Airlines Serving Sardinia Challenged the European Commission’s Decision Declaring Illegal State Aid … And They Lost

On May 13, 2020, the General Court of the European Union (“Court”) dismissed the actions brought by airlines easyJet, Volotea and Germanwings, who sought the annulment of the European Commission’s (“Commission”) decision declaring illegal the aid granted by Italy to airlines serving Sardinia.

The Court dismissed the airlines’ arguments relating to the absence of distortion of competition and of effect on trade between Member States.  In that regard, the Court explained that a national measure can be declared as State aid if such an aid is liable to affect trade and distort competition, without the necessity of establishing that such aid has a real effect on trade and that competition is actually being distorted.

 

 

Let’s take two steps back

 

In 2010, the Autonomous Region of Sardinia authorized the financing of the island’s airports of Alghero, Cagliari and Olbia, which in turn used it to provide financial compensation to selected airlines. The objective of this compensation was for these airlines to increase air traffic to Sardinian airports and promote it as a tourist destination.  The transfer of the regional funding from the airports to the airlines took place under conditions prescribed and monitored by the Sardinian authorities.

In January 2013, the Commission opened an in-depth investigation to examine whether this scheme complied with EU State aid rules.

As a result of the investigation, on July 29, 2016, the Commission found that public support granted by Sardinia provided an unfair advantage for selected airlines, in breach of EU State aid rules.  Financial compensation was granted by the airports to the airlines for the opening of new routes or extension of operations on existing routes to Sardinia.  This provided a financial incentive for the selected airlines to increase air traffic to Sardinia.  Furthermore, the selected airlines also received financial compensation from the airports for carrying out marketing operations as a part of their normal business.

Airlines easyJet, Volotea and Germanwings took their case to the Court. In support of their actions for annulment, the airlines put forward several pleas alleging, inter alia, errors of law relating to the concept of State aid, the possibility of justifying the aid at issue and the order to recover the aid at issue.

 

Commission’s findings supported by the Court

 

The Court confirmed the Commission’s conclusions, as follows:

 

  • the prohibition of State aid could apply to the payments made by the airport operators to the airlines;

 

  • the airport operators could be considered as intermediaries between the Sardinia region and the airlines since they had transferred fully the funds received from the region to the airlines and had acted in accordance with the instructions received from the region;

 

  • the airport operators were not beneficiaries of the aid scheme, given that operators were essentially limited to implementing the aid scheme established by the region;

 

  • the region had not acted as an investor, given that it had put in place the aid scheme at issue solely with a view to the island’s economic development;

 

  • the Commission had been entitled to categorize the measures at issue as a ‘State aid scheme’.

 

Finally, the decision is very interesting in terms of the Market Economy Investor Principle – MEIP. Within the meaning of EU rules, public authority investments in companies on terms and in conditions which would be acceptable to a private investor operating under normal market economy conditions, are not classed as State aid (so-called Market Economy Investor Principle – MEIP). If the MEIP is complied with, the measure confers no advantage on the company and therefore involves no State aid. If the MEIP is not complied with, the measure involves State aid and the Commission then examines whether it can be found compatible with common EU rules.  In this particular case, the Commission’s investigation found that no private investor would accept to finance such an increase in air traffic nor the related marketing activities of the airlines.

 

How does this decision concern Serbia?

 

The Republic of Serbia signed the Stabilization and Association Agreement (“SAA”) with the European Communities and their Member States.  Under Article 73 of the SAA, State aid that distorts or threatens to distort competition by favoring certain undertakings or certain products is incompatible with the proper functioning of the SAA insofar as it may affect trade between the European Community and Serbia.  Any action in accordance with, or contrary to this article is assessed based on criteria arising from the application of competition rules in the European Community.  This means that Serbia is required to fully apply the EU acquis, including both EU regulations and case law.  Hence, as a part of EU case law, this decision will be relevant for the Serbian authority when examining whether public authority investments in companies are free of State aid, i.e. whether they were made on terms and in conditions which would or would not be acceptable to a private investor.