European Commission gives green light for Portuguese rescue aid to TAP airline

Europe
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On 10 June 2020, the European Commission authorized as rescue aid a loan of EUR 1,200,000,000 from Portugal to its flag carrier, TAP Air Portugal (“TAP”).

The airline was hit by the coronavirus pandemic, facing a significant decline in its activities due to the travel restrictions in place in many EU Member States.

Given that TAP was already facing financial difficulty before 31 December 2019, it cannot benefit from public support on the basis of the temporary framework of the European Commission for State aid measures to support the economy in the COVID-19 outbreak. As a reminder, this temporary framework has been applied by various Member States for their companies, for example Air France, Finnair, Swedish airlines and Walloon airports. States can also opt to grant compensation to their companies for damage caused by the pandemic on the basis of Article 107.2 (b) TFEU. This was the case for Condor and SAS.

Portugal has therefore notified the Commission of its intention to grant aid to TAP in accordance with the Guidelines on State aid for rescuing and restructuring firms in difficulty. These Guidelines, adopted in 2014, allow Member States to grant rescue and/or restructuring aid to companies in difficulty, provided certain strict conditions are met and subject to prior notification to the European Commission.

Rescue aid is aid in the form of a loan or guarantee that is granted for a period of up to six months to fund a company’s cash flow in order to avoid bankruptcy and to prepare a restructuring plan.

Restructuring aid can take various forms (such as a long-term loan, conversion of a loan into capital, capital injection and a guarantee) that aim at covering a company’s restructuring costs to secure its long-term viability.

A company can benefit from rescue and/or restructuring aid that has been formally authorized by the Commission unless, in the case of a general scheme of rescue and restructuring aid to SMEs, that was previously authorized by the Commission.

Which factors should be considered by a Member State willing to grant rescue aid according to the Guidelines?

Public support measures must comply with the general EU State Aid rules and be compatible with the internal market, including the following conditions:

  • an objective of common interest;
  • the need for State intervention;
  • the appropriateness of the measure;
  • an incentive effect;
  • the proportionality of the aid;
  • avoiding negative effects on competition; and
  • the transparency of the aid.

But they must also meet specific requirements regarding such rescue aid, including the following:

  • Rescue aid must be granted to an undertaking in difficulty, meaning that, without State intervention, the undertaking would almost certainly go out of business in the short or medium term. The financial conditions that need to be met to fall under this definition depend on the undertaking’s legal form. However, a newly created undertaking will not be eligible to benefit from such aid.
  • Rescue aid can be granted for a maximum of six months as this should give the company time to seek solutions in an emergency situation.
  • Rescue aid must consist of temporary liquidity support in the form of loan guarantees or loans; the interest rate must be in line with the Commission’s reference rate; the loan must be repaid within the six-month period, or a restructuring or liquidation plan setting out the steps for liquidation must have been submitted to the Commission; and rescue aid cannot be used to finance structural measures.

However, it is important to remember that the European Commission's assessment is made on a case-by-case basis and that an analysis of the specific circumstances will have to be carried out in order to grant such aid.

In the TAP case, the Portuguese authorities have effectively made a commitment that TAP will repay the loan granted, or present a restructuring plan within six months, in order to ensure TAP’s future viability. This aid measure therefore enables the airline to obtain the resources necessary to meet its immediate liquidity needs, without unduly distorting competition, while also respecting the conditions set out in the above-mentioned Guidelines.

The Commission also noticed that the measure will indirectly support the Portuguese tourism sector and help avoid disruption for future passengers, given the relaxation of travel restrictions. On this basis, it therefore concluded that the measure was compatible with European Union State aid rules

Remember that TAP is not the only airline to benefit from an aid under the Guidelines on State aid for rescuing and restructuring firms in difficulty. In October 2019, the European Commission authorized a EUR 380 million rescue loan to the German airline Condor. In addition, the Hungarian airline, Malev, is the subject of an in-depth investigation by the Commission into various public interventions, especially with regard to these same Guidelines.

Cases to follow ...