One of the biggest controversies in the European aviation industry arose when the European Commission allowed France and Spain to pay state aid in unprecedented amounts to their national airlines Air France and Iberia. Many competitors, especially those which had rigorously cut costs to ensure recovery, expressed frustration and outrage.
If competing airlines had been aware of the legal protection at their disposal and had been willing to take advantage of it as early and as vigorously as possible, then they would have found that Commission decisions in this area are neither inevitable nor cast in stone. As old English law put it, 'equity aids the vigilant and not those who slumber on their rights.'
In July 1992, the Commission permitted Spain to grant recovery aid to its ailing carrier Iberia. This permission was based on the condition that there would be 'no further capital injections in the form of state aid', the so-called one time-last time principle. On 31 January 1996, however, the Commission approved a further injection of Pta87 billion (US$740 million). The Commission argued that any private investor could have made the same capital injection as the Spanish state in its capacity as Iberia's controlling shareholder, under the 'private investor test'.
Apparently, the Commission did not hear Iberia's competitors before it rendered its decision to the Spanish government. At press time, six months later, the decision had still not been published, though the Commission has expressed its intention to publish it. Nor is it publicly known whether competitors have challenged the decision.
Similarly, in July 1994 the Commission cleared a French rescue package worth FFr20 billion (US$1 billion) for Air France. One of the conditions was that Air France would not 'apply tariffs below those of its competitors for an equivalent supply on the routes that it operates within the European Economic Area'.
British Airways challenged the Commission's decision before the European Court of First Instance, and its case is expected to be heard in the coming months. Other carriers, including Lufthansa, expressed concern, but took no action in the courts. This year, however, Lufthansa, KLM and SAS asked the Commission to suspend payment of the third tranche of aid; they allege that Air France has been using the aid to lower its fares on intra-European routes on which these carriers compete. KLM reportedly intends terminating its Amsterdam-Marseille route for this reason.
In order to succeed, the three competitors must prove to the Commission that the lowering of certain Air France fares was made possible precisely through the aid. This proof will be hard to come by because the complainants, unlike the Commission, do not have access to Air France's books.
The Iberia and Air France cases are classic examples of the shortcomings of legal protection for enterprises which are affected by Commission decisions permitting state aid to their competitors.
The most palpable shortcoming is that the Commission procedure can be fundamentally unfair. The Treaty of Rome provides that the member states of the European Union must not grant state aid liable to distort competition unless the Commission has approved the aid beforehand. Member states must inform the Commission of any plan to grant aid, and proposed aid must not be put into effect before the Commission has reached a final decision. This may seem straightforward. However, in practice the procedure is such that the potential beneficiary of the aid and its competitors are granted little opportunity to express their views.
To begin with, there are no written rules of procedure. Instead, enterprises and their lawyers have to come to grips with a puzzling jumble of unconsolidated materials, such as regulations for special sectors, Community frameworks, Commission guidelines, Commission notices, Commission letters to national governments, Commission reports, and Commission decisions. Some of these materials, including important ones, are never published, despite the lip service the Commission pays to 'transparency'.
What is more, negotiations only occur between the Commission and the member state. At best, those ultimately affected - the potential beneficiary of the aid and its competitors - may submit comments to the Commission, but cannot take an active role in the procedure. Even worse, as in the Iberia case, the Commission often approves aid by way of summary proceedings: it only hears the member state concerned, not the industry, and no decision is published. Competitors are not able to express their views unless they hear of the proceedings by chance.
As a rule, public authorities may not do anything which would affect the competitive situation of enterprises unless these enterprises have been heard beforehand. However, the Commission seems to reject this maxim of 'due process' when it comes to state aid. The institution has constantly opposed any notion of a code of procedure which would enshrine the fundamental right of competitors to be heard and serve as a yardstick to control its operations. The Commission apparently fears this would make its political dealings more difficult, and prefers to avoid discipline by hard and fast rules, whose application would be subject to judicial review.
Thus the procedure whereby state aid is cleared often consists of political haggling between the Commission and member states behind closed doors, with commercial enterprises locked out.
Given that the procedure is so unfair, one would hope that at least the substantive test used by the Commission would entail some fundamental fairness to competitors. But that is often not so. Under its 'private investor test', the Commission allows member states to inject public money into ailing airlines to the extent that a private investor would have done. At first sight, this seems market-oriented and beneficial to competitors. In reality, however, the test is power-oriented and ideological. Airlines should know of this mindset before they argue about whether capital injections conform with the private investor test.
The basic flaw of the private investor test is that nobody can tell what a 'typical investor' would do if they were considering a capital injection into an ailing airline. There is no such thing as a 'typical investor', nor any uniform pattern of conduct that investors follow. If there were, every investor would take the same decision at the same time and there would be no weighing of risks against benefits by investors, and no competition among investors. Yet in the market there is rarely a single 'correct' investment decision: for example, private investors often make radically different competing bids for a public company.
What is occurring is a shift of regulatory power from member state governments, which are democratically elected, to the Commission, which is not. Airlines for or against state aid are the object of a power struggle which is ideological, in that the Commission often instinctively knows from the outset what it wants. Such an ideological approach is strongly indicated whenever the Brussels' rumour mill mentions a 'political decision' or a 'sensitive issue'.
These shortcomings make it advisable for those airlines, suffering because taxpayers' money is going to a competitor, to adhere to a number of practical strategies. The best general advice is to act as early as possible and on a consistent basis. Sadly, this is disregarded all too often. As with health care, few people take early and consistent precautions prior to the onset of physical pain. However, in law those who slumber on their rights may not be able to exercise these rights when they awaken in pain.
The early stages of a successful strategy against aid will often consist of subtle public affairs approaches. First and foremost, airlines should act before the Commission knows exactly what it wants, and ideally before a concrete case has come before it. Once the Commission has looked at an aid case itself, chances are that the administrative procedure will simply confirm the Commission's initial assessment, and then even very good arguments fail.
As soon as there is a concrete case before the Commission, airlines should liaise with their national governments. They should bear in mind that the procedure (and the power struggle) is between the member states and the Commission, and that the Commission will seldom be inclined to hear airline competitors directly. However, national governments are often prepared to carry messages to the Commission if these messages are based on solid facts and persuasive arguments. In addition, 'friendly' airlines should persuade other member states of the benefits of an alliance. Then, the 'hostile' member state - the one that wishes to grant aid - may stand alone.
The formal procedure normally starts by a member state notifying proposed aid to the Commission or by the Commission sending letters to national governments. From this point onwards, it cannot be ruled out that some sort of self-fulfilling ideology will drive the Commission to a predetermined result. Typically, ideology announces itself in terms of Euro-romantic stereotypes as, for example: 'The Commission must do something to protect Community aviation against third country carriers', or 'This aid is necessary to maintain important routes within our trans-European networks'.
This will be the moment for competing airlines to raise issues of fact and law with the Commission. Clear and ascertainable facts and market analysis must be used to counter ideology, and reviewable rules to counter elusive political language. Also, competitors should assert procedural rights, including access to the Commission's files and the right to be heard.
In shaping arguments, airlines should bear in mind that the Commission often thinks in terms of 'European integration' rather than in terms of conflicting enterprise interests. Arguments should therefore be based on, or linked to, Community policies.
The Commission may not accept or even examine arguments by competitors, and may refuse competitors access to the file and a hearing. But this alone may provide grounds for competitors to have the final decision annulled by the Community courts. Thus presentations to the Commission serve not only to persuade the institution, but also to build up a potential basis to challenge the decision before the Community courts. All arguments should therefore be raised in the course of the administrative procedure in order to ensure the admissibility and credibility of a later court action.
Where the Commission approves state aid, competitors of the beneficiary may consider challenging this approval decision before the Community courts in Luxembourg. While each case is unique, for strategic planning purposes four points should be noted:
1 An action against a Commission decision must be instituted within two months of the publication of the decision, or of the notification of the decision to the plaintiff. However, the decision is often neither fully published nor notified to the competitors. In such cases, the competitors must, 'within a reasonable period of time', try to procure the wording of the decision; otherwise they are time-barred.
2 Where an action is brought against a Commission decision rendered in favour of third parties and not addressed to the plaintiffs, plaintiffs have to overcome the hurdle of 'admissibility'. This normally requires that the plaintiff participated actively in the administrative procedure before the Commission. If the Commission conducted summary proceedings in secret, the courts only require that the plaintiff be a competitor of the beneficiary of the aid.
3 The European Court of First Instance has noted that competitors are not protected by a written code of procedure. The Court now appears to have evolved judge-made standards to fill this gap. In its landmark judgment in the Sytraval case, the Court of First Instance held that, where the Commission approves aid by way of summary proceedings, it may be obliged to hear competitors of the beneficiary or, at least, to take their views into consideration ex officio. Failure to do so may result in the Commission's approval decision being quashed. Airlines are well advised to remind the Commission of the Sytraval judgment from time to time.
4 Facts are the lifeblood of the law. The European Court of First Instance takes facts extremely seriously, and is not afraid to conduct a rigorous examination of the Commissions' appreciation of the facts. This painstaking factual approach seems to apply even where the institution classifies cases as 'political' or 'sensitive' because less efficient airlines seek protection against the spur of competition. When the Court finds factual error, it will quash the Commission's decision, which then cannot be reinstated. The Commission will thus be compelled to be more scrupulous, accurate, and impartial in reaching its conclusions - and perhaps less ideological, political and susceptible to haggling.
All in all, under the current trend in the Court, the legal clout of airline competitors may be strengthened, provided airline competitors are prepared to raise their voices. Yet airlines often seem to be afraid to speak up because they are wary of the effect on future relationships with the institution or their competitors. Such considerations may be valid for business reasons, but taking legal action helps to ensure fair play, transparency and correctness.
The European system of state aid clearance should develop towards greater procedural fairness and substantive justice. Vigilant enterprises provide perhaps the most valuable force to drive this development ahead.
Enterprises should not only rely on 'political' considerations, but more and more on the rule of law. This rule alone can assure that enterprises are treated without discrimination and enjoy equal opportunity in the market. The rule of law alone can guarantee that public authorities will interfere only for the common good and not simply for the benefit of competitors.
Successful European integration stands or falls by the commitment of the European institutions to this rule. The Air France and Iberia cases may become test cases for the rule of law in Europe, and the Commission might not have had the last word.
Source: Airline Business
