Shot down in flames
Ryanair has successfully challenged aid given by the Dutch and French governments to KLM and Air France. Marco Hickey touches down
Case T-146/22, Ryanair v Commission (7 February 2024), stems from a previous challenge by Ryanair against commission decision SA.57116 authorising state aid in favour of KLM in the context of the measures implemented by the Dutch government to address the COVID-19 pandemic (the May 2021 decision was Case T-643/20, Ryanair v Commission, 19 May 2021).
The General Court in May 2021 annulled commission decision SA.57116 on the ground that it was vitiated by a failure to state reasons as regards the determination of the beneficiary of the measure at issue, and ordered that the effects of the annulment of that decision be suspended pending the adoption of a new decision by the commission under article 108 of the TFEU.
The commission responded in July 2021 by adopting the corrected and contested decision, in which it found that the measure at issue involved state aid within the meaning of article 107(1) TFEU, but was compatible with the internal market on the basis of article 107(3)(b), which empowers the commission to approve aid “to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a member state”.
Significantly, the commission in the contested decision held that KLM and its subsidiaries were the sole beneficiaries of the aid, to the exclusion of the other companies in the Air France-KLM group.
The decision of the General Court in May 2021 followed two challenges by Ryanair (and its subsidiary Malta Air) before the General Court in Case T-216/21, Ryanair and Malta Air v Commission, where the General Court annulled the corresponding commission decisions of 2020 by which it authorised state aid granted by the French government to address the COVID-19 pandemic as follows:
- Commission decision approving aid to Air France in the context of measures implemented by the French government to address the COVID-19 pandemic (‘Air France decision’), where the court found that the commission committed a manifest error of assessment by considering that the beneficiaries of the measure at issue were Air France and its subsidiaries, to the exclusion of the Air France-KLM holding and its other subsidiaries, including KLM and KLM’s subsidiaries, and
- Commission decision approving aid to Air FranceKLM and Air France also in the context of measures implemented by the French government to address the COVID-19 pandemic (‘Air France and Air France-KLM decision’), where it held that the commission committed a manifest error of assessment by considering that the beneficiaries of the measure at issue were Air France and its subsidiaries and the Air France-KLM holding and its other subsidiaries, with the sole exception of KLM and its subsidiaries.
In Case T-146/22 on 7 February 2024, the General Court again annulled the corrected version of commission decision SA.57116.
Ryanair submitted that the commission wrongly considered that only KLM and the companies that it controls were the beneficiaries of the measure at issue, to the exclusion of the holding company Air France-KLM (‘Air France-KLM holding’), and Air France.
Ryanair referred to several factors to demonstrate that Air France-KLM holding and Air France were also potential or indirect beneficiaries of the measure at issue, such as the capital, organic, functional, and economic links between the Air France-KLM holding, Air France and KLM, the contractual framework on the basis of which the measure at issue was granted and the context of that measure.
The General Court examined capital and organic links, functional links, economic links, the agreements on the basis of which the measure at issue was granted, and the type of aid measure granted and the context in which it was granted.
Capital and organic links
Air France was 100% owned by the Air France-KLM holding, and the latter held 93.84% of the share capital, 99.7% of the economic rights, and 49% of the voting rights in KLM.
The Air France-KLM holding had a power of control over KLM by virtue of the veto rights that it enjoyed over KLM’s business plans and budgets, on the one hand, and over the remuneration, appointment, and dismissal of its managers, including the appointment and dismissal of the members of KLM’s board of directors, on the other, such that that the holding company had to approve decisions concerning, inter alia, the strategic options, budget, and investment plan of the ‘Air France-KLM group, including KLM’ before they were adopted or implemented, and Air France-KLM holding had the right to approve any financing transactions in excess of €150 million carried out by its subsidiaries.
The General Court referred to the 2019 universal registration document filed by the holding company with Autorité des Marchés Financiers (Financial Markets Authority, France) pursuant to Regulation (EU) 2017/1129 (2019 Universal Registration Document) referring to, at the Air France-KLM group level, a number of mixed bodies, composed of highlevel representatives of the Air France-KLM holding, Air France, and KLM, responsible for monitoring and coordinating certain important decisions to be taken within that group.
The court referred to the fact that the 2019 Universal Registration Document stated that, while investments were managed at the level of each company in the Air France-KLM group, the decision-making process was coordinated by a group investment committee, composed of the executive vice-president of Air France-KLM holding with responsibility for economic and financial affairs, the executive vice-president of Air France with responsibility for economic and financial affairs, and the chief financial officer of KLM.
It was apparent from the 2019 Universal Registration Document that the management of market risk within the Air France-KLM group was overseen by a risk management committee, which was also made up of senior managers from Air France-KLM holding, Air France and KLM, and that the risk management committee decided on and monitored the group’s financial risks and determined which safeguards needed to be put in place.
The decisions taken by the above bodies at the level of the Air France-KLM group were then implemented by each entity of the group.
Functional links
Air France-KLM holding had a strategic role in the provision of air transport services by Air France and KLM; even though Air France-KLM holding did not provide them itself (in particular in the area of sales and price and revenue management), Air France-KLM holding was involved in decisions regarding operations relating to the fleet, and Air France-KLM holding performed financial functions as required by Air France and KLM.
Air France-KLM holding performed financial functions as required by Air France and KLM, such as budgetary instructions to its subsidiaries and occasionally raised capital on the financial (debt or equity) markets for the benefit of its subsidiaries, depending on their individual requirements.
Air France-KLM holding was involved in the coordination and approval of significant investments by its subsidiaries, in shareholding and divestment transactions, and in the management of financial risks and the safeguards that needed to be put in place, which were subject to continuous and ongoing monitoring at the level of the Air France-KLM group.
It had a right of approval in respect of financing transactions of its subsidiaries that exceeded €150 million and that, consequently, it had to approve the measure at issue.
Economic links
Air France-KLM holding generated its revenue solely from its subsidiaries, which demonstrated that there was a degree of economic interdependence between that holding company and its subsidiaries.
This was supported in particular by the fact that Air France and KLM were trying to achieve synergies by coordinating their respective activities under the aegis of Air France-KLM holding, in particular in the area of sales and price and revenue management and that that holding company was involved in the financing of its subsidiaries in a coordinated manner.
Air France-KLM holding acted on the financial markets as an ‘intermediary’ between its subsidiaries and investors and was acting in the interests of its subsidiaries by raising funds to meet their needs on those financial markets.
Air France-KLM holding negotiated the terms of financing on the financial markets on the basis of the financial position of the Air France-KLM group as a whole, thereby achieving synergies within that group.
There were cost-sharing agreements between Air France and KLM, and activities carried out collectively by Air France and KLM and their subsidiaries confirmed that there was a degree of economic integration and cooperation between them.
The financial and commercial relations between the Air France-KLM holding and its subsidiaries, Air France and KLM, as well as between those subsidiaries themselves, were conducted under ‘normal market conditions’.
In the absence of the measure at issue, KLM would probably not have been able to continue its activities and, therefore, would also have jeopardised the continuation of the activities carried out collectively with Air France.
Agreements
The agreements on the basis of which the measure at issue was granted consisted, among other things, of various contracts (framework and loan), and Air France-KLM holding was a contracting party to the framework agreement that laid down the general conditions governing the grant of the measure at issue.
Type of aid measure
With regard to the type of aid measure granted and the context in which it was granted, the General Court accepted that the commission did not examine the cumulative effects of the aid covered by the Air France decision, the Air France-KLM and Air France decision, and the contested decision.
The contested decision only mentioned the aid measure that was the subject of the Air France decision and not the Air France-KLM and Air France decision.
The commission submitted that the measure at issue, at most, had only “mere secondary economic effects” in respect of Air France-KLM holding and Air France, which were inherent in any state aid, but which could not be classified as a direct or indirect advantage for them.
The court highlighted that an undertaking receiving an indirect advantage must be regarded as a beneficiary of the aid.
An advantage directly granted to certain natural or legal persons may constitute an indirect advantage and, therefore, state aid for other legal persons that are undertakings.
The General Court referred to the following provisions of the commission notice on the notion of state aid as referred to in article 107(1) of the TFEU (‘state aid notice’):
- Paragraph 115, which states that a “measure can also constitute both a direct advantage to the recipient undertaking and an indirect advantage to other undertakings, for instance, undertakings operating at subsequent levels of activity”,
- Footnote 179 of the state aid notice, which states that, where an intermediary undertaking is a mere vehicle for transferring the advantage to the beneficiary and it does not retain any advantage, it should not normally be considered as a recipient of state aid,
- The commission underlines in the state aid notice that indirect advantages should be distinguished from mere secondary economic effects that are inherent in almost all state aid measures. The court stated that, for that purpose, the foreseeable effects of the measure should be examined from an ex ante point of view. Thus, an indirect advantage is present if the measure is designed in such a way as to channel its secondary effects “towards identifiable undertakings or groups of undertakings”. The court referred to footnote 181 of the state aid notice, which explains that, by contrast, a mere secondary economic effect in the form of increased output, which does not amount to indirect aid, can be found where the aid is simply channelled through an undertaking, for example, through a financial intermediary, which passes it on in full to the aid beneficiary.
The court held that it was apparent that Air France-KLM holding was not limited to that of a ‘mere vehicle for transferring the advantage to the beneficiary’ or to a ‘financial intermediary’ for the purposes of paragraphs 115 and 116 of the state aid notice and that the holding company actually exercised control over its subsidiaries by involving itself directly or indirectly in their management, and thus took part in the economic activity they pursued, which enabled it to control and direct the activities of its subsidiaries on the basis of its own interests and those of the group in general.
Similarly, the foreseeable effects of the measure at issue from an ex ante perspective suggested that, in view of the type of aid measure granted and the context in which it was granted – consisting, in essence, of a financing solution – that that financing solution was likely to benefit the Air France-KLM group as a whole by improving its overall financial position, which indicated the existence, at the very least, of an indirect advantage in favour of “[an] identifiable [group] of undertakings” for the purposes of paragraph 116 of the state aid notice.
The court stated that it was apparent in particular from recital 13 of the contested decision that, in view of the significant and immediate financial impact of the COVID-19 pandemic, the Kingdom of the Netherlands decided to assist KLM at a time of severe liquidity shortage and risk of failure.
Thus, since the objective of the measure at issue was to find a financing solution in order to meet KLM’s liquidity needs and since it was apparent from the documents before the court that Air France-KLM holding played a certain role in financing the Air France-KLM group, that measure would have the foreseeable ex ante effects of (a) improving the financial situation of that holding company – which is a party to the framework agreement and had significant contractual rights and obligations in that capacity – and thus of the group as a whole, and (b) ensuring the financial stability – including in the eyes of the financial markets – of that group as a whole, including Air France.
Furthermore, in the absence of the measure at issue, the immediate threat to the continuity of KLM’s activities, identified in the contested decision, could have spread to the Air France-KLM group as a whole, given that KLM was one of the main subsidiaries of that group, generating a significant portion of its revenue.
The General Court held that the above finding was not called into question by the order of Case C604/14, Alcoa Trasformazioni v Commission (21 January 2016), cited by the commission in support of its argument that, when calculating the amount of aid, it does not examine the secondary effects of the aid on consumers, suppliers, investors, or employees of the beneficiary.
The court stressed that the above case did not concern an intra-group situation, and the KLM case itself did not concern the secondary economic effects of an aid measure on consumers, suppliers, investors, or employees.
Manifest error
The General Court concluded that the commission, in its revised state-aid approval decision, committed a manifest error of assessment by considering that the beneficiaries of the measure at issue were KLM and its subsidiaries, to the exclusion of the Air France-KLM holding and its other subsidiaries, including Air France and its subsidiaries.
This case, along with the General Court decisions arising from the various Ryanair (and its subsidiary Malta Air) state-aid challenges to aid to the corporate group of Air France-KLM group, underlines the need for the commission to properly assess and identify the beneficiaries of state-aid measures, which includes an analysis of the relevant links between related entities.
The four challenges made by Ryanair to aid to the KLM-Air France corporate group resulted in the annulment of each of the four contested commission state-aid approval decisions, on the basis that the commission failed in each case properly to identify the beneficiaries of the state-aid measure in question.
Dr Marco W Hickey SC is head of the EU Competition and Regulated Markets Unit at LK Shields Solicitors
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Marco W Hickey
Marco W Hickey is head of the EU Competition and Regulated Markets Unit at LK Shields Solicitors