State aid & the COVID-19 pandemic in the Aviation sector

By Jose Rivas

03-2020

The European Commission has recognized the major impact of the COVID-19 pandemic in European transport systems in general, and in the aviation sector in particular.

International aviation has been severely hit, first by the COVID-19 outbreak and second, by diverse national measures adopted across different countries, attempting to contain the pandemic. According to the International Air Transport Association (IATA), airline revenues could fall by $113 billion (19%) if the virus is not contained. The situation is deteriorating on a daily (sometimes even hourly) basis, as air traffic is massively disrupted.  On a global basis, IATA estimates that emergency aid of up to $200 billion is required.

In this period of crisis, the European Commission has shown its willingness to help Member States in the design of state aid schemes and/or individual measures to support companies facing economic difficulties due to the COVID-19 outbreak.

Aid to compensate companies for damages suffered as a result of the COVID-19 outbreak

Member States may provide support to airlines and airports affected by the COVID-19 pandemic in line with the de minimis rules or the General Block Exemption Regulation (GBER) which do not require prior authorization to the Commission. Furthermore, the Rescue and Restructuring Guidelines, together with Article 107(3)(c) TFEU, enables Member States, (subject to Commission approval), to meet acute liquidity needs and support of companies facing economic difficulties or bankruptcy due to the COVID-19 outbreak.

To keep pace with the economic disruption caused by the Covid-19 virus, the Commission has issued some guidelines for the notification of State aid measures under Article 107(2)(b)TFEU  as well as a new Temporary Framework under which State aid measures can be justified in line with Article 107(3)(b) TFEU [1].

According to the European Commission, the COVID-19 pandemic qualifies as an "exceptional occurrence" under EU Law [2]. Article 107(2)(b) TFEU enables Member States, subject to Commission approval, to compensate companies for the damage suffered in exceptional circumstances, such as the COVID-19 outbreak. Under this legal basis, the Commission already approved the grant of aid to (inter alia) airlines for losses incurred following the 9/11 terrorist attacks. 

Regarding the aviation sector in particular, the Executive Vice-President Margrethe Vestager stated that "compensation can be granted to airlines under Article 107(2)(b) TFEU for damages suffered due to the COVID-19 outbreak, even if they have received rescue aid in the last ten years."

The “one time, last time” principle aims at avoiding that economically unviable companies are kept in the market. Following the COVID-19 outbreak the Commission stands ready to accept exceptions to that rule. However, an assessment on the viability of the airline in the long term (i.e., after the Covid-19 crisis), seems necessary in order to justify the grant of public support to a given airline.

The new guidelines for the notification of aid measures under Article 107(2)(b) TFEU describe the information that Member States are required to share with the Commission in order to get a swift approval of their aid measure.

Furthermore, the new Temporary Framework recognises that the entire EU economy is experiencing a serious disturbance. To remedy that, the Temporary Framework provides for five types of aid that can be declared compatible (subject to conditions) under Article 107(3)(b) TFEU if it is granted before the 31 December 2020. Those which may be of interest for the aviation sector concern : (i) Direct grants, selective tax advantages and advance payments of up to €800,000 to address companies' liquidity needs; (ii) State guarantees for loans taken by companies from banks and (iii) Subsidised public loans with favorable interest rates to companies. The new Temporary Framework is accompanied by a Notification Template that Member States can follow in their notification of State Aid measures in support of the economy in the current COVID-19 outbreak.

 

Diverse reactions from Member States

While airlines are calling for public support (e.g., Finnair, Virgin Atlantic and AirFrance-KLM), Member States appear to be open to use all available means to protect big companies, including recapitalization or even nationalization, (e.g., Alitalia).

On 31 Mars 2020, the European Commission approved the first State aid measure aiming to mitigate damages caused by the COVID-19 pandemic to the airline sector.

The French scheme sets up a deferral payment mechanism of certain aeronautical taxes to compensate damages suffered by airlines due to the COVID-19 outbreak. The scheme will be accessible to airlines with an operating licence in France, and will offer them the possibility to defer the payment of certain taxes that would in principle be due between March and December 2020 to after 1 January 2021, and to pay the taxes over a period of up to 24 months.

On their side, the Swedish and Danish governments have granted SAS a joint $302 million guarantee. Furthermore, in Norway (subject to prior notification to the National Competition Authority), companies have received a three-month temporary exception from antitrust enforcement to help maintain transportation services for passengers and goods during the Covid-19 outbreak.  According to the Norwegian government, airlines SAS and Norwegian can coordinate their schedules to maintain minimum services for citizens during the COVID-19 crisis.

The list of State aid measures approved by the European Commission under Article 107(2)(b) TFEU and under the Temporary State Aid Framework since the COVID-19 outbreak can be consulted here.

Expecting the unexpected

The COVID-19 virus moves quickly and silently.

In order to help ease the impact of the outbreak, the EU has approved targeted legislation to temporarily alleviate airlines from their slot usage obligations (the so-called “use-it-or-lose-it” rule) under EU law.  The waiver will apply from 1 March to 24 October 2020. It will also apply retroactively from 23 January to 29 February 2020 for flights between the EU and China or Hong Kong.  

Further, EU Member States have been called on to support air cargo operations during the COVID-19 crisis. On 26 March 2020, the Commission adopted a new Communication aiming at facilitating air cargo operations and keeping essential transport flows moving, including those of medical supplies and personnel.  Several airlines have already made some passenger aircraft available for chartered cargo operations.

Finally, the Commission will continue providing guidance to Member States for the approval of emergency state aid measures in the coming days and weeks.  The Commission can be expected to insist on strict conditions to ensure that any measures are fair to the aviation industry in particular; and the transport industry in general. Some European rail service operators are raising their voices against public support granted exclusively to the air transport sector to the detriment of other means of transport. Indeed, high speed rail services face strong competition from low-cost airlines over certain routes.

To guard against a future repayment obligation, beneficiaries still need to verify the legality of state aid under EU law.  

In the spirit of solidarity with clients and contacts in these extraordinary times, Bird&Bird's state aid experts will, at no cost, guide you with your preliminary state aid queries by phone/email. You will find their contact details below:

Paul Briggs, Co-head of International Aviation & Aerospace Sector Group 
José Rivas, Partner, Competition & EU Practice Group 
Morten Nissen, Co-head, Competition & EU Practice Group

All of our Competition & EU contacts can be found here.
All of our Aviation & Aerospace contacts can be found here.


[1] Similar action was taken during the 2008 financial crisis, when the Commission adopted a Temporary Framework in response to the economic and financial crisis.

[2]The characterization of an event as being an exceptional occurrence is made by the Commission on a case-by-case basis, having regard to its previous practice in the field. In this regard, the following indicators relating to the event concerned must be cumulatively met: (i) unforeseeable or difficult to foresee ; (ii) significant scale/economic impact , and (iii) extraordinary. See Commission Decision of 12 March 2020 in Case SA.56685 (2020/N) – DK – Compensation scheme for cancellation of events related to COVID-19, recital 25.