State aid and the airline industry

Posted on 11 May 2020

The COVID-19 pandemic has had a particularly significant impact on the aviation industry, with the International Civil Aviation Organization estimating an approximate $50 billion international passenger revenue loss between January and April this year.

These revenue losses have already resulted in airlines having to take drastic and difficult decisions.  Ryanair has warned they may need to cut 3,000 jobs, British Airways 12,000 and Lufthansa 10,000. Air Mauritius has entered into voluntary administration following “a complete erosion of the Company’s revenue base".

Many airlines have called for – and received - state aid in order to help them survive the current crisis.  However, with national governments taking different approaches both to the eligibility criteria for receiving such aid and the conditions attached to it, some have expressed concern over the potential long-term impact that this could have on competition.

The UK

The UK has so far shown a reluctance to offer bespoke aid to individual airlines (making it a bit of an outlier in Europe).  While EasyJet has managed to secure a loan from the UK government, this was because it met the requirements of the country's general COVID-19 Corporate Financing Facility, rather than it forming any part of a bespoke package for the airline.

It is thought that Virgin Atlantic does not qualify for this scheme (partly because it does not have investment-grade assets), which is why the company has been publicly calling for state support.  Politically however, it may be difficult for the UK Government to change its approach and accommodate Virgin particularly when Ryanair and British Airways have not called for bespoke aid themselves.

EU Member States

EU Member States in contrast have been much more active in providing specific aid packages to airlines. 

The French Government has approved a €7 billion package to Air France (consisting of loan guarantees and loans), SAS has secured a c. €300 million guarantee on a revolving credit facility from the Danish and Swedish Governments, Lufthansa is in the process of negotiating a reported €9 billion package with the German Government (although negotiations have stalled over the details of the government taking an equity stake in the company), and Alitalia has been re-nationalised in Italy.  Sweden has also had a €455 million guarantee scheme to support airlines approved by the European Commission. 

However, there is some concern in the industry that the ability to provide such aid is concentrated in the hands of wealthier Member States and that this could ultimately lead to a distortion of competition.  This concern is exacerbated by the selective nature of the aid that is being given.

Ryanair, for example, has filed a challenge with the General Court with regards to the Commission's approval of the Swedish scheme, which requires applicant airlines to hold a Swedish aviation licence.  Ryanair argues that such an approach is discriminatory given that, in a fully liberalised aviation market such as the EU's, the country that has issued an airline its licence should be irrelevant as this does not impact the ability of the airline to provide flights throughout the EU.  . 

Even as between the Member States that are offering bespoke aid packages, the conditions attached to the aid vary significantly – something that could also have the potential to distort competition going forwards.  The aid provided to Air France for example is contingent on various green initiatives.  However, unless other Governments follow suit, this could lead to a further distortion of the market with other less energy efficient airlines able to benefit.

Should Member States continue to offer bespoke or selective aid packages to airlines it would not be a surprise if other aggrieved airlines follow Ryanair's lead and seek to challenge the measures, either directly with the Commission or by seeking injunctions through the national courts for example.

The European Commission

The European Commission, for its part, has stepped back from the suggestion that they should be co-ordinating a pan-European approach, noting that they do not have the mandate for such action.  Frans Timmermans, Executive Vice President of the European Commission, also noted that is up to National Governments to decide whether to attach green conditions to their aid, although adding that it would be beneficial for Member States to co-ordinate on such matters.

Aside from state aid, the Commission has been engaging with the airline industry in other ways – for example issuing guidance on when compensation may not be payable in relation to cancelled flights due to 'extraordinary circumstances'. 

The Commission's guidance makes clear however that the pandemic does not impact passengers' rights to a full refund should their flight be cancelled.  This has led 12 Member States to write to the Commission asking them to consider amending the law so that airlines are only required to offer vouchers for future travel (instead of cash refunds) in order to protect struggling airlines.

What next?

Despite Governments providing the sector with varying forms of aid, one common theme has been that the aid has not taken the form of free handouts.  Airlines will be required to pay back their loans and pay deferred tax charges in the future.  Consequently, these companies will have to factor in debt repayments in their business plans for years to come while simultaneously looking to bounce back from the crisis. 

Finally, should the industry see further bankruptcies and/or distortions of competition resulting from the significant state aid referred to above, some airlines could find themselves in a much stronger position than was the case prior to COVID-19.  This could lead to increased scrutiny by the competition authorities, particularly in areas such as abuse of dominance.

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