's exit from capital with an overall similar impact on the State's remuneration had been achieved. The Court agreed with the Commission that fixed rates were not necessarily more favourable than variable rates, contrary to Ryanair's assertion, because while it is true that rates can move downwards, they can also move upwards. Consequently, the Court authorized the mechanism on the grounds that the fixed-rate remuneration provided for by the measure was superior overall to that provided for by the variable rates.

However, the Court partly agreed with Ryanair on the following point: the price of the shares on conversion of the hybrid instrument into equity was not determined, in this case, on the basis of the market price as required by the Framework. The Court therefore concluded that the Commission failed to state its reasons, as it did not explain in its decision why it was justified in calculating the share price on conversion of the hybrid holding into equity without following the method recommended by the Commission in its Temporary Framework.

In addition, the Court rejected the Commission's position that Deutsche Lufthansa's undertaking to seek the Commission's authorization if the share price calculated according to the Temporary Framework were lower than that provided for in the measure in question would allow it to derogate from the Temporary Framework. Germany had not undertaken to bring the share price of the hybrid instrument into line with the requirements of the Temporary Framework when it was converted into equity, but only, procedurally, to seek the Commission's authorization before exercising its conversion right.

Lack of remuneration increases in recapitalization instruments sanctioned by the General Court of the EU

In both cases, the capital instrument was not accompanied by any mechanism for increasing remuneration. The Commission nevertheless considered that the overall structure of the measures in question constituted an alternative mechanism that complied with the Temporary Framework.

In both cases, the Court of First Instance rejected this argument, stating that the absence of a mechanism to increase the remuneration of the recapitalization could not be compensated for by the existence of other separate mechanisms that had separate objectives. By way of example, the States invoked compliance with the Temporary Framework as regards the initial purchase price of the shares because they had acquired the shares at a favourable price.

The Court pointed out that the obligation to provide for such a mechanism was distinct from the need to create a mechanism for increasing remuneration because the objectives of the two mechanisms were different.

The purpose of increasing the shareholding was to make it more expensive for States to participate, whereas the purpose of the share purchase price was to ensure that the price at which the States acquired the shares did not exceed the market price and was not necessarily intended to increase the operator's incentive to buy back the shares. The same applies to the prohibition on distributing dividends, which was also a separate requirement under the Temporary Framework.

Thus, the General Court of the EU held that the Member States had not put in place any mechanism to increase the remuneration of the recapitalization or any alternative mechanism with similar effects.

The Italian companies case

Failure to state reasons for the Commission's decision not to initiate the formal investigation procedure in respect of the aid scheme, in particular with regard to the compatibility of the measure with other provisions of EU law

The Court of First Instance noted the Commission's failure to state adequate reasons for its decision not to initiate the formal investigation procedure in respect of the aid scheme. Such a decision could undermine the applicant's procedural guarantees.

In the present case, the Court of First Instance did not question the Commission's reasoning that it is not possible to assess the modalities of an aidin isolation and that all the conditions of eligibility of the aid were inextricably linked to the measure in question. However, the Commission considered in its decision that the minimum remuneration requirement laid down by the national collective agreement applicable to the air transport sector, even though it was included in the measure in question, was not intrinsic to the objective of that measure, given that its aim, which was social in nature, was different. Consequently, the compatibility of that requirement had to be assessed in the light of "other relevant provisions of Union law".

The Court noted that the Commission's position that the minimum pay requirement was inextricably linked to the measure in question was not apparent from the text of the decision. Furthermore, the Commission had not sufficiently examined the compatibility of the measure with other provisions of EU law in addition to Articles 107 and 108 TFEU and the Roma 1 Regulation, in particular Article 56 TFEU on the freedom to provide services.

The scope of the Court's decisions

By annulling three Commission decisions authorizing significant aid measures to the airline sector, the Court of First Instance has set a much higher standard for the European Commission's assessment of the compatibility of aid, notwithstanding the urgency of the situation at the time. The Court thus reminded the Commission that it must comply with the rules it itself laid down in its Temporary Framework, which was adopted and regularly amended to adapt to the economic context arising from the pandemic. In addition, the Court of First Instance recalls the Commission’s obligation to state reasons for the eligibility criteria for beneficiaries of an aid scheme.

However, in any event, the economic impact on the airlines concerned should be limited, as the Commission always has a wide margin of discretion when authorizing aid, particularly in the exceptional circumstances of the pandemic. Deutsche Lufthansa has already repaid the aid it received in advance.

Ryanair had already obtained cancellations in two previous cases, namely aid to KLM and TAP Air Portugal. The Commission then adopted new, better-reasoned decisions in the weeks following their cancellation. It should be noted that, in these two cases, the Court of First Instance took the exceptional step of suspending the effects of the annulment of these judgments, which is not the case in the three cases commented on.