Introduction
On the same day that the General Court ruled on the recapitalisation of SAS, it also ruled on the recapitalisation of Lufthansa in case T-34/21, Ryanair v European Commission.1 In the latter case, Ryanair sought the annulment of Commission decision SA.57153 of June 2020 by which the Commission approved injection of capital in Deutsche Lufthansa [DLH] of the amount of EUR 6 billion. The recapitalisation was considered to be State aid compatible with the internal market under Article 107(3)(b) TFEU.
DLH is the parent company of the Lufthansa Group, which, includes Lufthansa, Brussels Airlines, Austrian Airlines, Swiss International Air Lines and Edelweiss Air.
The aid measure consisted of the following three elements:
· An equity participation of EUR 306 million.
· A ‘silent participation’ of EUR 4694 million, which was a hybrid capital instrument treated as equity [silent participation I].
· A ‘silent participation’ of EUR 1 billion with the features of a convertible debt instrument [silent participation II].
The recapitalisation was just one of several aid covid-19 related measures in favour of DLH. They can be summarised as follows:
· A state guarantee of 80% on a loan of EUR 3 billion to DLH [SA.56714].
· A state guarantee of 90% on a loan of EUR 300 million to Austrian Airlines [SA.56840].
· A loan of EUR 150 million to Austrian Airlines.
· Liquidity support of EUR 250 million and a loan of EUR 40 million to Brussels Airlines.
· A state guarantee of 85% on a loan of EUR 1.4 billion to Swiss International Air Lines and Edelweiss Air.
The probative value of the expert reports
After the General Court held that Ryanair had legal standing it did something rather unusual: It commented on the role of expert reports in judicial proceedings because Ryanair’s arguments relied on several such reports.
“(81) It should be borne in mind that given that there is no legislation at EU level governing the concept of proof, the Courts of the European Union have laid down a principle of unfettered production of evidence or freedom as to the form of evidence adduced, which is to be interpreted as the right to rely, in order to prove a particular fact, on any form of evidence, such as oral testimony, documentary evidence, confessions, expert reports and so on. Correspondingly, it is settled case-law that the determination of reliability or, in other words, the probative value of an item of evidence is a matter for those Courts. Accordingly, in order to establish the probative value of a document, it is necessary to take account of several factors, such as the origin of the document, the circumstances in which it was drawn up, the person to whom it was addressed and its content, and to consider whether, according to those aspects, the information it contains appears sound and reliable”.
Then the General Court noted that some reports were prepared independently for other purposes by experts who had no connection to Ryanair. Certain other reports were prepared specifically for this case at the request of Ryanair.
The Court observed that “(85) those reports were drawn up on the basis of information that was publicly available or which originated from reputable and reliable sources that were independent of Ryanair.” “(86) While it is true that those reports post-date the adoption of the contested decision, the fact remains that they are based on data that existed at the time the contested decision was adopted. In that regard, according to the case-law, the fact that the review carried out by the Court hearing an application for annulment is carried out solely by reference to the elements of fact and of law existing on the date of adoption of the contested decision is without prejudice to the possibility afforded to the parties, in the exercise of their rights of defence, of supplementing them by evidence established after that date, but for the specific purpose of contesting or defending that decision”.
“(87) In those circumstances, the Court finds that the reports […] have probative value.”
The eligibility of DLH for the aid and point 49(c) of the Temporary Framework
In its first plea, Ryanair claimed that DLH was not eligible to receive aid under the Temporary Framework [TF]. Ryanair advanced several arguments, not all of which succeeded. This article reviews the most important of those arguments.
Ryanair claimed that the Commission infringed point 49(c) of the TF which required that the aid recipient had to be unable to obtain financing on the markets at affordable terms.
“(118) In the present case, it must be stated, as Ryanair has done, that, in the period preceding the adoption of the contested decision, the Lufthansa Group owned 86% of its fleet of 763 aircraft, that 87% of the aircraft it owned were unencumbered, and that the book value of
that fleet was approximately EUR 10 billion. Those findings emerge in a clear, unequivocal and consistent manner from several items of evidence”.
“(119) Taking into account a potential asset value decline of 20% to 50% due to the COVID-19 pandemic and a loan-to-value ratio (LTV) of 40% to 60%, DLH could have raised between EUR 1 and 3.7 billion in debt financing by using its aircraft and spare parts as collateral.”
“(122) In the contested decision the Commission merely asserted that DLH did not have ‘sufficient collateral’ to obtain financing instruments on the markets ‘over the entire amount’ of the aid.” “(123) However, […], the Commission did not substantiate that assertion in any way.”
“(124) Yet that is an important aspect of the condition laid down in point 49(c) of the Temporary Framework. An evaluation of an undertaking’s inability to obtain financing on the markets at affordable terms implies determining, in particular, whether that undertaking could offer collateral allowing it to have access to such financing. Furthermore, the terms for such financing depend, inter alia, on the type and value of such collateral. There is nothing in the contested decision to show that the Commission examined those issues.”
Furthermore, “(128) there is nothing in the wording of point 49(c) of the Temporary Framework to show that the beneficiary must be incapable of finding financing on the markets for the entirety of its needs.”
“(130) Point 44 of the Temporary Framework, […] states that recapitalisations must not exceed the minimum needed to ensure the viability of the beneficiary, and, more widely, by the general principle of proportionality, which requires that measures adopted by EU institutions must not exceed what is appropriate and necessary to attain the objective pursued”.
“(132) In the present case, the Commission failed to assess whether the beneficiary could have raised a non-negligible part of the necessary financing on the markets.”
Ryanair also argued that the Commission had failed to show that the recapitalisation was the most appropriate and the least distortionary, in line with point 53 of the TF. But this argument was rejected by the General Court which recalled established case law according to which “(147) the Commission is not required to take a decision on every other possible aid measure. It is not required to prove, positively, that no other conceivable aid measure, which by definition would be hypothetical, would be more appropriate and less distortive to competition”.
The amount of the aid and point 54 of the Temporary Framework
Ryanair contended that the amount of aid was excessive and infringed point 54 of the TF.
The General Court, first, interpreted point 54, according to which “(153) in order to ensure the proportionality of the aid, the amount of the COVID-19 recapitalisation must not exceed the minimum needed to ensure the viability of the beneficiary concerned, and should not go
beyond restoring the capital structure of the beneficiary to that pre-dating the COVID-19 outbreak, namely the situation on 31 December 2019.”
Then it noted that “(155) point 54 of the Temporary Framework makes no reference to the profitability of the beneficiary concerned.”
“(156) Furthermore, several parts of the Temporary Framework show that the principal objective of the planned aid measures is, in essence, to ensure that the beneficiaries concerned are able to cover their liquidity needs in order to allow operational continuity during and after the COVID-19 pandemic.”
“(157) The Temporary Framework is thus not intended to restore ‘a positive return’ for the beneficiary or its profitability, or to ensure that it becomes profitable as a result of the aid, but merely to guarantee its operational continuity during and after the COVID-19 pandemic, in particular by re-establishing the capital structure that existed before the outbreak of the pandemic.”
“(162) Consequently, this complaint must be rejected as unfounded.”
The remuneration of the state and absence of a step-up mechanism
Ryanair claimed that the Commission infringed the conditions laid down in the TF regarding the remuneration and exit of the state.
Ryanair contended that the Commission infringed points 61 and 68 of the TF by not requiring a step-up mechanism for increased remuneration of the equity participation and for the silent participation II after its possible conversion into equity.
The General Court, first, observed that “(247) the remuneration for the equity participation does not provide for a step-up mechanism within the meaning of point 61 of the Temporary Framework.” “(248) Nevertheless, the Commission found […] that the ‘overall structure’ of the measure at issue constituted an ‘alternative’ step-up mechanism.”
“(250) It is important to point out that the Temporary Framework, in the version applicable ratione temporis, does not provide for any derogation from the obligation to require either a step-up mechanism or an alternative mechanism leading to the same result.” “(251) It must be stated that, in the present case, the equity participation is not accompanied by any step-up mechanism.” “(252) Furthermore, it should be observed, as Ryanair has done, that none of the grounds put forward in the contested decision demonstrates that the equity participation was accompanied by an ‘alternative’ mechanism to that of the step-up.”
“(271) The present complaint is therefore well founded and must be upheld.”
Undue distortions of competition and significant market power
Ryanair argued that the Commission infringed point 72 of the TF because DLH held significant market power [SMP] at several major German airports.
First, the General Court clarified the concept of SMP which, in fact, is not defined in the TF or in other State aid rules.
The concept of SMP “(365 – 368) is derived from Article 63(2) of Directive (EU) 2018/1972 […] establishing the European Electronic Communications Code […] That provision states that an undertaking is to be deemed to have SMP if, either individually or jointly with others, it enjoys a position equivalent to dominance, namely a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers. According to recital 161 of Directive 2018/1972, the definition of SMP used in that directive is ‘equivalent to the concept of dominance as defined in the case-law of the Court of Justice [of the European Union]’. The General Court considers that there is no objective reason to interpret the concept of SMP within the meaning of point 72 of the Temporary Framework differently from that stemming from Directive 2018/1972. … Accordingly, the concept of SMP within the meaning of point 72 of the Temporary Framework must be regarded, in essence, as equivalent to that of a dominant position under competition law.”
“(369) In that regard, it should be borne in mind that, according to settled case-law, a dominant position is defined in EU law as a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers”.
“(370) In addition, it has been held that a market share of 50% or more constituted a presumption of the existence of a dominant position […] Furthermore, […], the Court of Justice stated that the fact that an undertaking had a market share of 40% to 45% did not of itself permit the conclusion that it held a dominant position, but that such a conclusion could arise from that circumstance, taken together with other factors, such as, in particular, the strength and number of competitors. The Court of Justice held in that case that a dominant position existed on account of a market share of 40% to 45%, combined with the fact that that market share was several times greater than that of its best-placed competitor, the others coming far behind.”
“(383) It should be borne in mind that, for the purpose of assessing SMP, a concept which is similar or even equivalent to that of a dominant position […], market shares provide useful first indications on the structure of the market and the relative importance of the undertakings that are active on it. Accordingly, if the market share is high and held for a long time, it is very likely that that factor will constitute an important preliminary indication of the existence of a dominant position”.
“(384) Similarly, the Courts of the European Union have stated on numerous occasions that the existence of a dominant position may derive from several factors which, taken separately, are not necessarily determinative but among those factors a highly important one is the existence of very large market shares […] Accordingly, the relationship between the market shares of the undertaking at issue and its competitors, especially those of the next largest, is relevant evidence of the existence of a dominant position […] Moreover, in certain cases, the
existence of a dominant position may even be presumed on the basis of market shares alone if they exceed the threshold of 50%”.
“(385) Accordingly, it was incumbent on the Commission to take into consideration all the relevant factors for assessing the existence of SMP, relating both to barriers to entry and expansion and to the market shares held by the beneficiary concerned and its competitors on the market for passenger air transport services.”
“(386) In the light of all the foregoing, it must be found, as the applicants have observed, that the Commission, by solely examining factors that related, in essence, to barriers to entry and expansion with regard to airport capacity, failed to take into consideration all the factors that were relevant in the present case for assessing the market power of the beneficiary concerned at the relevant airports, thereby making a manifest error of assessment that vitiates the contested decision, as rectified by the correcting decision.”
Then the General Court examined whether DLH held SMP at main airports other than Frankfurt and Munich for which the Commission had already found that DLH held SMP.
With respect to Dusseldorf airport, the Court found that “(400) an overall assessment of those criteria demonstrates the existence of a very high slot holding, including during peak hours, on the part of the Lufthansa Group, a very high congestion rate, characterised by almost complete congestion during peak hours, and the weak position of the group’s competitors.” “(401) Consequently, on the basis of those criteria alone, the Commission could not properly find that the Lufthansa Group did not hold SMP at Düsseldorf Airport, at least during the IATA 2019 summer season.”
With respect to Vienna airport, the view of the General Court was that “(407) an overall assessment […] demonstrates the existence of a high slot holding, including during peak hours, on the part of the Lufthansa Group, a very high congestion rate, characterised by almost complete congestion during peak hours, and the weak position of the group’s competitors.” “(408) Consequently, on the basis of those criteria alone, the Commission could not properly find that the Lufthansa Group did not hold SMP at Vienna Airport, at least during the IATA 2019 summer season.”
Conclusion
The General Court upheld three of Ryanair’s pleas: the eligibility of DLH for aid given its ability to obtain market financing, the lack of a step-up mechanism for the remuneration of the state holding and the existence of SMP at several major airports.
On the basis of the above findings, the General Court proceeded to annul the Commission decision.
