The European Commission approves compensation for damage caused by Covid-19 to German carrier Condor

 

Introduction

The European Commission has declared that aid granted by Germany to holiday air carrier Condor on the basis of Article 107(2)(b) TFEU[1].

 

Background

Article 107(2)(b) TFEU allows Member States to grant compensation of damages directly caused by exceptional circumstances. Condor is a German charter airline that experienced significant revenue decline due to travel restrictions imposed by countries to deal with the Covid-19 pandemic, though the airline took up new activities such as  return flights for stranded passengers and cargo flights.

Germany notified the European Commission a package aid to compensate Condor for the direct damage suffered because of the cancellation or re-scheduling of flights following the imposition of travel restrictions linked to the Covid-19 outbreak over the March 2020-December 2020 period. The aid consisted of two State-guaranteed loans with subsidized interest rates amounting to € 529.8 million and € 20.2 million, respectively.

 

The decision of the Commission

Having found that the above financial measures in favour of Condor constituted State aid within the meaning of Article 107(1) TFEU, the Commission went on to consider whether the aid qualified for the exemption in Article 107(2(b) TFEU. Being an exception to general rules, this provision is of narrow interpretation. For the exemption in Article 107(2)(b) to apply, the following compatibility conditions must be met by the national measure: i) the presence of a natural disaster or exceptional occurrence; ii) a causal link between the damage suffered by the aid beneficiary and the exceptional occurrence; iii) proportionality of aid.

An event is qualified by the Commission as an exceptional occurrence on a case-by-case base when it is unforeseeable and extraordinary and have a significant economic impact. The Commission believed that the Covid-19 health crisis fulfilled these criteria. The risk for public health due to the absence of vaccines and drugs to treat the Covid-19 disease determines the exceptional nature of the event while the rapid spread of the virus can result in far-reaching disruption of various economic sectors, including the aviation business. Moreover, the pandemic was not foreseeable and is distinguishable from ordinary events.

As clarified by the CJEU[2], there must be established a direct link between the damage and the exceptional circumstance. The Commission noted that the travel restrictions imposed by national governments to deal with the pandemic with the ensuing cancellation and re-scheduling of its flights caused  90% reduction in the flight volume of Condor in comparison to the originally planned volume despite of the new lines of business launched by the beneficiary. With the Covid-19 crisis still ongoing, the exact amount of damage caused by the pandemic to Condor was however uncertain. The German authorities estimated such damage in € 276.7 million by comparing the forecasts for earnings before taxes (EBT) before and after the Covid-19 outbreak for the period March to December 2020.

The Commission agreed with this figure though it replaced the EBT planned for the March-December 2020 with the actual EBT achieved over the same period one year before. The German’s assumptions were solid and the figure of € 276,7 million was considered by the Commission as a correct estimate of damage directly inflicted by the pandemic to Condor.

Concerning the compatibility condition of proportionality of aid to the damage, the Commission calculated the aid element in the two loans granted to Condor in € 267.1 million. This figure was lower than the estimated damage of the aid beneficiary. In addition, Germany committed to review the calculation of the amount of damage and aid on the basis of the financial accounts of Condor for the year 2020 audited by an independent external auditor. Germany also committed to a claw-back mechanism to ensure that Condor would repay any over-compensation resulting from such review.

Hence, the Commission reached the conclusion that the aid package granted to Condor met the compatibility conditions in Article 107(2)(b) and on this legal basis declared the aid compatible with the internal market.

 

Conclusion

Article 107(2)(b) is the appropriate legal tool to approve financial aid to carriers experiencing a shortage liquidity due to travel restrictions related to Covid-19  that fall outside the Temporary Framework of the European Commission because they were already in economic difficulties on 31 December 2019[3]. This was the case with Condor. Because of the insolvency of its parent company, Thomas Cook Group, Condor faced financial difficulties since September 2019 though it was a sound and profitable company. Compensation for damage inflicted by the exceptional occurrence of the outbreak of Covid 19 was then the only way for Germany to provide much needed financial aid to the ailing carrier without breaching EU law.

A further takeaway from this case is how to establish the compatibility conditions of a direct causal link between damage and the exceptional occurrence. As the Covid-19 crisis is far from being over and its actual impact on the financial position of Condor is still uncertain, the Commission accepted as a correct proxy of that damage an estimate comparing the projected EBT for the March-December 2020 year and the actual EBT for the March-December 2019 period. This estimate is to be verified when Condor will publish its audited financial accounts for the year 2020.


[1] European Commission, Decision of 26 April 2020, CaseSA.56867- Germany Compensation for the damage caused by the COVID-19 outbreak to Condor Flugdienst GmbH.

[2] Joined Cases C-346/03 and C-529/03 Atzeni and Others [2006] ECR I-1875.

[3] Communication from the Commission, Temporary Framework for State aid measures to support the economy in the current Covid-19 outbreak,  https://ec.europa.eu/competition/state_aid/what_is_new/TF_consolidated_version_amended_3_april_8_may_and_29_june_2020_en.pdf

Comments

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April 21, 2021 at 7:51 AM
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