Rainy Days for Airlines
In its judgment of the 13th of May 2020, the General Court dismissed the actions for annulment brought by three airlines against the Commission’s Decision of the 29th of July 2016 establishing that the implementing rules on State aid granted by the Autonomous Region of Sardinia to the airports on the island, given in order to increase the air traffic of the area, are incompatible with the internal market.
In the context of expanding our areas of practice, the Costaș, Negru & Asociații – Lawyers’ Civil Partnership team welcomes the European legal reasoning in the field of Competition Law. Given this opportunity, we shall summarise the reasoning of the General Court of the European Union in relation to the grounds for annulment raised by the three applicants.
In fact, by Regional Law no. 10/2010 on measures for the development of air transport, the Autonomous Region of Sardinia granted State aid amounting to EUR 19,700,000 for 2010 and EUR 24,500,000 for each of the years 2011, 2012 and 2013, in order to finance the three existing airports on the island of Sardinia. The reason for granting the state aid was limited to the development of air transport seen as a service of general economic interest.
Within the implementation of this law, agreements were concluded between airport operators and airlines with the aim of improving air transport services on the island and ensuring the promotion of Sardinia as a tourist destination. Subsequently, the amounts were reimbursed to the airport operators by the competent authorities of the Autonomous Region of Sardinia.
In 2016, the Commission adopted Decision (EU) 2017/1861 of 29 July 2016 on State aid SA33983, which established that the financial aid scheme offered by the implementing rules of Regional Law no. 10/2010 was incompatible with the internal market. The Commission therefore ordered the recovery of the State aid from the beneficiary airlines. The premise from which the Commission began its analysis was that the real beneficiaries of the State aid were, in fact, the airlines, not the airports.
The airlines therefore brought actions for annulment against the Commission’s decision. Thus, cases Volotea (T-607/17), Germanwings (T-716/17) and easyJet (T-8/18) were brought before the General Court of the European Union. The grounds for annulment of the Commission’s decision were limited to the following, as we shall point them out in the case of each of the applicants:
easyJet Airline Co. Ltd
a. a misinterpretation of the concept of State aid within the meaning of Article 107(1) TFEU
b. an error as to the possibility of justifying the aid at issue
c. an error of law in the order for recovery of the aid at issue
d. mismanagement of the investigation
e. a failure to state reasons and contradictory reasoning
a. infringement of Article 107(1) TFEU, in that the Commission did not demonstrate the existence of aid, having failed to examine whether SOGAER had acted as a private operator in a market economy
b. infringement of Article 107(1) TFEU, in that the Commission did not demonstrate that the aid granted to the applicant distorted or threatened to distort competition and affected trade between Member States
c. an error in law on the ground that the Commission did not examine whether the contested payment constituted de minimis aid.
a. a manifest error of assessment as regards the classification of the payments by airport operators to the applicant as ‘State resources’, the grant of which was imputable to the Italian State
b. a manifest error of assessment as regards the receipt of an advantage by the airlines
c. a manifest error of assessment as regards whether the measures at issue distort or threaten to distort competition and affect trade between Member States
d. a manifest error of assessment as regards the absence of possibility of declaring the measures at issue compatible with the internal market under Article 107(3) TFEU
e. infringement of the principle of legitimate expectations as regards the order to recover the aid from the applicant
f. insufficient reasoning and contradictory reasoning in the contested decision.
Given the similarity of the grounds invoked by the three applicants, as well as the identity of the General Court’s reasoning in each of the three cases, we shall summarise the findings of the supranational court by reference to the arguments of Volotea SA, as they seem to follow a more logical structure.
In that regard, without losing sight of the last four grounds for annulment invoked by the applicant, in today’s summary we shall confine ourselves to highlighting the findings of the General Court concerning the Member State’s infringement of Article 107 (1) TFEU on State aid, provided in the context of competition rules.
In essence, the economic operator criticises the fact that the beneficiaries of the State aid scheme were incorrectly determined by the Commission, respectively claims that there was no advantage for the petitioner. The airline considers that the airport operators are the only beneficiaries of the state aid scheme and that Volotea SA did not benefit from any advantage in the sense claimed by Art. 107 par. (2) TFEU. It denies that the airports acted exclusively as intermediaries between the Autonomous Region of Sardinia and the airlines; it also disputes that the decisions of the airports were imputable to the Autonomous Region.
The Court rejected the applicant’s claims as unfounded. It pointed out that, in accordance with Art. 107 par. (1) TFEU, ”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 or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market”.
The General Court stated that, in applying this article, four conditions must be met in order to categorise a transfer of resources as State aid:
- that there be intervention by the State or through State resources;
- that the intervention be liable to affect trade between Member States;
- that it confers a selective advantage on the beneficiary;
- that it distorts or threaten to distort competition.
The first condition means that the advantages must be granted directly or indirectly from State resources and be imputable to the State; these two conditions must be met cumulatively.
State intervention does not necessarily mean an advantage coming from the central structures of the state; it may as well come from an authority below the national level, such as, in this case, the Autonomous Region of Sardinia.
In the matter of state aid, as regulated by the supranational union, the purpose pursued by the Member State in granting resources is indifferent to the qualification as ”aid” within the meaning of Art. 107 TFEU; one criterion, however, is the effect that such an intervention by the State produces. Thus, an advantage granted directly to natural or legal persons may constitute an indirect advantage, therefore a state aid for other undertakings.
In the present case (Volotea SA) it is not disputed that the Autonomous Region of Sardinia made funds available to airports (considered beneficiaries by Law no. 10/2010) in order to boost the tourism in the Sardinian area. The applicant does not dispute that those funds, originating in the Autonomous Region of Sardinia and originally granted to airports, are State resources and that the decision to grant those resources is imputable to the Italian State.
The issue is whether those amounts received by the applicant from the airport operators under the contracts concluded with them were or remained ”state resources” within the meaning of Art. 107 par. (1) TFEU.
The Court noted, in this context, that it is clear from the mechanism provided by the Autonomous Region of Sardinia and its implementation in practice that the funds transferred by the region to airports were the same as those used by the latter to remunerate the co-contracting airlines; this was also the case of Volotea SA. Therefore, these amounts continued to be considered state resources, thus constituted state aid within the meaning of Art. 107 par. (1) TFEU.
The airline also raised an issue of principle, limited to the fact that, in 2013, airports continued to remunerate airlines under the concluded contracts, even if they (the airport operators) no longer received funds from the Autonomous Region of Sardinia, the state aid mechanism being suspended.
The Commission explained that all the airport operators did in this case was to honour their contractual obligations, as there were no clauses in these contracts concluded with the airlines regarding their termination in case of loss of funding from the Autonomous Region of Sardinia. This does not mean that the airport operators did not use all of the funds guaranteed by the Autonomous Region of Sardinia to remunerate the co-contracting airlines, such as the applicant, which are the only ones that have the obligation to refund these sums, as laid down in Article 2 of the Commission’s Decision.
As regards the question whether the airports’ decisions to conclude the contracts in question with the applicant may be imputable to the Autonomous Region of Sardinia, Volotea SA denies that the airport operators acted merely as intermediaries. The airline claims that despite the fact that the activity plans of the airports required the approval of the Region, they benefited from a discretionary power regarding the distribution of funds received from the Autonomous Region of Sardinia.
The Court drew attention to the fact that the European case law confirms the fact that the decisive criterion for establishing the existence of an advantage granted directly or indirectly from State resources within the meaning of Art. 107 TFEU is the level of control exercised by the State over the granting of the advantage, in particular as regards the way in which the advantage is transmitted.
In order to examine the level of control and to establish to what extent the public authorities were involved in the adoption of the measure, so that the condition claimed by Art. 107 par. (1) TFEU on the award of the measure in question to the State (in this case, the measure representing the decision to conclude contracts with airlines), the circumstances of the case and the context in which the decision was taken (measure), in particular the scale of the decision, its content and its conditions, must be taken into consideration.
In the case brought before the Court, the Commission found that the funds made available by the Autonomous Region of Sardinia to airport operators had to be and were, in fact, used in accordance with the instructions drawn up by the Region, in this case as remuneration for the services provided by airlines, respectively the inauguration of new air routes, the increase of the frequency of flights to Sardinia, the fulfilment of the target regarding the number of passengers, the extension of the operating periods on the existing routes and the provision of marketing services.
Even if, as the applicant Volotea SA claimed, the airports were expressly provided by Law no. 10/2010 as the beneficiaries of the resources granted by this law, another article of that law also expressly stipulates the criteria, nature and duration of the transport offer, as well as the fact that the activity plans of the airport operators must be adopted by the executive authority of the Region, only after obtaining the binding opinion of the competent executive committee.
In other words, once the airport operator decided to participate in the financing program offered by the Autonomous Region of Sardinia representing the State aid scheme, the airport’s discretion in establishing the activity plans and in selecting co-contracting service providers was significantly reduced in the light of the criteria and instructions established by the Autonomous Region.
In the present case, another indication for the assessment of the discretion is the contractual clauses, namely the preamble to the contract concluded between the airports and the airlines. However, since they expressly specify the compliance of the contractual provisions with the instructions clearly set out in the implementing laws enacted by the Autonomous Region of Sardinia, it is clear that the discretion of airport operators is significantly diminished.
Moreover, the fact that the airport operators had the possibility to monitor the activity plans did not mean they held any autonomy in the implementation of the state aid scheme.
In the light of these factors, Volotea SA’s argument concerning the decision-making autonomy of airports cannot be upheld.
As regards the alleged misidentification of the beneficiaries of the State aid scheme and the alleged absence of an advantage for the airlines, Volotea SA claimed that the airports were the real beneficiaries of the State aid scheme, as they were thus exempted from the costs in the event that they requested the provision of the services which were the subject of the contracts in question (frequency of air routes, targets on the number of passengers, marketing services). State aid would also have reduced the costs that airports would have had to bear if they had developed their own activities. Thus, according to the airline, the economic interest of the airports is obvious.
Although this economic interest cannot be denied, the General Court pointed out that, as the Commission noted, it is unlikely that, in the absence of funding received from the Autonomous Region of Sardinia, airports would have made such significant acquisitions as the services in question and at a price like the one in the present case – tens of millions of euros. Thus, it appears that the airports have concluded such contracts with the airlines only in view of the fact that they will receive the corresponding funds from the Autonomous Region of Sardinia. This must be corroborated with the fact that no such contracts were concluded with the airlines before the implementation of this state aid scheme.
For all these reasons, examined in detail in paragraphs 99 to 110 of the judgment of the General Court, the latter concluded that airports were not the true beneficiaries of the State aid, but that airlines held that status; on the contrary, the provision of services by the airlines desired and financed by the Autonomous Region of Sardinia has had the effect of increasing air traffic in the Sardinian area and the number of passengers to and from the airports in question.
Volotea SA also criticised the fact that the Commission did not correctly assess the State aid scheme in question, since it did not carry out the market economy investor test, both at the level of the Autonomous Region and at the level of the airport operators. In that regard, the applicant claims that the activities provided represented a significant contribution to the development of the contracting airports, and that the fact that in 2013 the airports continued to finance the activities carried out under the contracts certifies that the financial year 2012 also met the test of the market economy investor test.
The Commission, on the other hand, claims that it took into account the market economy investor test both at the level of the Autonomous Region of Sardinia and at the level of the Italian State, a principle derived from Article 345 TFEU, which necessarily asks that the public authority in question to be involved in an economic transaction and to have a connection with the beneficiary, being its owner, partner or shareholder.
In this respect, the Commission pointed out that the Autonomous Region of Sardinia did not seek to make profit by concluding these contracts, but to achieve public policy objectives, in particular to improve the economy as a whole by attracting more tourists. Such a purpose would not have been considered by a private economic operator intending to make an investment, all the more so since the Region was not a shareholder of the airports in question either. Therefore, the adoption of the State aid scheme cannot be seen as a State investment decision as a partner / shareholder.
Moreover, the market economy investor test is also unsuccessful in terms of the contractual relationship between airports and airlines, as the measures examined were instituted for public policy reasons and were not established under a contractual agreement with the airlines. Thus, it is clear that airport operators did not act as market economy investors when entering into contractual relationships with the airlines. Therefore, the arguments of Volotea SA do not subsist in this respect either.
Volotea SA also claims the following: even if it were the actual beneficiary of the State aid scheme, the latter cannot be described as ”selective”. This opens the discussion on competition. According to Volotea SA, airlines operating flights to or from Sardinian airports are in similar situations and are in competition with each other. They had access to the financing granted by the Autonomous Region of Sardinia under the same conditions as Volotea SA for the promotion of air transport and had open negotiations with the airports. However, since the other airlines have chosen not to participate, it means that they have not been discriminated against. Moreover, the selection criteria for the companies to be contracted was the adequacy of their offers, which were not chosen in the light of the requirements laid down by the Autonomous Region of Sardinia. Thus, in the airline ‘s view, the Commission did not establish the selective nature of the aid.
The General Court agreed with the Commission’s findings, which justified the selectivity of the State aid measure in view of the fact that it could not be seen as a scheme of general application, and the way in which it was designed and its implementation were to the exclusive benefit of certain undertakings or of certain sectors of activity, namely for the exclusive benefit of the airlines financed by the Autonomous Region of Sardinia through the airport operators.
Thus, the competing airlines of those which actually benefited from the State aid scheme, since they did not conclude contracts with airports or could not conclude contracts with airports because they used air routes that were excluded from the State aid scheme, did not benefit from the same advantage.
Finally, Volotea SA complained that there was no distortion of competition and that the State aid scheme did not have any effect on the trade carried out within the Member States.
In essence, the General Court examined whether the State aid measure adopted by the Autonomous Region of Sardinia did not fall below the de minimis threshold laid down in Regulation no. 360/2012. This threshold amounts to EUR 500,000 and is considered unable to affect trade between Member States or to affect or threaten competition. The General Court, just as the Commission, ruled out the impact of the de minimis threshold in the present case.
As regards the effect on trade between Member States, the General Court recalled that, in order to regard a national measure as State aid, it is not necessary to determine whether such aid has an actual effect on trade between Member States or whether it actually affects competition, but only to examine whether that aid can affect trade or can distort competition.
As a principle, if aid granted by a Member State enhances the position of an undertaking in comparison with other undertakings engaged in intra-Union trade, the latter will be considered to be affected by that aid; and the Commission has sufficiently explained that the airlines which have benefited from the State aid granted by the Autonomous Region of Sardinia operate in a sector characterised by intense competition between operators from different Member States, participating in trade between Member States. For all of these reasons, the General Court also rejected this particular argument put forward by the applicant.
We conclude our summary with the Court’s final assessment of the provision adopted by the Commission in Decision (EU) 2017/1861 of 29 July 2016, which ordered the recovery of the amounts charged by airlines as State aid under the contracts concluded with airports. In that regard, the General Court censored the applicant’s argument concerning legitimate expectation as to the lawfulness of the State aid measure in question. In bad faith, the airlines collected the State aid even though the scheme was implemented before the Commission’s decision on this measure.
We look forward to seeing if the General Court’s decision is appealed by the losing parties. Until then, we can only applaud the supranational court’s efforts to provide a consistent and equally compelling reasoning in a case that has caused a stir in the European press.
This text was prepared for the website of Costaș, Negru & Asociații – Lawyers’ Civil Partnership by Atty. Irina Galiș of the Arad Bar Association.