State intervention in the aviation sector: State aid issues

The below Q&A addresses the state aid implications of heightened State intervention as a result of COVID-19 – in particular, as it applies to the aviation industry in the EU. In short, the immediate response from the European Commission (the Commission) should give companies some comfort that emergency assistance offered by EU Member States can be designed in compliance with state aid law. The Commission has already cleared aid granted by the Danish government in response to COVID-19 as permissible given the “exceptional occurrence” of COVID-19. It is also seeking to put in place a Temporary Framework which will give further clarity as to the application of the permissibility of aid designed to remedy a serious disturbance in Member State economies.

What has the UK government proposed?

At the time of writing, the UK government has announced £330bn in loans to help businesses pay for supplies, rent and salaries. At this stage, no specific measures have been announced in the aviation sector, but some measures to help airlines are expected.

But, isn’t “state aid” illegal?

Under EU law, state aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. State aid is acceptable in a variety of circumstances, but only if it has been notified to or approved in advance by the Commission. State aid entails:

• An intervention by the State or through State resources (whether through grants, interest and tax reliefs, guarantees, or providing goods and services on preferential terms, etc.).
• Which gives the recipient a financial advantage.

State aid must also be granted on a selective basis, have the potential to distort competition, and be likely to affect trade between Member States, but in practice these latter criteria tend to be met in the majority of cases. In the context of COVID-19, it is important to stress that not all compensation offered by States will necessarily constitute state aid.

It is for the EU Member State in question to apply to the Commission for state aid approval, and aid that is granted without approval will be illegal and must be recovered from the recipient. Recipient companies may be involved in the application process.

Does it make any difference if money comes from banks/insurers (subject to state guarantee/insurance) or direct from a Member State government?

No. It follows from the definition of aid above that, so long as the aid flows from State resources, the measure would be state aid. The state guarantee/insurance would be the aid in this context, assuming it has not been provided on commercial terms.

But some state aid can be justified. How would that apply here?

Despite the general prohibition of state aid, in some circumstances government intervention is necessary for a well-functioning economy. Therefore, the Treaty leaves room for a number of policy objectives for which state aid can be considered acceptable.

The key available exception is contained in Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU). This exemption applies to aid granted to specific companies or sectors compensating for damage caused by “exceptional occurrences.” Unsurprisingly, the Commission has already indicated that the COVID-19 outbreak is an exceptional occurrence. Further, as detailed further below, aid may be acceptable where it is designed to remedy a serious disturbance in the economy, and the Commission is developing a framework as to how that applies in the present situation.

What is the Commission saying?

On March 17, 2020, Executive Vice President Margrethe Vestager explained that, in order to both keep business afloat and to prevent distortions across Member States, the “Commission will enable Member States to use the full flexibility foreseen under state aid rules to tackle this unprecedented situation.”

Executive Vice-President Vestager discussed aviation in particular, saying “if we want to minimise permanent layoffs and damage to the European aviation sector, urgent action is necessary. The Commission is ready to work with Member States immediately to find workable solutions that preserve this important part of our economy, using the full flexibility under state aid rules.” In this regard, she referenced Article 107(2)(b) – i.e. the “exceptional occurrences” exemption.

And what is the Commission doing?

These indications from Executive Vice President Vestager are important. In practical terms, the first aid notification relating to COVID-19 was received on March 12 and approved on March 13. This related to Danish legislation providing compensation to companies affected by the Danish government decision to cancel events of 1,000 people or more. This clearance by the Commission in just 24 hours, on the basis of Article 107(2)(b), shows the urgency with which the Commission is treating these issues (typically state aid approvals take months).

In addition, the Commission has proposed a new “Temporary Framework,” which is designed to enable four types of aid. This is in line with Article 107(3)b, which says aid may be compatible with the common market where the aid is given to remedy a serious disturbance in the economy of a Member State. The Temporary Framework will give some further guidance on how Article 107(3)b will apply in the context of the COVID-19 outbreak.

The draft Temporary Framework would allow for:

• Direct grants and selective tax advantages, but only up to €500,000 per recipient.
• State guarantees for loans taken by companies from banks.
• Subsidized public loans to companies.
• Safeguards for banks that channel support to the real economy.

Member States are currently commenting on the proposal, but the Commission hopes it will be agreed within days.

Have we seen anything like this before?

Yes. During the global financial crisis in 2008, the Commission adopted various temporary communications in order to facilitate the granting of aid to institutions affected – especially financial institutions. It also vastly speeded up its usual timeframe for considering state aid, in some cases turning around approvals within a few days. However, the nature of the current crisis is likely to require even more creative approaches to deal with the volume and variety of likely applications for aid.

What will the effect of the new framework be?

This is to be seen.

However, in our view, the use of the “exceptional occurrences” exemption under Article 107(2)b provides a useful way forward. A key issue in applying Article 107(2)b will be showing that any measure (or package of measures) does not exceed what is necessary to make good the damage suffered as a result of COVID-19. The Danish case referred to above is designed to pay out compensation to businesses that can provide evidence of loss. For larger interventions, working out the right level of aid (and evidencing it as such) may be more difficult. The Commission is clear that “no profit” will be allowed as a consequence of grant of such aid.

Will there be any difference in treatment of UK and other EU carriers?

It is open to different EU Member States to take differing approaches in designing support for their airlines based on the state aid rules and the new framework. For example, it may be that a Member State feels unable to support its aviation sector, and so does not. It may also be the case that some Member States put together more generous packages. The challenge for the Commission will be in ensuring quick access to aid to allow survival of the airline industry, while seeking to moderate any distortions in competition that could be caused by individual Member States granting more favorable support to their airlines.

We also note that state aid rules do not prevent decisions to nationalize airlines, such as that taken by the Italian government in relation to Alitalia. (This does not resolve the existing Commission State aid investigations into Alitalia, or mean that it would be easy, or desirable, for Member States to nationalize airlines more broadly.)

How will State support for non-European carriers be treated?

Already, South Korea has offered loans totalling US$250m to its airlines, and the Australian government has unveiled a package of measures for its carriers.

The EU state aid rules only govern the actions of EU/EEA Member States. The EU state aid regime is relatively unusual in that it is designed to ensure a level playing field within the EU, and equivalent rules are not a feature of domestic law in many jurisdictions. To the extent individual countries outside the EU seek to support their airlines, there will be fewer legal obstacles; challenges by third parties under WTO rules, for example, are unlikely. Under EU Regulation 2019/712, the Commission can take action against third-country subsidies granted to airlines which distort competition as against EU airlines. These rules could be used to seek to challenge COVID-19 relief considered to be excessive where granted to non-EU carriers. However, these rules have not been used to date and their use in these exceptional circumstances also appears unlikely.

Would the position be different post-Brexit?

The EU state aid rules still apply to the UK until the end of the year (pending any new agreement). The UK and EU negotiating positions (published in February 2020) are completely at odds as to what should happen next: the EU position being that EU rules should continue to apply; the UK position is that the UK be bound by nothing more intrusive than WTO rules. As such, the “post-Brexit” position is a matter of speculation. Of course, the effect of COVID-19 on the negotiations and the timetable for Brexit is yet to be seen. What is clear is that the Commission does not want its state aid rules to stand in the way of necessary measures at this time.

What should airlines do?

This situation will continue to develop. It is clear that governments, and the European Commission, recognize that business-as-usual is not appropriate. Airlines (as with any business in any sector) are continuing to put pressure on their governments to find a workable path through the current crisis. But the design of any relief provided will be important and need careful consideration to ensure it receives prompt Commission approval (within the EU), or (for non-EU airlines operating to/from the EU) does not face potential challenge under EU anti-subsidy rules subsequently.