Introduction
In December 2020, the Commission approved State aid scheme SA.59029 by which Italy compensated airlines for damage they had suffered as a result of covid-19-related restrictions, in the period from 1 March to 15 June 2020. Eligible airlines were only those that were licensed in Italy. The aid was approved on the basis of Article 107(2)(b) TFEU.
In May 2023, the General Court annulled the 2020 Commission decision [see T-268/21, Ryanair v Commission]. This judgment of the General Court was reviewed here on 13 June 2023. It can be accessed at:
The General Court found, first, a contradiction in the Commission’s reasoning. On the one hand the Commission considered that one of eligibility conditions was indissolubly linked to the aid measure itself. On the other, it also stated that the same condition was not inherent in the objective of that measure. The condition in question was that eligible airlines licenced in Italy remunerated their employees at a rate that exceeded the minimum wage in the aviation sector. Second, the General Court found that the Commission had not carried out a thorough examination of other provisions of EU law for the purpose of confirming that the Italian scheme was compatible with EU law outside the field of State aid. The Commission examined the compatibility of the scheme only with a regulation concerning contractual obligations. The General Court ruled that that was not sufficient.
Although an appeal against the judgment of the General Court is still pending before the Court of Justice [C-490/23 P, Neos v Ryanair & Commission], the Commission proceeded to correct its initial decision to conform with the findings of the General Court [appeals do not have a suspensory effect]. The revised decision was adopted in March 2024 also under number SA.59029.[1]
Compatibility with the internal market
The Commission assessed the compatibility of the aid measure on the basis of Article 107(2)(b) TFEU which applies to compensation for damage caused by natural disasters or exceptional occurrences.
Exceptional occurrence
As a first step, the Commission confirmed that covid-19 was an exceptional occurrence.
“(58) Neither the TFEU nor Union secondary legislation give an exact definition of the notion of ‘exceptional occurrences’ contained in Article 107(2)(b) TFEU. […] the Commission, in line with the Union case law, holds that the notions of ‘exceptional occurrences’ referred to in Article 107(2)(b) TFEU must be interpreted restrictively.”
“(59) To establish whether an event is to be considered an exceptional occurrence within the meaning of Article 107(2)(b) TFEU, the Commission makes a case-by-case assessment, having regard to its previous practice in the field. In that context, the following conditions must be cumulatively met: (i) the event must be unforeseeable or difficult to foresee; (ii) it must have a significant scale/economic impact; and (iii) it must be extraordinary, i.e., differ sharply from the events linked to the conditions under which the market normally operates.”
“(65) The COVID-19 pandemic is an event that was not foreseeable and is clearly distinguishable from ordinary events, by its character and its social and economic effects, which therefore fall outside the normal functioning of the market”.
Causal link between the damage compensation and covid-19
Next, the Commission also confirmed that the damage was indeed caused by covid-19. The case law [e.g. C-278/00, Greece v Commission, paragraphs 81 & 82] requires that the damage is “caused directly” by a natural disaster or exceptional occurrence and that there is a “direct link” between the damage and the natural disaster or the exceptional occurrence. In other words, it excludes indirect links such as, for example, reduced revenue from the sale of perfume on flights because aircraft did not fly during the pandemic.
“(86) The Commission therefore concludes that the aid scheme aims at covering the net losses incurred by the beneficiaries as a direct effect of the COVID-19 pandemic, and related to the restrictions taken by public authorities between 1 March and 15 June 2020 to limit its spread.”
Proportionality of the aid
For State aid to be declared compatible with the internal market, either on the basis of Article 107(2) or Article 107(3) TFEU, the aid must be proportional. In the case of compensation for damage, the aid may offset only the impact of the damage caused by a natural disaster or exceptional occurrence – not of any other event – and may not exceed the monetary value of that damage.
“(89) The Commission notes that the damage to be compensated under the scheme corresponds to the net losses, i.e., the loss of revenue net of the avoided costs […], suffered by the beneficiaries of the scheme as a consequence of the COVID-19 pandemic and linked to the containment measures taken by public authorities to limit its spread.”
“(90) The Commission also notes that the net losses amount to the difference between the revenue that each beneficiary would have expected during the reference period, had said containment measures not been adopted, and the revenue that it actually made during that period […] To estimate the counterfactual revenue for the reference period, the Italian authorities considered the revenue made by the beneficiaries in the period from 1 March to 15 June 2019 […], that is, the same period in the year preceding the outbreak of the COVID19 pandemic and the introduction of the containment measures.”
“(91) The Commission further notes that avoided costs amount to the costs that the beneficiaries would have had to have borne during the reference period if their activities had not been affected by the containment measures enforced to limit the spread of the COVID-19 pandemic, and that they did not bear as a result of their reduced activities […] The Italian authorities estimated avoided costs by comparing the costs borne by the beneficiaries in the reference period with the costs borne in the period 1 March–15 June 2019”.
“(93) The Commission finally notes that, as explained by the Italian authorities, the amount of aid to be granted to the beneficiaries of the scheme corresponds to the lowest damage calculation (net losses calculation as defined in recital (32) or EBITDA figures) provided by the beneficiaries, and that, therefore, the total amount or the aid cannot be more that EUR 78.45 million”.
“(95) The Italian authorities also committed to implementing safeguards against any risk of overcompensation of damage already made good by the beneficiaries from other sources: in view of this, an ex-post mechanism to recover any aid unduly granted was established”.
Compliance of the aid scheme with other provisions of EU law
This was the part of the Commission’s initial assessment that had been found by the General Court to be defective. Therefore, the Commission, in its revision, paid particular attention to the explanation of its reasoning.
First, it recalled that “(98) State aid measures that breach provisions or general principles of Union law cannot be declared compatible with the internal market”.
“(99) It is settled case law that those aspects of State aid measures that contravene specific provisions of Union law other than Articles 107 and 108 TFEU may be so indissolubly linked to the object of the aid that it is impossible to evaluate them separately, so that their effect on the compatibility or incompatibility of the aid viewed as a whole must therefore be determined in the light of the procedure prescribed in Article 108 TFEU”.
“(100) In the present case, the Commission notes that the Italian authorities established four eligibility requirements […] Those requirements are indissolubly linked to the object of the scheme, because they were specifically set out in order to select the undertakings that will be eligible for compensation under the scheme itself, and thus regulate the identification of the potential beneficiaries thereof. In other words, the eligibility requirements […] determine the scope of the measure, which is an aspect that must necessarily be taken into account in the assessment of the selectivity of the measure and hence of its qualification as State aid within the meaning of Article 107(1) TFEU […] The scope of an aid scheme is also an element to take into account in the assessment of its compatibility with the internal market, as it must be defined in coherence with the public interest objective allegedly pursued by the aid scheme itself. Therefore, the eligibility requirements to identify the beneficiaries of the measure must be examined by means of the procedure prescribed in Article 108 TFEU.”
“(101) The Commission further notes that one of the four eligibility requirements, namely the minimum remuneration requirement, is not inherent in the objective of the measure, however. While the objective of the scheme is to make good the damage suffered by its beneficiaries due to the COVID-19 pandemic […], the minimum remuneration requirement aims at ensuring that the beneficiaries of the scheme apply certain salary standards to their employees that have their ‘home base’ in Italy.”
I cannot understand paragraphs 100 and 101 taken together. While in paragraph 100, the Commission states that the four eligibility requirements are “indissolubly linked to the object of the scheme”, in paragraph 101 it notes that one of those requirements are not “inherent in the objective of the measure”. A feature that is indissoluble to something, must also be inherent to that same thing. This is one of the defects identified by the General Court in the initial decision. The Commission appears here to be trying to justify the distinction it makes by referring to the purpose of the minimum remuneration requirement. But, since by the logic of the principles expounded in paragraph 100, all of the requirements determine the selectivity and scope of the measure, they must also necessarily be taken into account in the compatibility assessment.
Then the Commission also noted that “(102) on 29 June 2020, AICALF, the Italian Low Fares Airline Association, lodged a complaint with the Commission, alleging that Article 203 of Decree-Law 34 of 19 May 2020 breached the freedom to provide services (‘AICALF complaint’). Article 203 of Decree-Law 34 of 19 May 2020 imposes a minimum remuneration obligation to airlines operating in Italy which is overall comparable to the minimum remuneration requirement attached to the scheme […] The AICALF complaint was closed by the Commission on 19 August 2021, following a pre-closure letter sent to the complainant on 8 June 2021.”
I also don’t understand why the reference to the closure of the complaint is relevant here, given that the closure decision was taken in August 2021, while the judgment of the General Court that annulled the Commission decision on the scheme in question was delivered in May 2023.
And, then, rather surprisingly, the Commission makes an about-face.
“(103) Given that context, the Commission concludes that, while the condition concerning the minimum remuneration requirement shall not be decoupled from the aid measure assessed in the present procedure and must be examined in the present decision, there is particular cause to examine whether that minimum remuneration requirement could breach relevant provisions of Union law other than Article 107 and 108 TFEU.”
“(104) The minimum remuneration requirement requires the beneficiaries of the scheme to apply to their employees based in Italy a remuneration not lower than the minimum established by the Italian national collective agreement for the aviation sector. As a condition to be eligible for aid, the minimum remuneration requirement thus limits the freedom for the beneficiaries of the scheme and their employees to choose the rules applicable to the employment contracts, as concerns, in particular, an essential feature of those contracts, i.e., remuneration. The minimum remuneration requirement applies irrespective of any transnational element that could be present in such contracts. Therefore, the Commission will assess the compatibility of the minimum remuneration requirement with Article 8 of the Rome I Regulation, which sets the rules applicable to the choice of law for individual employment contracts.”
The Commission, as in its initial decision, limits its assessment to the Rome I Regulation. This is puzzling because it is the limited scope of the assessment that was faulted by the General Court. But again, the Commission appears to make an about-face.
“(105) The Commission also notes that, as the minimum remuneration requirement impacts on the freedom to choose the rules governing employment contracts, it could impact on the free provision of passenger air transport services as well. In that respect, the Commission notes that the AICALF complaint raised the question of compatibility of the minimum remuneration obligation imposed by Article 203 of Decree-Law 34 of 19 May 2020, which is in essence comparable to the minimum remuneration requirement of the measure, with the freedom to provide service […] Therefore, for the sake of completeness, the Commission will also assess the compatibility of the minimum remuneration requirement with the freedom to provide services.”
Compliance of the minimum remuneration requirement with Article 8(1) of the Rome I Regulation
The Commission explained that the Rome I Regulation contained a provision that was very relevant to this case: namely a requirement for compliance with local labour law.
“(107) Pursuant to Article 8(2) of the Rome I Regulation, individual employment contracts ‘shall be governed by the law of the country in which or, failing that, from which the employee habitually carries out his work in performance of the contract’.”
“(109) Employees who have their ‘home base’ in Italy cannot be deprived of the protection imposed by rules of Italian law from which, pursuant to Article 8(1) of the Rome I Regulation, individual employment contracts cannot derogate. The minimum remuneration set by the national collective agreement is one of those rules. As a consequence, all airlines that have employees based on the Italian territory would in any case be bound to meet the minimum protection provided by Italian law, no matter the Member State where the airline is established and/or incorporated.”
“(110) Therefore, the Commission concludes, for the purposes of this decision, that the minimum remuneration requirement appears to comply with the protection granted to employees by Article 8(1) of the Rome I Regulation.”
Compliance of the minimum remuneration requirement with the freedom to provide services
Article 56 TFEU protects the freedom of undertakings to provide cross-border services.
However, the Commission, first, noted that “(111) pursuant to Article 58(1) TFEU, the free provision of services in the field of transport is governed by the provisions of the Title relating to transport, namely Title VI of the TFEU. The free provision of services in the field of transport is therefore governed, in primary law, by a special legal regime. Consequently, Article 56 TFEU, which enshrines the freedom to provide services, does not apply as such to the air transport sector, as confirmed by the Union courts.”
“(112) As concerns the air transport sector, Regulation 1008/2008 (the ‘Air Services Regulation’) sets out rules for the operation of air services. Consequently, to verify if the minimum remuneration requirement is in breach of the freedom to provide services, that assessment must be carried out in the light of the provisions contained in the Air Services Regulation, and, more specifically, in its Article 15.”
“(113) Article 15(1) of the Air Services Regulation grants air carriers the right to freely operate intra-Union air services. It guarantees that all air carriers have the same access to the air transport market, irrespective of where they are incorporated and/or where their principal place of business is located.”
(114) That provision, however, does not release air carriers from their obligations deriving from Union and domestic social legislation that aim at protecting workers. This is confirmed by recital (9) of the Air Services Regulation itself, which provides that ‘[w]ith respect to employees of a [Union] air carrier operating air services from an operational base outside the territory of the Member State where that [Union] air carrier has its principal place of business, Member States should ensure the proper application of [Union] and national social legislation’.”
“(115) Therefore, the freedom to provide services in the air transport sector cannot be enjoyed to the detriment of relevant Union and national law protecting employees, such as those referred to by the minimum remuneration requirement, whose objective is to make sure that beneficiaries of the aid scheme apply to their employees based in Italy certain remuneration standards.”
“(117) Therefore, while the fundamental freedom to provide services within the Union applies to the air transport sector […], that freedom does not operate to the detriment of applicable Union and national social legislation […] In the case of national social standards, they can differ significantly depending on the applicable law […] : thus, the fact that certain Member States apply social standards that are higher than those applied by other Member States, cannot be regarded as violating the freedom to provide air transport services.”
The “(118) minimum remuneration can, in some cases, be higher than the one applied in other Member States. However, […], the imposition of that requirement cannot be considered a breach of Article 15(1) of Regulation 1008/2008.”
“(119) In the light of the above, the Commission concludes, for the purposes of this decision, that the minimum remuneration requirement appears to comply with Article 15(1) of Regulation 1008/2008 and therefore does not appear to breach the fundamental freedom to provide services.”
Conclusions
In view of the above explanation, the Commission found no cause to doubt the compatibility of the Italian scheme either with the internal market in the context of State aid rules or with other provisions of EU law.
In fact, if we ignore the reasoning “gymnastics” of the Commission, this case is a good example of how the Commission applies in practice the principle that State aid may not infringe provisions of EU law outside the field of State aid. It limits its assessment to those features of a State aid measure that are inseparable from the measure itself such as those that determine eligibility or delineate the scope of the measure. It follows that the Commission does not consider the economic impact of the measure on anything other than trade and competition [unless the economic impact forms part of specific compatibility criteria such as those that apply to Large Investment Projects in the Regional Aid Guidelines]. Broadly, this is because the economic impact of an aid measure very much depends on how the aid is used by the aid recipients and is not dictated by its inherent features.
[1] The full text of SA.59029 can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202430/SA_59029_193.pdf
