30 March 2020 

Guest Blog by Ian Clarke, CEO of Excalibur Global Managed Services Ltd.

Following on from the previous blog by Erika Szyszczak on the new temporary adaptation of EU state aid rules in the light of the COVID-19 economic crisis, this blog discusses why the UK should take a cautionary approach to special aid being directed to the aviation sector.

The UK Chancellor, Rishi Sunak, has written to British airlines advising them that the government’s existing package of COVID-19 financial measures designed to support UK businesses would provide the necessary assistance to support the industry. Also, he was clear that any further taxpayers’ financial support would only be considered by the government as a “last resort”. The letter was in response to a request by the sector for urgent financial assistance, with the International Air Transport Association (IATA) suggesting that some European airlines could cease trading by the end of May 2020.

Whilst recognising the importance of the airlines to the UK economy, the Chancellor is clearly aware that they are part of a highly internationalised sector and that the European Commission is creating a Temporary Framework for the State Aid rules to allow Member States to take speedy measures to protect business. The Chancellor is wise to step back and wait to see what emerges from this framework. Several airlines, including Lufthansa and Norwegian, have already applied for state aid. It is prudent to see what becomes of this and attempt to foster a collaborative approach to financial assistance that protects a liberal and competitive airline market. Such an approach also avoids the legal, political and commercial risks of unilaterally bailing out the sector, especially when the UK is in negotiations about its future trading relationship with the EU.

There are several important issues that the Chancellor will need to consider when developing emergency financial packages for the airlines:

• State aid rules
• Ownership and control
• Operational centres
• Alternative funding

State aid

The European Commission has recognised that the COVID-19 pandemic qualifies as an “exceptional occurrence” under EU law and it is having a severe financial impact on all businesses, not just the aviation sector.  It is working with Member States to design state aid packages that support companies affected by the outbreak. On 19 March 2020, the Commission published its Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak.

This framework allows Member States to provide support to airlines and airports affected by the COVID-19 pandemic, without prior authorisation from the Commission. Article 107 (3) (c) TFEU, together with the Rescue and Restructuring Guidelines in the Temporary Framework, also provides a mechanism for Member States to inject liquidity into companies facing severe financial pressures due to the outbreak. This latter provision is subject to Commission approval but it does mean compensation can be granted to airlines for damage suffered due to the COVID-19 outbreak.

Steps taken now will impact upon any future relationship between the UK and the EU in the aviation sector, where air transport, regardless of ownership, will make a significant contribution to all national economies.

Ownership and control

Most countries impose strict controls on airline ownership. These restrictions (the numbers of voting shares a foreign national can hold) are designed to protect important national transportation asserts. For example, in the US the maximum shareholding is 25% and in the EU it is 49%.

Establishing ownership is relatively easy but who controls the airline is often more difficult to define. For example, Delta Airlines in the US owns 49% of the equity in the UK’s Virgin Atlantic company and is compliant with the EU foreign ownership rules. However, the most lucrative part of the Virgin business, its transatlantic operation, is delivered through a 50/50 joint venture with Delta so effectively, with its 49% stake in the main business, it has control over both the joint venture and, arguably, the main company.

Holding company structures in Europe provide further complexity. For example, groups such as International Airlines Group (IAG) owns British Airways, Aer Lingus, Iberia, Level and Vueling; the Air France-KLM group owns Air France, KLM Royal Dutch Airlines and Transavia. The economic ownership is clearly held by the parent company but beneath each is a complex structure that suggests voting control rests with each of the national subsidiary airlines.

The Chancellor will need to understand how any further financial assistance is deployed should an airline ask for it. For example, he will need to ensure that financial support is ring fenced for the purpose agreed and not diluted through payments to holding companies or used to subsidize another airline in the group.

Operational centres

Europe’s liberalised aviation market has allowed Low Cost Carriers such as EasyJet and Ryanair to establish a significant number of local bases across Europe. This allows the establishment of local fleet and personnel and provides flexibility across the airline’s network, allowing the airline to benefit from any preferential tax, salary and labour laws.

Should further financial assistance be required, the Chancellor will need to establish how much of the aid package would be used to support local bases outside of the UK. He will then have to make a judgment on whether financial assistance for those bases should be the responsibility of the host nation or through a collaborative state aid arrangement.

Alternative funding

The Chancellor made it clear in his letter to the airlines that any additional financial assistance would be subject to all other commercial avenues being fully explored, including raising further capital from existing investors and negotiating other arrangements with financial stakeholders. He also stated that;

“Terms would be structured to protect taxpayers’ interest, and the government would expect to have regard to factors including but not limited to whether the business makes a material contribution to the economic activity of the UK, the importance of maintaining a thriving competitive aviation sector in the UK to deliver connectivity and the equitable and fair treatment across businesses in the sector.”

This sends a clear message to the airlines that the government expects them to exhaust every other financing and funding opportunity before discussing any further financial assistance package. It also suggests the government will not tolerate proposals that give individual airlines a competitive advantage or distort competition.

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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