State Aid
European Commission’s in-depth investigations into state aid for European airlines
The European Commission has been conducting thorough investigations into the state aid measures provided to Deutsche Lufthansa AG and Air France-KLM Group to ensure their compliance with EU State aid rules. Initially approved under the State aid COVID Temporary Framework, these measures have faced legal challenges leading to their annulment by the General Court. The Commission’s reassessment is aiming to address the Court’s concerns and ensure that the aid complies with EU regulations.
Lufthansa’s Recapitalisation Measure
The European Commission is currently reassessing compliance on a €6 billion recapitalisation measure granted by Germany to Deutsche Lufthansa AG. Originally approved on 25 June 2020, this measure was subsequently annulled by the General Court on 10 May 2023. The measure included an equity component of €306 million and two hybrid instruments totalling €5.7 billion: Silent Participation I (€4.7 billion) as a non-convertible equity instrument and Silent Participation II (€1 billion) as a convertible debt instrument.
To benefit from the aid, Lufthansa was required to adhere to several behavioural commitments, including a prohibition on dividend distribution, strict limits on the remuneration of management (including a ban on bonus payments), and the divestment of up to 24 slots per day at Frankfurt and Munich airports to facilitate the entry of competing carriers. The Commission’s ongoing investigation will focus on several key points, including confirming Lufthansa’s eligibility for the aid, evaluating the need for a “step-up” or similar mechanism to incentivize the state’s exit from the capital, assessing the price of shares in case of conversion of Silent Participation II into equity, investigating the existence of significant market power at airports other than Frankfurt and Munich (particularly at Düsseldorf and Vienna airports), and reviewing certain aspects of the structural commitments imposed on Lufthansa.
The opening of this in-depth investigation allows Germany and interested third parties to submit comments, without prejudging the investigation’s outcome.
Air France-KLM Support Measures
The European Commission also recently approved support measures totalling €10.4 billion provided by France and the Netherlands to the Air France-KLM Group. Initially approved on 4 May 2020 and 13 July 2020, these measures were annulled by the General Court on 20 December 2023 and 7 February 2024, respectively. The court found that the Commission erred in considering Air France and KLM as the sole beneficiaries of the aid measures.
The French aid consisted of a €4 billion bank loan guarantee and a €3 billion loan, while the Dutch aid included a €2.4 billion bank loan guarantee and a €1 billion loan. The Commission has now reassessed the measures with the Air France-KLM Group as the beneficiary and concluded their compatibility with the COVID Temporary Framework and EU Treaty principles. The remuneration for both the loans and guarantees is structured to increase over time, encouraging early reimbursement. The loans and guarantees were granted before 31 December 2020, with durations not exceeding six years, and the amounts were within the limits set by the Temporary Framework. The measures are aimed at remedying serious disturbances in the economies of France and the Netherlands, in line with Article 107(3)(b) TFEU. The Commission ensured that the combination of Dutch and French measures did not lead to incompatible cumulation of aid, with combined amounts remaining below relevant ceilings.
The Commission concluded that these measures were necessary, appropriate, and proportionate to manage the economic impact of the coronavirus pandemic in both Member States.
Background and Implications
The European Commission’s investigations into state aid measures for Lufthansa and Air France-KLM are part of a broader framework established to address the economic disruptions caused by the COVID-19 pandemic. On 19 March 2020, the Commission adopted the State aid COVID Temporary Framework, which provided Member States with unprecedented flexibility to support their economies in response to the pandemic. This framework was amended several times to extend its scope and duration.
The COVID Temporary Framework allowed Member States to design measures compatible with existing EU State aid rules, such as providing urgent liquidity support to companies facing sudden financial difficulties. It also facilitated the compensation of companies for damages directly caused by exceptional occurrences, such as the pandemic, under Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU).
Despite its expiration on 30 June 2022, the Temporary Framework played a critical role in stabilizing the European economy during the pandemic. The framework complemented other EU initiatives, such as the Recovery and Resilience Facility, aimed at fostering a sustainable recovery across Member States.
For Lufthansa, the Commission’s reassessment will scrutinise the company’s eligibility for the aid and the structural commitments imposed, such as divesting airport slots. This reflects a broader concern about the potential market dominance of major airlines and the need to maintain competitive access to key airports for new entrants and smaller carriers.
The Air France-KLM case underscores the complexity of state aid involving multinational groups with significant operations in multiple Member States. The Commission’s reassessment considers the need to avoid incompatible cumulation of aid and to ensure that the measures remain proportionate and targeted.
Moreover, the investigations have broader implications for the aviation sector, which has been severely impacted by the pandemic. The sector’s recovery is crucial for the European economy, given its significant role in tourism, trade, and connectivity.
