Introduction
Ryanair has challenged many Commission decisions authorising State aid for its rivals. In 2021 and 2022, the General Court delivered 12 judgments concerning covid-19-related aid granted to other airlines. Of those 12 judgments, Ryanair temporarily won only three. Its wins were transient because the General Court suspended the annulment of the relevant Commission decisions, on the grounds that the aid was important for the survival of the recipient airlines and that the errors of the Commission were minor and could be easily corrected. Within a couple of months, the Commission re-adopted the decisions and fixed the parts that the General Court had found to be defective.
However, on 10 May and again on 24 May 2023, Ryanair scored three significant successes. It managed to persuade the General Court that three Commission decisions – on the recapitalisation of SAS and of Lufthansa and on damage compensation for Italian airlines – were defective to an extent that annulment in their entirety was necessary. This article reviews case T-238/21, Ryanair v European Commission (SAS).1 The articles in the next couple of weeks will examine the other cases.
The evolution of Ryanair’s argumentation
In the first cases that Ryanair brought against the Commission its arguments were based on points of principle such as that the State aid to other airlines was discriminatory or that the aid infringed fundamental rights such as the freedom to provide services. They failed. In the latest cases it appears to have changed its tactics. It attacked successfully specific points of the Commission’s technical analysis. A summary of the unsuccessful arguments of Ryanair and the response of the General Court in italics can be found below.
State aid violates the principle of non-discrimination if it is granted only to certain airlines.
All State aid is discriminatory.
Member States have the right to choose to whom they grant aid.
Member States do not have unlimited resources.
Sharing State aid among many recipients reduces its effectiveness.
The Commission failed to balance the positive and negative effects of State aid.
State aid granted on the basis of Article 107(2)(b) or Article 107(3)(b) has to be appropriate, necessary and proportional.
No balancing is required by either Article.
State aid limited to airlines registered in the granting Member State is not appropriate.
State aid granted only to domestic airlines is more easily controlled by the granting State.
State aid to the main national airline is an appropriate intervention to remedy the disruption caused by covid-19, as it is important for connectivity and the national economy.
Recapitalisation of SAS
Ryanair appealed against a Commission decision with two registry numbers – SA.57543 and SA.58342 – authorising State aid granted by Denmark and Sweden, respectively, to SAS in the form of new capital. The purpose of the recapitalisation was to remedy the impact covid-19 on SAS. The aid was found to be compatible with Article 107(3)(b).
The recapitalisation was carried out through a hybrid instrument [i.e. loan convertible to equity] and an equity instrument. The aid, totalling EUR 1.1 billion, was granted on the basis of section 3.11 of the Temporary Framework [TF]. The TF allows recapitalisation only if, among other things, it is provided on conditions that incentivise the beneficiary undertaking to repay the aid as quickly as possible. This is achieved through a “step-up” mechanism which increases the rate of remuneration of the state over time. The longer the beneficiary keeps the capital, the more expensive it becomes.
Ryanair claimed that the Commission decision did not comply with the TF requirement for a step-up mechanism.
The provisions of the Temporary Framework on the step-up mechanism
The General Court began by summarising the relevant provisions of the TF on the step-up mechanism.
The Court observed that “(36) as regards the general principles [in section 3.11.5 of the TF], it is apparent from points 56 to 58 of the Temporary Framework that the Member State must put a mechanism in place to gradually incentivise the beneficiary concerned and the other shareholders to redeem the State recapitalisation carried out in the context of the COVID-19 pandemic. To that end, point 57 of the framework provides that, ‘The remuneration of the […] recapitalisation measure should be increased in order to converge with market prices’. As an alternative to the remuneration methodologies set out in the Temporary Framework, point 59 allows Member States to use an adapted remuneration methodology, provided that that
method leads overall to a similar outcome with regard to the incentive effects on the exit of the State and a similar impact overall on the State’s remuneration.”
The Court went on to note that “(37) as regards the remuneration of equity instruments, point 61 of the Temporary Framework provides that, ‘Any recapitalisation measure shall include a step-up mechanism increasing the remuneration of the State, to incentivise the beneficiary to buy back the State capital injections’. That increase in remuneration may take the form of additional shares granted to the State or other mechanisms, and should correspond to a minimum 10% increase in the remuneration of the State four years after the capital injection, if the State has not sold at least 40% of its equity participation resulting from that injection. If, six years after the capital injection, the State has not sold in full its equity participation resulting from that injection, the step-up mechanism is to be activated again.”
“(39) As regards the remuneration of hybrid capital instruments, point 66 of the Temporary Framework establishes a minimum remuneration for hybrid capital instruments until they are converted into equity instruments. It is apparent from the table inserted in that point of the Temporary Framework that the interest rate providing that remuneration is to increase over time, rising in the second, fourth, sixth and eighth years following the recapitalisation.”
Step-up mechanism for the hybrid instrument
Then the General Court examined the terms on which the hybrid capital had been granted. Ryanair argued that there was no step-up mechanism in the Commission decision.
The Court, first, pointed out that “(44) point 68 of the Temporary Framework provides for a step-up mechanism ‘after conversion into equity’ of the hybrid capital instrument concerned. As a result, as the Commission rightly observes, that point does not apply to hybrid capital instruments that are not convertible into equity, such as the State hybrid notes in the present case, which, as the parties agree, are not convertible into shares”.
In addition, “(47) the measure at issue in the present case provides for remuneration for the State hybrid notes by means of an interest rate which increases over time […] Moreover, while it is true that there is no certainty as to the principle for and the timing of the payment of the coupons, it should be observed that that measure also includes a system of compound interest in the event of the non-payment of the coupons […] It follows that the remuneration of the State hybrid notes increases over time, which constitutes an incentive for the exit of the State, in accordance with the provisions of points 57 and 66 of the Temporary Framework.”
Therefore, the General Court rejected Ryanair’s argument with respect to the hybrid instrument.
Step-up mechanism for the equity instrument
With respect to the presence of a step-up mechanism in relation to the equity instrument, the Court considered that “(49) since the new common shares constitute equity, the
remuneration for that recapitalisation instrument is governed by points 61 and 62 of the Temporary Framework, as correctly claimed by the applicant”.
“(51) In that regard, it is important to point out that points 61 and 62 of the Temporary Framework do not provide for any derogation from the obligation to require either a step-up mechanism or an alternative mechanism leading to the same result.”
“(52) In the present case, it is common ground that the equity instrument is not accompanied by any step-up mechanism, within the meaning of point 61 of the Temporary Framework.”
However, “(53) in paragraph 133 of the contested decision, the Commission nevertheless found that the ‘overall structure’ of the measure at issue constituted an alternative mechanism to the one envisaged in point 61 of the Temporary Framework.”
Therefore, the Court considered it “(54) necessary to examine whether the Commission was entitled to conclude, […], that the equity instrument included an alternative mechanism to that of the step-up mechanism, within the meaning of point 62 of the Temporary Framework.”
Alternative arrangements equivalent to step-up?
The General Court observed that “(55) that none of the factors put forward by the Commission demonstrates that the equity instrument was accompanied by an alternative mechanism to that of the step-up.”
Next, the Court explained why that was so. “(56) The Commission states, in paragraphs 128 and 130 of the contested decision, that, by acquiring new common shares at a price of SEK 1.16 per share, the Kingdom of Denmark and the Kingdom of Sweden benefit from a discount of 86.7% compared with the average price of SAS shares over the 15 days preceding the request for the capital injection, namely SEK 8.71 per share. That discount, according to the Commission, is very significant and enables those two Member States to acquire 72.7% of the capital injected into SAS, that is to say, more than the 68.13% of that capital that they would have obtained by purchasing their shares at that average price and then benefiting from a step-up mechanism in compliance with the Temporary Framework. Consequently, according to the Commission, that discount constitutes sufficient remuneration for those States ‘at entry’ into SAS’s capital.”
However, “(59) the objective pursued by the step-up mechanism is different from that underlying the rule on the initial purchase price of the shares. The objective of that mechanism is to cause the State’s shareholding to become more onerous over time by increasing the latter’s share of the company’s equity, without there being a further injection of capital by the State. That mechanism is therefore intended to be an ex post incentive to the beneficiary concerned to buy back that shareholding as quickly as possible, since the mechanism is only activated, if necessary, in the fourth and then the sixth year respectively after the capital injection. By contrast, the requirements as to the purchase price of the shares are intended, in essence, to ensure that the price at which the State acquires its shares does not exceed their market price. That price therefore has an ex ante impact on the situation of
the beneficiary concerned, that is to say, at the time the State enters the capital of that beneficiary, and it is not necessarily intended to increase over time the incentive, for the beneficiary concerned, to buy back that shareholding, since the price of the shares may rise as well as fall.”
“(60) Consequently, the price of the shares at the time of the State’s entry into the capital of the beneficiary concerned does not lead overall to a similar outcome with regard to the incentive effects on the exit of the State, as required under point 62 of the Temporary Framework.”
“(65) It follows that the Commission has not demonstrated to the requisite legal standard that the ‘overall structure’ of the measure at issue, and in particular the combined effects of its two interconnected components, led overall, with regard to the equity instrument, to incentive effects on the exit of the State from the beneficiary’s capital that are comparable to the incentive effects generated by a step-up mechanism within the meaning of point 61 of the Temporary Framework or an alternative mechanism within the meaning of point 62 of that framework.”
Conclusion
The General Court proceeded to annul the whole Commission decision because the part on equity could not be severed from the rest of the decision.
