26 April 2010

European Commission Considers State Aid Requests for EU Aviation Industry, as Losses Rise High on a Cloud of Volcanic Ash

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The European Commission is considering allowing governments to compensate national airlines struggling as a result of the widespread closures of European air space following the spread of volcanic ash plumes from Iceland's erupting volcano.
European Union Antitrust/Competition Law
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The European Commission is considering allowing governments to compensate national airlines struggling as a result of the widespread closures of European air space following the spread of volcanic ash plumes from Iceland's erupting volcano. In this exceptional situation, the Commission is considering limited state aid measures, modeled on those following the September 11 attacks.

State aid measures likely to follow

During a European Policy Centre breakfast policy briefing yesterday, EU competition commissioner, Vice President (of the EU Commission) Joaquín Almunia, stated that he was "ready to consider" EU governments' requests to compensate airlines for the losses amassing as a result of the continuing closure of European air space.

Financial aid from governments to selected national companies is generally prohibited as anticompetitive, because it may distort competition by favouring certain companies over their competitors. However, exceptions to the rule exist, including Article 107 2(b), which permits aid to make good the damage caused by natural disasters or exceptional occurrences. Vice-President Almunia explained that he was "looking carefully at what we did after September 11. We can use similar instruments. We are indeed facing exceptional circumstances".

The state aid measures taken in the EU after September 11 included compensation for costs arising directly from the closure of American airspace and, for a limited period, the assumption of the extra cost of insurance. These measures were conditional on them applying in a non-discriminatory manner to all airlines in a given Member State. In the U.S., the measures also included subsidised government loans or loan guarantees.

Vice-President Almunia confirmed that strict conditions would apply to prevent discrimination in favour of a particular airline and to ensure the proportionality of any aid, making clear that "Member States should demonstrate need for the aid and its proportionality".

Any permitted financial aid will not be limitless. The 2001 compensation offered was calculated by comparing the traffic recorded by each airline during the four days of airspace closure with that recorded by the same airline in the preceding week, adjusted to take account of the development in the corresponding period of 2000. Account had to be taken of both of the actual costs incurred and those avoided. The maximum compensation was set equal to the loss of revenue recorded during these four days – any compensation claimed had to be less than the fraction 4/365 of the airline's annual turnover. Similar limits will likely apply to any volcanic ash aid.

Implications for air freight cartel penalties?

In addition to the question of financial aid measures, the effect of the current aviation industry crisis on the level of any financial penalty that the Commission is expected to impose on the participants in the alleged air freight forwarding cartel also has been raised. (Freight forwarding is the organizing the transport of goods, along with related activities such as customs clearance, warehousing, and ground services.)

In February 2010, the Commission sent a Statement of Objections to a number of companies, thought to include DHL, Panalpina, and Kuehne+Nagel, alleging their participation in price fixing cartels in air freight forwarding, relating to services from the UK to outside the EEA, from the EEA to the U.S., from China to the EEA, and from Southern China/Hong Kong to the EEA. The Commission alleged these companies colluded on the imposition, level, timing, and application of various surcharges. A decision, which ordinarily could be expected to include substantial financial penalties on the participants, is expected to follow in the next few weeks.

Vice-President Almunia refused to comment on the ongoing case and the effect the current ash crisis may have on any penalties. He did state, "I am always under pressure. My duty is to take account of the good aspects of pressure and not to give up. We will be tough. I am determined not to give up". Not surprisingly, it appears that, while the Commission is sympathetic to ongoing unavoidable costs incurred by the industry in the wake of an exceptional natural occurrence, such losses may not be taken into account in its calculation of a one-time financial penalty imposed on a company for its own (alleged) wrongdoing. Presumably this will particularly be the case if the participants to the cartel qualify for any relevant state aid.

EU impact group launched

Vice-President Almunia's comments followed on from the launch on 18 April, by EU Commission President Barroso, of an ad-hoc group to assess the impact of the situation created by the volcanic ash cloud on the air travel industry and the economy in general. The group is led by EU transport commissioner Siim Kallas, who is assisted by Vice-President Almunia and the EU economic and monetary affairs commissioner, Olli Rehn. The trio are due to meet for further discussions this week.

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