The European Court of Justice has overturned a €6 billion bailout of Lufthansa by the German government during the Covid pandemic following a complaint by Ryanair.
The court found that the European Commission should not have approved the bailout under state aid rules because it had relied on the belief that the airline could not secure financing on the markets to meet its needs.
The ECJ also found that Lufthansa did not buy back the German government's shareholding as soon as it should have.
It said that the Commission had erroneously denied the airline had maintained significant market power at certain airports.
The German government informed the Commission in June 2020 that it was recapitalising a division of Luftansa to the tune of €6 billion as part of a wider set of liquidity supports for the Lufthansa Group because of losses due to the pandemic.
The injection included an equity participation of €300m, a silent participation not convertible into shares of €4.7 billion and a silent participation of €1 billion with the features of a convertible debt instrument.
The European Commission said at the time the supports were compatible with state aid rules and in line with the temporary relaxation of some of those rules due to the pandemic.
However Ryanair and German airline Condor took legal action against the granting of state aid.
The ECJ today found against the Commission's decision, on the basis that it infringed several of the requirements laid down by the rules.
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The ECJ held that both Ryanair and Condor could show their market shares were adversely affected by the bailout of Lufthansa as they were competing on a multitude of routes.
A court statement said Ryanair had also highlighted its status as a direct competitor in the German, Belgian and Austrian markets.
The ECJ found that the bailout not only helped Lufthansa avoid the risk of exiting those routes where it was directly competing with Ryanair and Condor, but that it ended up strengthening its competitive position.
"It is apparent from examining the relevant and credible data provided by [Ryanair and Condor] that the measure at issue was not only likely to allow the Lufthansa Group to cope with the risk of an exit from the markets on which it was in direct competition with the applicants, but also to strengthen its competitive position," a statement said.
The court found that in order for Lufthansa to be able to avail of the temporary relaxation of EU state aid rules during the pandemic it would have to be able to show that it was unable to obtain financing on the markets at an affordable rate.
The European Commission believed that condition was satisfied because it believed Lufthansa did not have sufficient collateral to obtain the financing for the entire amount of the aid.
However, the ECJ said there was no indication that the Commission had assessed the possible availability of collateral, such as Lufthansa's fleet of aircraft, their value and the terms for any loans it may have been able to obtain on the markets against such collateral.
The court found in general that the European Commission had not fully complied with the so-called "escape clause" of the EU's state aid rules, which provided for a relaxation of the rules during the pandemic.
In a related case, the ECJ has also annulled Covid-related state aid that had been granted to the Scandinavian airline SAS, also following a complaint from Ryanair.
Denmark and Sweden had notified the European Commission of a capitalisation plan for SAS worth €1.07 billion in August 2020 which Brussels then approved.
The court today found that the two separate instruments used by Denmark and Sweden to recapitalise SAS effectively amounted to a single rescue package which did not meet "the requisite legal standard" under the temporary relaxation of the rules due to the Covid pandemic.
Ryanair has welcomed today's EU General Court's rulings.
A Ryanair's spokesperson said that one of the EU's greatest achievements is the creation of a single market for air transport.
"The European Commission’s approval of the German recapitalisation aid to Lufthansa and the Swedish and Danish recapitalisation aid to SAS went against the fundamental principles of EU law," the spokesperson said in a statement.
"Today’s judgments confirm that the Commission must act as a guardian of the level playing field in air transport and cannot sign-off discriminatory State aid under political pressure by national governments. The Court’s intervention is a triumph for fair competition and consumers across the EU," the spokesperson added.
Ryanair noted that during the Covid-19 pandemic over €40 billion in "discriminatory State subsidies has been gifted to EU flag carriers".
Unless halted by the EU Courts in line with today’s ruling, this State aid spree will distort the market for decades to come," the airline's spokesperson said.
"Europe’s emergence from the Covid-19 crisis with a functioning single market depends on airlines being allowed to compete on a level playing field. Undistorted competition eliminates inefficiency and benefits consumers through low fares and choice. Unjustified subsidies, on the other hand, encourage ineffectiveness and will harm consumers for decades to come," the airline added.
Lufthansa said it would decide on a further course of action after analysing the ruling.
It has already repaid the aid in full, which could limit any immediate impact of the ruling, although it could have consequences for future state bailouts.
Germany's Economy Ministry said that it was not possible to assess the impact of the judgment, which it planned to examine.
Meanwhile, it is unclear what effect the judgement will have for SAS, which filed for bankruptcy protection in the US last year.
SAS said it was reviewing the content of the ruling.
"We have seen the ruling by the General Court in the EU and will now review the content of the ruling as well as possible ways to proceed. We will revert on these issues when there is information to share," the airline added.
Additional reporting by Reuters
