1999/197/EC: Commission Decision of 22 July 1998 concerning the notified capital increase of Air France (notified under document number C(1998) 2404) (Only the French text is authentic) (Text with EEA relevance)
Date: 1998-07-22
Institutions: European Commission
Subjects: France, State aid, air transport, capital increase, transport company

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COMMISSION DECISION

of 22 July 1998

concerning the notified capital increase of Air France

(notified under document number C(1998) 2404)

(Only the French text is authentic)

(Text with EEA relevance)

(1999/197/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having regard to the Agreement establishing the Euro-
pean Economic Area, and in particular point (a) of Article
62(1) thereof and Protocol 27 thereto,

Having, in accordance with Article 93 of the Treaty, given
notice to the parties concerned to submit their comments
by opening the procedure on 25 May 1994, and having
regard to those comments,

Whereas:

I. THE FACTS

(1)

By Decision 94/653/EC (1) (hereinafter referred to
as ‘the 1994 Decision'), the Commission authorised
the French authorities to grant to the Compagnie
Nationale Air France (hereinafter referred to as ‘Air
France') State aid amounting to FRF 20 billion.
The first two Articles of the enacting part of the
Decision read as follows:

‘Article 1

The aid to be granted in the period 1994 to
1996 in favour of Air France, in the form of a
FRF 20 billion capital increase to be paid in
three tranches, and aimed at its restructuring in
accordance with the plan is compatible with
the common market and the EEA Agreement
by virtue of Article 92(3)(c) of the Treaty and
Article 61(3)(c) of the Agreement, provided that
the French Government comply with the
following commitments:

alone. Air France means

(1) the entire amount of aid shall benefit Air
France
the
Compagnie Nationale Air France, as well
as any company of whose capital it holds
more than 50 %, with the exception of Air
Inter. In order to prevent any transfer of
aid to Air Inter, a holding company will be
set up by 31 December 1994 which will
have a majority shareholding in Air France
and Air Inter. No financial transfer which

(1) OJ L 254, 30. 9. 1994, p. 73.

does not form part of normal commercial
relationships shall be made between the
companies in the group, either before or
after the actual setting up of the holding
transfers of
company. Accordingly,
goods and services between the companies
shall be carried out at market prices; in no
case may Air France apply preferential
tariffs in favour of Air Inter;

all

(2) the process of privatising Air France shall
begin once the company’s economic and
financial recovery has been achieved,
in
accordance with the plan, having regard
also to the situation on the financial
markets;

(3) Air France shall continue the process of
implementing in full the plan as commun-
icated to the Commission on 18 March
1994, in particular as regards the following
productivity targets expressed by the in-
dicator equivalent revenue passenger kilo-
the
metre/employee for the duration of
restructuring plan:

— 1994: 1 556 200 equivalent

revenue

passenger kilometre/employee,

— 1995: 1 725 000 equivalent

revenue

passenger kilometre/employee,

— 1996: 1 829 200 equivalent

revenue

passenger kilometre/employee;

(4) they shall adopt the normal behaviour of a
shareholder vis-(cid:133)-vis Air France, allowing
the company to be managed in accordance
with commercial principles alone and
abstaining
its
management for reasons other than those
connected with its status as a shareholder;

from intervention

in

(5) they will not grant

in
accordance with Community law, any new
appropriation or any other form of aid;

to Air France,

(6) they will ensure that, for the duration of
the plan, the aid is used exclusively by Air
France for the purposes of restructuring
the company and not to acquire new hold-
ings in other air carriers;

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(7) they will ensure that, during the period
covered by the plan, Compagnie Nationale
Air France does not increase the number
of aircraft in its operating fleet beyond 146;

(8) they will not increase, during the period
covered by
supply of
the plan,
Compagnie Nationale Air France beyond
the level reached in 1993 for the following
routes:

the

— between Paris and all destinations in
the European Economic Area (7 045
million available seat kilometre),

— between provincial airports and all
destinations in the European Economic
Area (1 413,4 million available seat
kilometre).

The supply could be increased by 2,7 %
each year, unless the growth rate of each of
the corresponding markets is lower.

However, if the annual growth rate of these
markets exceeds 5 %, supply could be
increased beyond 2,7 % by the amount of
increase above 5 %;

(9) they will ensure that Air France does not,
during the period covered by the plan,
apply tariffs below those of its competitors
for an equivalent supply on the routes that
it operates within the European Economic
Area;

(10) they will not grant preferential treatment
to Air France in the matter of traffic rights;

(11) they will ensure that Air France does not
operate, during the period covered by the
plan, more
scheduled routes between
France and the other countries in the
European Economic Area than it did in
1993 (89);

(15) with the cooperation of A(cid:130)roports de Paris,
they will, as soon as possible, modify the
traffic distribution rules
the Paris
airport
system in accordance with the
Commission Decision of 27 April 1994 on
the opening of the Orly-London link;

for

(16) they will ensure that the work required to
adapt the two terminals at Orly carried out
by A(cid:130)roports de Paris, and a possible
saturation of one or other of those termi-
nals, do not affect competitive conditions
to the detriment of the companies oper-
ating there.

Article 2

In order to ensure that
the amount of aid
remains compatible with the common market,
the payment of the second and third tranches
of the capital increase shall be subject to fulfil-
ment of the above commitments and to the
actual implementation of the plan and achieve-
ment of
the planned results (particularly as
regards the profits and cost-effectiveness ratio as
expressed in equivalent revenue passenger kilo-
metre/employee, as well as the sale of shares).

The French Government shall submit to the
Commission a report of the progress of the
restructuring programme and on the economic
and financial situation of Air France. These
reports shall be submitted at least eight weeks
before the release of
the second and third
tranches of aid in 1995 and 1996.

The Commission shall have the proper imple-
mentation of the plan and the fulfilment of the
conditions laid down for the approval of aid
verified, in the light of, inter alia, the business
environment and market trends, by indepen-
dent consultants chosen by the Commission in
consultation with the French Government'.

(12) they will limit, during the period covered
by the plan, the supply of Air Charter to its
(3 047 seats and 17 aircraft),
1993 level
with a possible annual
increase corre-
sponding to the market growth rate;

(2)

(13) they will guarantee that any transfer of
goods or services from Air France to Air
Charter reflects market prices;

(14) they will ensure that Air France disposes of
its shareholding in the Meridien hotel
group by the end of the year on the best
possible financial, commercial and legal
terms;

The 1994 Decision was contested before the Court
of First Instance by British Airways, SAS, KLM, Air
UK, Euralair and TAT, applicants in Case T-371/
94, and by British Midland, applicant in Case T-
394/94. On 25 June 1998 the Court of First
Instance delivered a judgment in these two actions
and annulled the 1994 Decision. The conclusions
of the grounds for the judgment of the Court were
as follows (point 454 of the Judgment):

‘Examination of all the pleas in law raised in
the present litigation has made it clear that the
contested decision suffers
from insufficient
reasoning on two points, concerning, respect-
ively, the purchase of 17 new aircraft for FRF

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11,5 billion (see paragraphs 84 to 120 above)
and the competitive position of Air France on
the network of its non-EEA routes with the
associated feeder traffic (see paragraphs 238 to
280 above). Those two points are of crucial
importance within the general scheme of the
contested decision. That decision must con-
sequently be annulled'.

(3) With regard, more specifically, to the insufficient
reasoning concerning the purchase of 17 new
aircraft, the Court of First Instance first recalled the
case-law of the Court of Justice (2) quoted by the
parties concerned in the procedure through admin-
istrative channels preceding the 1994 Decision,
according to which investment intended to ensure
the renewal or modernisation, whether regular or
normal, of the production capacity of an under-
taking could not be financed through State aid.
According to the Court of First Instance it appears
that the 1994 Decision ‘. . . acknowledged that the
aid was intended to finance the fleet investment
involving the acquisition of 17 new aircraft . . .' and
that ‘. . . in any event, the decision did not preclude
the possibility that the aid might be used, at least
in part, for the purpose of financing such invest-
ment . . .' since ‘. . . the only independent financial
means at Air France’s disposal designed to contri-
bute to financing this investment, namely the
disposal of assets, was expected to realise only FRF
7 billion, whereas the costs of the investment in
question amounted to FRF 11,5 billion' (point 111).
The Court considered that the acquisition of the 17
aircraft ‘. . . clearly constitutes a modernisation of
Air France’s fleet' and that in the reasons given for
the 1994 Decision the Commission failed to
specify whether it would tolerate, exceptionally, the
financing of
this acquisition through State aid
because it considered the case-law quoted to be ‘. . .
irrelevant
the
present context or whether it intended to depart
from the actual principle laid down therein' (point
112). It noted that the Commission’s own decision-
making practice reflected its opposition in prin-
ciple to all operating aid intended to finance
normal modernisation
and
concluded that:

in the specific circumstances of

installations,

of

‘It follows that the grounds of the contested
decision do not make it clear that the Commis-
sion did in fact examine whether, contrary to
the above case-law and its own decision-making
practice, the modernisation of the Air France

(2) Judgments of the Court of 24 February 1987 in Case 310/85,
Deufil v. Commission, [1987] ECR 901, and of 8 March 1988
in Joined Cases 62/87 and 72/87, Ex(cid:130)cutif r(cid:130)gional wallon
and SA Glaverbel v. Commission,

[1988] ECR 1573.

could be partially

aid
fleet
earmarked for restructuring of the company,
and, if so, for what reasons'

financed by

(point 114).

(4)

(5)

it

is for the College of

The Court of First Instance added that the argu-
ment presented by the Commission’s agents that
the aid in question was intended only to reduce Air
France’s indebtedness and not for the acquisition
of the 17 new aircraft could not be upheld in that it
the 1994
was contradicted by the reasoning of
Decision and that
the
Commissioners alone to adopt any alteration to the
statement of reasons. The Court also considered
contradictory the reasoning according to which the
restructuring plan was intended to produce a cash
flow enabling Air France to meet its operating and
investment costs and also the reasons for the 1994
Decision from which it was clear that the financial
stability and profitability of Air France were not
expected to be restored until the end of 1996 (point
119).

the statement of

As for Air France’s competitive position in the
network of routes outside the European Economic
Area (EEA) in regard to associated feeder traffic, the
Court, having recalled that this question had been
raised by some of the applicants in the administra-
tive procedure prior to the adoption of the 1994
the
‘. . .
Decision, held that
grounds of the contested decision does not contain
the slightest indication as to Air France’s compet-
itive position outside the EEA'
(point 270). It
emphasised that
there was no analysis of Air
France’s international network and that the condi-
tions of authorisation of the aid in terms of quan-
tity and pricing practices covered only routes
within the EEA even though the Commission, in a
case connected with the application of Council
Regulation (EEC) No 4064/89 of 21 December
1989 on the control of concentrations between
undertakings (3), made a relevant market analysis
using the concept of substitutability of flights and
Air France’s restructuring plan expressly provided
for the development of long-haul flights. From this,
the Court concludes that ‘. . . having regard to that
decision-making practice and bearing in mind the
observations which the parties concerned made in
that connection, the Commission was obliged to
set out its views on the problem of non-EEA air
routes served by Air France, the beneficiary of the
authorised aid, in competition with other compa-
nies within the EEA' (point 273) and that as it did
not extend the aforementioned conditions to EEA

(3) OJ L 395, 30. 12. 1989, p. 1; corrigendum: OJ L 257, 21. 9.

1990, p. 13.

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(6)

(7)

it ‘. . . was required to
routes served by France,
assess, in its examination of the relevant market,
the potential substitutability of the non-EEA flights
operated, for example, from Paris, London, Rome,
Frankfurt, Copenhagen, Amsterdam and Brussels,
and thus the potential competition, in regard to
those flights, between the airline companies whose
hubs are situated in any of those cities' (point 274).

The Court adds that Air France’s conduct on routes
outside the EEA from its hub at Paris (CDG)
airport may have repercussions on feeder traffic to
that hub, possibly at the expense of feeder traffic to
other hubs, and that the Commission ought there-
fore to have set out its views in the arguments for
its decision, regarding the situation of the small
airline companies which frequently depend on a
few specific routes.

restrictions

imposed on Air France

The Court further notes that none of the require-
ments imposed by the Commission and associated
with the 1994 Decision can make up for the fact
that the Decision provides insufficient reasoning
with regard to non-EEA routes. Nor does the Court
accept, because it
is not covered by collegiate
responsibility, the argument put forward by the
Commission and the interveners to the effect that
the
for
non-EEA connections, governed by bilateral agree-
ments, would have benefited only non-EEA airlines
and would therefore have been manifestly contrary
to the common interest. The Court concludes that
it cannot examine whether
the arguments put
forward on the effects of the aid on the competitive
position of Air France in regard to its network of
non-EEA routes and the associated feeder traffic are
well founded, nor can it ‘. . . rule on the argument
relating to Air France’s pricing practices on its
non-EEA network, allegedly operational measures
financed by the aid'

(point 280).

(8)

The Court declared unfounded all the other argu-
ments put
including
forward by the applicants,
those relating to the allegedly incorrect course of
the administrative procedure and those ensuing
from errors of assessment and errors of law,
in
particular the alleged violation of the principle of
proportionality with regard to the amount of the

(9)

(10)

(11)

aid, the change in trading conditions to an extent
contrary to the common interest, and the inability
of the restructuring plan to restore Air France’s
viability.

II. LEGAL EVALUATION

Under Article 176 of the Treaty, ‘the institution or
institutions whose act has been declared void or
whose failure to act has been declared contrary to
this Treaty shall be required to take the necessary
measures to comply with the judgment of
the
Court of Justice'.

‘The institution is required,

The Court has elaborated on these provisions as
follows.
in order to
comply with the judgment and implement it fully,
to have regard not only to the operative part of the
judgment but also to the grounds which led to the
judgment and constitute its essential basis, in so far
as they are necessary in order to determine the
exact meaning of what is stated in the operative
part. It is those grounds which, on the one hand,
identify the precise provision held to be illegal and,
on the other, indicate the specific reasons which
underlie the finding of illegality contained in the
operative part and which the institution concerned
must
into account when replacing the
annulled measure' (4). The Court also emphasised
that it is for the institution whose act has been
declared void to determine the measures necessary
to comply with a judgment annulling an act (5).

take

it

In the present case, to take due account of the
Court’s judgment,
is for the Commission to
adopt a new decision including the reasoning for
the two points on which the Court found that there
was insufficient reasoning. Moreover, as the 1994
Decision was annulled because of a breach of
procedure, Article 176 does not oblige
the
Commission to reopen the procedure that led to
the Decision and again go through the entire
procedure before adopting a new decision.
It
appears from the established case-law that when an
act has been annulled because of formal or pro-
cedural flaws, the institution concerned may take
up the procedure from the stage at which the flaw
occurred (6). In particular, as the Court stated in its
judgment of 25 June 1998 (point 81), this Decision

(4) Judgment of the Court of Justice of 26 April 1988 in Joined
Cases 97/86, 193/86, 99/86 and 215/86, Ast(cid:130)ris and Others v.
Commission,
(5) Judgment of

[1988] ECR 2181, point 27.
the Court of 5 March 1980 in Case 76/79,

K(cid:148)necke v. Commission,

[1980] ECR 665, points 13 to 15.

(6) Judgment of the Court of 13 November 1990 in Case 331/88,
Fedesa and others,
[1990] ECR I-4023, and judgment of the
Court of First Instance of 17 October 1991 in Case T-26/89,
De Compte v. European Parliament, [1991] ECR II-781, point
70.

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must be based on the elements of fact existing at
the time when the 1994 Decision was adopted, the
Member States and the other interested parties have
already had the opportunity to state their points of
view in the administrative procedure preceding the
adoption of the 1994 Decision and the procedural
rights have therefore been respected, the Commis-
sion can adopt a new decision without reopening
the procedure provided for by Article 93(2) of the
Treaty.

(12) As the Court recalled in its judgment of 25 June
1998, the statement of grounds required by Article
190 of the Treaty must disclose in a clear and
unequivocal fashion the reasoning followed by the
Community authority which adopted the contested
act in such a way as to enable the Court to exercise
its
supervisory jurisdiction and the interested
parties to know the grounds of the measure taken
in order to be able to defend their rights (7). More-
over, it appears from the established case-law of the
Court that the question whether the statement of
the grounds for a decision meet the requirements
of Article 190 of the Treaty must be assessed with
regard not only to its wording but also to its
context and to all the legal rules governing the
matter in question (8). In this regard, while the
Commission is not obliged to reply, in its state-
ment of the grounds for a decision, to all the points
of fact and of law invoked by the parties concerned
in the course of the administrative procedure, it
must nevertheless take account of all the circum-
stances and all the relevant factors of the case to
to exercise its supervision of
enable the Court
legality and to inform the Member States and the
nationals concerned of the conditions in which it
applies the Treaty (9).

(14)

(13)

In order to meet the abovementioned obligations
on the two points which the Court found to be
based on insufficient reasoning, the Commission
wishes to point to the fact, first of all, that the aid
granted to Air France is an aid for the restructuring
of the company. In accordance with Article 92(3)(c)
of the Treaty, the Commission holds that aids for
the restructuring of undertakings in difficulty may

(7) Judgment of the Court of 14 February 1990 in Case 350/88,
[1990] ECR I-395, point

Delacre and Others v. Commission,
15.

(8) Ibid., point 16. See also judgment of the Court of 2 April
1998 in Case 367/95P, Commission v. Sytraval and Brink’s
France SARL,
(9) Judgments of

[1998] ECR I-1719, point 63.
the Court of Justice of 24 October 1996 in
Joined Cases C-329/93, C-62/95 and C-63/95, Bremer Vulkan
v. Commission,
[1996] ECR I-5151, point 32, and of 17
January 1995 in Case C-360/92 P, Publishers Association v.
Commission,

[1995] ECR I-23, point 39.

has

indispensable

contribute to the development of certain economic
activities without affecting trade to an extent
contrary to the common interest. It is therefore for
the Commission to ascertain, under the supervision
of the Court, the discipline required to ensure that
intervention by the Member States is not detri-
mental to the economic activities regarded as being
in the common interest. In this exercise,
the
Commission
discretionary
powers to identify and specify the conditions in
which national intervention benefiting individual
companies do not have the effect of shifting the
difficulties of one Member State to another and
may be considered as pursuing the common
interest of developing activities in an economic
sector. Past Commission decision-making in this
matter has been highlighted from 1978 in its
Eighth Report on Competition Policy: aid to
companies in difficulty may be justified under the
it
Treaty if
to the achievement of a
coherent
restructuring programme designed to
attain a long-term improvement of the situation
and restore the competitiveness of
these com-
panies, and if it is confined to what is strictly
necessary to preserve the company’s equilibrium
during the unavoidable transitional period before
the programme bears fruit (10). This approach was
confirmed by the Commission’s communication
on State aids in the aviation sector (11), which
continues the policy line followed by the Commis-
sion in its Decisions 94/118/EC (12) Aer Lingus,
94/698/EC (13) TAP and 94/696/EC (14) Olympic
Airways. It was set out in more general terms in the
Guidelines on State aid for rescuing and restruc-
turing firms in difficulty (15).

is subject

restructuring ‘. . .

In the abovementioned guidelines, the Commis-
sion states that
is part of a
feasible, coherent and far-reaching plan to restore a
firm’s
long-term viability. Restructuring usually
involves one or more of the following elements: the
the firm’s
reorganisation and rationalisation of
typically
activities on a more
involving the withdrawal from activities that are no
longer viable or are already loss-making,
the
restructuring of those existing activities that can be
made competitive again and, possibly, the develop-
ment of, or diversification to new viability activities.

efficient basis

(10) See paragraphs 227, 228 and 177 of the Eighth Report on

Competition Policy.

(11) OJ C 350, 10. 12. 1994, p. 5.
(12) OJ L 54, 25. 2. 1994, p. 30.
(13) OJ L 279, 28. 10. 1994, p. 29.
(14) OJ L 273, 25. 10. 1994, p. 22.
(15) OJ C 368, 23. 12. 1994, p. 12.

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restructuring (capital

injections, debt
Financial
reduction) usually has to accompany the physical
restructuring. Restructuring plans take account of,
inter alia, the circumstances giving rise to the
firm’s difficulties, market supply and demand for
the relevant products as well as the expected devel-
opment and the specific strengths and weaknesses
of the firm. They allow an orderly transition of the
firm to a new structure that gives it viable long-
term prospects and will enable it to operate on the
strength of
its own resources without requiring
further State assistance' (paragraph 2.1). Where the
Commission examines, pursuant to Article 92 of
the Treaty, a restructuring operation involving a
State aid, it must first determine if the restoration
of the company may be regarded as an objective of
its Community policy. Next, it ascertains whether
the aid may restore the company to viability and
whether the aid is commensurate with the costs
and advantages of restructuring without engen-
dering inappropriate distortion of competition.
With this in mind,
it may make a decision to
authorise aid subject to compliance with certain
conditions.

(15)

In the present case, the Commission took the view
in its 1994 Decision that it is in the Community’s
interest to foster the success of restructuring Air
France and ensure its long-term viability, and this
view was not questioned by the Court (point 235 of
the judgment).

without which the return to viability is bound to
fail. All of
these operations are partly financed
through the recapitalisation of the company by a
total amount of FRF 20 billion. This capital injec-
tion thus constitutes an indispensable element,
inextricably linked with the overall restructuring of
the airline, as is clear from the report compiled by
Lazard Fr(cid:138)res.

(17) On account of

the comprehensiveness of

the
restructuring operation and the
indispensable
nature of recapitalisation, the full amount of the aid
is intended for the financing of the restructuring
measures as a whole. These measures may be of
various kinds: purely structural, such as the meas-
ures to reorganise the company’s activity; social (17),
such as those relating to staff cuts (dismissal, retire-
ment, etc.); financial, for example those intended to
eliminate the company’s accumulated losses or
even cover losses realised during the restructuring
period (18). There may also be measures relating to
the ordinary activity or the normal functioning of
the company. In short,
the co-
financing measure through the aid is not decisive
as it forms part of a restructuring plan that is likely
to restore the company’s viability, and the above-
mentioned conditions of proportionality and the
absence of inappropriate distortions of competition
are fulfilled (19). The acquisition of new aircraft
forms part of Air France’s overall restructuring plan
and a failure to renew the fleet might jeopardise the
viability of this restructuring exercise, as noted by
the Commission in the 1994 Decision. The Court
has recognised that the reasoning for this decision
on the latter point was insufficient (point 102 of
the judgment). The Commission is therefore of the
opinion that there is no obstacle to the aid received
by Air France being used to finance fleet renewal.

the nature of

On the reason concerning the financing of
fleet renewal

(18)

(16)

In connection with the above, it should be pointed
out that, with regard to the financing of the ac-
quisition of new aircraft by Air France in the
restructuring stage, company restructuring is based
on an independent overall programme to restore
the company’s viability within a reasonable time-
frame without the grant of any other aid (16). It
comprises the reorganisation and rationalisation of
Air France’s activities, planned cost
reductions,
giving up some loss-making routes, improving effi-
ciency and productivity, sale of assets, reducing
major financial burdens, all these being measures

(16) See note 11, paragraph V.2.38.

It is correct, as the Court points out (point 113 of
the judgment), that for operating aids intended to
finance normal modernisation of installations and
relieve an undertaking of the expenses which it
would itself normally have had to bear in its
day-to-day management there can be no derogation
from the prohibition laid down in Article 92(1),

65.

See

also

(17) Ibid.
(18) See point 228 of the Eighth Report on Competition Policy.
(19) Judgment of the Court of First Instance of 5 November 1997
in Case T-149/95, Ducros v. Commission [1997] ECR II-
2031, point
the Commission’s decisions
published in full: ABB (OJ L 309, 13. 12. 1993, p. 21), La
Papelera Espa(cid:157)ola (OJ C 123, 5. 5. 1993, p. 7), Bull (OJ L
386, 31. 12. 1994, p. 1), Iritecna (OJ L 330, 13. 12. 1995, p.
23), Seda de Barcelona (OJ L 298, 21. 11. 1996, p. 14), SEAT
(OJ L 88, 5. 4. 1996, p. 7), Compagnie G(cid:130)n(cid:130)rale Maritime
(OJ L 5, 9. 1. 1997, p. 40), Aircraft Services Lemverder (OJ L
306, 11. 11. 1997, p. 19) and the numerous Commission
decisions not to raise objections, published in summary: for
example, Bayerische Zellstoff (SG 93/D/18262), Polte (SEC(97)
1055), Magdeburger Stahlbau (SEC(97) 1271), Koenitz (SEC(97)
546/2), etc.

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if

their distorting effects are counterba-
except
lanced by one of the objectives of common interest
specified in Article 92(2) and (3) (20). This is the
context of the reference to the Court’s rulings in
the Deufil and Glaverbel cases made by the parties
concerned during the administrative procedure. In
the present case, however, even if fleet renewal does
not constitute initial investment and does not relate
to additional or new equipment (21), it does form
part of a restructuring operation encompassing the
elements detailed above, in contrast with the situ-
ation in the Deufil and Glaverbel cases.

(19)

Furthermore, the investment considered in these
two court cases had to be viewed in the context of a
significant overcapacity on the markets in question
and, in the Deufil case, the investment had enabled
the company to double its production capacity. In
the present case, however, the acquisition of new
aircraft in no way increases Air France’s supply in
terms of greater seating capacity and the European
aviation market was not suffering a structural over-
capacity crisis in 1994 as illustrated below.

(20) Moreover, in the notification sent to the Commis-
sion on 18 March 1994, the French authorities
stated that
injection Air
through the capital
France’s indebtedness would be reduced from FRF
34 billion to FRF 15 billion between the end of
1993 and the end of 1996. Lazard Freres’ report
appended to the notification presents the following
development of Air France’s equity capital and net
debt over this period

(in billion FRF)

1993

1994

1995

1996

Equity capital

(0,4)

7,1

11,7

17,4 (1)

Net debt

34,1

25,1

20,7

15,2 (1)

(1) Excluding capitalised rents amounting to FRF 6,9 billion and
before conversion of ORAs (Obligations remboursables en
actions) totalling FRF 1,25 billion.

The table shows that Air France’s indebtedness
should decrease by FRF 18,9 billion between the
end of 1993 and the end of 1996. If account is

(20) Judgment of the Court of 15 May 1997 in Case C-278/95P,
Siemens v. Commission,
[1997] ECR I-2507, point 23, con-
firming the judgment of the Court of First Instance in Case
T-459/93,

[1995] ECR II-1675, point 48.

(21) The concept of operational aid extended to replacement
judg-
is not necessarily identical with that evolved by

investment, mentioned in the Glaverbel and Deufil
ments,
economic theory.

taken of the airline’s additional indebtedness in the
first half of 1994, the Commission takes the view
that the aid granted to Air France, is in its entirety,
intended to reduce the company’s indebtedness,
its equity
concomitantly with the increase of
capital, and not to finance the purchase of new
aircraft. Moreover, the financing table included in
Lazard Fr(cid:138)res’ report also shows that the opera-
tional resources obtained from the sale of assets
(FRF 7 billion) and the self-financing capacity (FRF
12,1 billion), which not only includes the com-
pany’s results but also depreciation, depletion and
to cover
amortisation, are more than sufficient
operational
billion),
14
(FRF
requirements
in
including FRF 11,5 billion for
aircraft. It should be pointed out, finally, that net
expenditure on investment
in aircraft does not
amount
to FRF 11,5 billion during the period
covered by the restructuring programme, but to
FRF 6,2 billion, of which FRF 3,5 billion for
investment in aeroplanes alone, as the plan notified
to the Commission makes provision for FRF 4,1
billion from the transfer of aircraft and FRF 1,2
billion from the sale of spare parts in 1994 to 1996.

investment

The reasoning as to Air France’s competitive
position on non-EEA routes

(21) With regard, secondly, to Air France’s competitive
position on the network of routes to non-EEA
countries, it should first of all be pointed out that
the relevant markets defmed by the Commission in
a case concerning State aid are more general than
those covered by its analysis in the competition
cases referred to it under Articles 85 and 86 of the
Treaty or Regulation (EEC) No 4064/89. The
Commission’s communication on State aid in the
aviation sector states that the geographical market
to be taken into consideration to limit the effects of
aid on competition may be either the EEA market
in its entirety or a specific regional market particu-
the
larly
Commission partly makes a route-by-route analysis
by applying Articles 85 and 86 of the Treaty to civil
aviation markets (23).

to competition (22), whereas

subject

(22)

The judgment of the Court of First Instance of 25
June 1998 confirms the validity of this approach.
In its 1994 Decision the Commission refrained
from carrying out a route-by-route examination
within the EEA but addressed the question of Air
France’s competitive position on this market as a

(22) See footnote 11, point V.2.38.4.
(23) Judgment of

the Court of 11 April 1989 in Case 66/86,
Ahmed Saeed Flugreisen and Silver Line Reiseb(cid:129)ro v.
Zentrale zur Bek(cid:132)mpfung unlauteren Wettbewerbs,
[1989]
ECR 803, points 40 to 46. Judgment of the Court of First
Instance of 19 May 1994 in Case T-2/93, Air France v.
Commission,
[1994] ECR II-323, points 45 and 80 to 85.
Commission Decisions 92/213/EEC of 26 February 1992,
British Midland/Aer Lingus (OJ L 96, 10. 4. 1992, p. 34); of
5 October 1992, Air France/Sabena (OJ C 272, 21. 10. 1992);
of 27 November 1992, British Airways/TAT (OJ C 326, 11.
12. 1992); of 20 July 1995, Swissair/Sabena (OJ C 200, 4. 8.
1995, p. 10); 96/180/EC, LH/SAS (OJ L 54, 5. 3. 1996, p. 28).

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Official Journal of the European Communities

L 63/73

whole. The Court accepted this Commission posi-
tion both with regard to its reasoning (point 269)
and the principle as
such (point 288). The
Commission therefore holds that it can undertake a
similar overall analysis with regard to non-EEA
routes.

(23) With regard to the restrictions

that may be
imposed to limit distortions resulting from the aid
or effects on trade between the Member States, the
Commission’s guidelines on State aid for rescuing
and restructuring firms in difficulty provide that
the restructuring plan must include a reduction in
production capacity if there is structural overca-
pacity on the Community market in question. The
situation is different, however, if there is no such
overcapacity: ‘Where, on the other hand, there is no
structural excess of production capacity in a rele-
vant market in the Community served by the reci-
pient, the Commission will normally not require a
reduction of capacity in return for
the aid.
However, it must be satisfied that the aid will be
used only for the purpose of restoring the firm’s
viability and that it will not enable the recipient
the restructuring
during the implementation of
plan to expand production capacity, except in so
far as is essential for restoring viability without
thereby unduly distorting competition' (24). This
approach is confirmed by the case-law, in which
reduction of capacity is considered an acceptable
remedy for distortions of competition (25). However,
on the subject of the proportionality of restraint
mechanisms that may be imposed, the Court has
recognised that no exact quantitative ratio needs to
be established between the amount of the aid and
the size of the required cuts in production capacity.
The Commission’s assessment cannot be subjected
to a review based solely on economic criteria but
may also ‘. . . take account of a wide variety of
political, economic and social considerations'
in
exercising its discretion (26).

(24)

In the present case, in order to prevent trade being
affected to an extent contrary to the common
interest,
the Commission makes its decision to
authorise the aid subject to compliance with the
following main conditions: a commitment by Air
France that
it will use the aid exclusively for
restructuring purposes; limiting to 146 the number
of Air France’s aircraft during the period covered

(24) See footnote 15.
(25) Ducros, see footnote 19, point 67.
(26) Judgment of the Court of First Instance of 24 October 1997
in Case T-244/94, Wirtschaftsvereinigung Stahl v. Commis-
sion,
[1997] ECR II-1963, point 111, referring to the judg-
ment of the Court of Justice of 3 October 1985 in Case 214/
83, Germany v. Commission,

[1985] ECR 3053, point 33.

by the plan; limiting the supply of Air France in
terms of seat/kilometre available within the EEA
during the period covered by the plan; prohibition
for Air France to act as a price leader within the
EEA for the duration of the plan; no preferential
treatment for Air France in terms of traffic rights;
limiting to 89 the number of routes regularly oper-
ated by Air France between France and the other
EEA countries. Of these various conditions, the
absence of preferential treatment with regard to
traffic rights and the limitation to 146 of
the
number of aircraft apply to all routes, including
those to non-member countries. Within the scope
of its overall discretionary powers, the Commission
has seen fit not to extend the other abovemen-
tioned conditions to non-EEA routes, in particular
the prohibition of price leadership and the limita-
tion of the quantity of seat/kilometre available, for
the following reasons:

— the existence of substantial guarantees for all

routes

— the

conditions of

competition and intra-
Community trade in 1994 were much more
strongly affected by the development of routes
within the EEA than by that of non-EEA routes

— extending the above conditions to non-EEA
routes would essentially benefit airlines in non-
member countries.

(25) On the first point, the Commission takes the view
that the commitment to use the aid exclusively for
the purpose of restructuring Air France and the
limitation of the number of aircraft, both of which
conditions fully apply to non-EEA routes, are in
themselves substantial concessions to be made by
Air France in return for the aid. As demonstrated
above, the FRF 20 billion capital injection must be
regarded as used solely to reduce the debt, to the
exclusion of any use intended to revert to tariff or
other practices that are likely to lead to losses. The
notified restructuring plan also limits the number
of aircraft to 146 during the period covered by the
plan, with concomitantly a slight reduction in the
total number of seats available, and in its commu-
nication on State aids in the aviation sector the
Commission
programme
financed by State aid must not be intended to
increase the capacity and supply of the company
concerned to the detriment of its direct European
competitors and that at any rate the programme
must not lead to an increase in the number of
aircraft or seats available on the markets concerned
in excess of the growth of these markets (27).

specified

that

the

(27) See footnote 11, point V.2.38.4.

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Official Journal of the European Communities

12. 3. 1999

(26)

In the 1994 Decision the Commission took the
view that the European air transport market was
not going through a structural overcapacity crisis
and that the situation in the aviation sector did not
reduction of capacity. The
justify an overall
Commission’s reasoning on these two aspects was
accepted by the Court of First Instance (points 365
and 367 of the judgment). It should be added here
that civil aviation is one of the sectors where long-
term growth has been strongest for the past 50
years. This growth even continued in the period
1990 to 1994 in which air transport went through
the worst crisis in its history. As the Commission
indicated in the 1994 Decision, the prospects for
long-term growth are of the order of 6 % per year.
In this context, the slight reduction in the total
number of seats available from Air France during
the period covered by the programme, which is
tantamount to a freeze of its production capacity,
appears on its own as a very serious limitation, in
particular as there are no plans for partnerships
with other major airlines. Forecasts of the trend of
Air France’s traffic on non-EEA routes in 1994 to
1996, communicated to the Commission in April
1994, show for each major region in the world a
growth in Air France’s traffic that is substantially
lower than that for traffic as a whole, measured in
terms of passenger-kilometres carried (e.g. [ . . . ] (28)
as against [ . . . ] for North America, [ . . . ] as against
[ . . . ] for South America, [ . . . ] as against [ . . . ] for
the Asia/Pacific zone, etc.). In practice, finally, the
risk that Air France would benefit from the aid to
deploy more capacity and put more planes on
routes to non-member countries is very small in
practice as, on the one hand, the capacity available
to Air France on routes to non-member countries
is regulated by bilateral agreements which cannot
be changed without the consent of the other coun-
tries concerned, as indicated above, and on the
other hand short- and medium-haul aircraft used
on routes within the EEA can hardly be used to
replace long-haul aircraft used for intercontinental
flights which account for a very large proportion of
non-EEA routes.

(28)

full

freedom to
on 1 January 1993 grants
Community airlines to choose their own air fares,
flight frequency and seating capacity on all routes
within the EEA. However, the operating conditions
of routes between the various EEA countries and
non-EEA countries are still
largely regulated by
bilateral agreements which, except on certain trans-
atlantic routes, strictly limit the quantities offered
and the possibilities of air-fare variation. The risks
involved in using a State aid to finance practices
that distort competition are thus naturally much
greater on routes within the EEA than on non-EEA
routes. In its communication on State aids in the
aviation sector, the Commission specifically indi-
in connection with relations with non-
cated,
member countries, that market access conditions
and the limitation of competition laid down by
most bilateral agreements with non-member coun-
tries appear to be far more important economically
than any State aids (29).

For instance, one third of the bilateral agreements
in force in 1994 between France and countries
outside the EEA include a sole designation clause
limiting the number of airlines likely to be desig-
nated by France to a single one. Virtually all of
these agreements comprise provisions restricting all
or part of the services supplied (in terms of flight
frequency, seating capacity, etc.) by the airline or
airlines designated by each party. Only a very small
number of bilateral agreements concluded by
lay down a specific provision
France do not
limiting supply. The France-USA relationship is a
special case as, since the termination in 1992 of the
aviation agreement by which their relationship was
governed,
the capacity made available by each
airline required approval by both parties for each
scheduling
completely
governed by the bilateral agreements concluded by
France, as they are almost systematically subject to
the principle of double approval by the States
concerned (30). Finally, all of these bilateral agree-
ments confine possible designation to airlines
largely owned and effectively controlled by French
nationals.

season. Air

fares

are

(27) With regard to the second point, it should be noted
in general that the Commission logically focuses
the restrictions imposed on Air France on routes
within the EEA, where the effect of the aid will be
strongest, since it has to ensure that this effect does
not change the trading conditions to an extent
contrary to Community interest. Moreover,
the
Third Aviation Package which entered into force

(29) Among the routes outside the EEA that may be
affected by the grant of the aid to Air France, a
distinction should be made between direct flights

(28) This version of the Decision has been edited to ensure that

confidential information is not disclosed.

(29) See footnote 11, point II.2.11.
(30) See the Digest of Bilateral Air Transport Agreements
published by the International Civil Aviation Organisation.

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Official Journal of the European Communities

L 63/75

between France and non-EEA countries, on the
one hand, and flights between other EEA countries
and non-EEA countries following an indirect route
via the Paris-CDG hub.

a

the

result,

(30) On the markets constituted by flights between
France and non-EEA countries, Air France is in
practice not in direct competition with other non-
French Community airlines because of the restric-
tions imposed by bilateral agreements regarding
the air carrier’s nationality. The sole designation
provision included in many agreements
also
prevents the designation of French airlines in
competition with Air France. The fact is that even
if another French airline were to enter the market
as
condition
in particular, of
precluding all preferential treatment of Air France,
the other restrictions imposed by bilateral agree-
ments concerning prices and capacities offered
limit very strictly the conditions of competition. It
is emphasised that the system of dual approval of
air fares in practice precludes all risks of predatory
air fare practices by one of the designated airlines
on an extra-Community route, which removes the
possible useful effects of a prohibition on price
leadership. A limitation of capacities made avail-
able by Air France on extra-Community routes
would hardly be more useful as price controls make
it much less interesting for an airline to increase
considerably the number of seats available on these
routes, even assuming that the bilateral agreements
allow such an increase. Particularly on the North
Atlantic market, which is by far the most important
intercontinental market
for flights from France,
control exercised by the French and American
authorities since 1992 has in effect sought to limit
the trend toward increasing seating capacity.

another terminal building with luggage-processing
risks. The Commission is of the opinion that there
is a certain degree of substitutability between the
Paris-CDG hub and other hubs located in the
the
Community on the relevant markets
segment of customers mainly interested in low air
fares, i.e. essentially tourists. This substitutability,
however, is only very slight for business passengers,
who are mainly interested in travelling time, punc-
tuality and quality of service. It is for the business
that airline margins are the
passenger segment
most
of distortion of
and risks
competition through improper use of aid the most
pronounced.

significant

for

(32)

should also be mentioned that

It
in 1994
Paris-CDG airport was not an efficient hub with an
optimal combination of waves of aircraft arrivals
and departures. In 1992 the average connecting
time for Air France passengers was 2 hours 48
minutes and early-1994 the airline offered an
average of 16 possible connecting flights for each
incoming flight compared with 23 for Lufthansa at
Frankfurt and 29 for KLM at Amsterdam. Most
internal French flights end at Paris-Orly airport,
which is some 40 km away from Paris-CDG and
the links between them are poor. This double
handicap adversely affects the ‘substitutability' of
the Paris-CDG hub. Thus,
the number of Air
France transit passengers between EEA countries
(other than France) and non-EEA countries would
account for only approximately 4 % of the airline’s
traffic in 1991 and about 5 % in 1993. This means
that the effect of the aid on feeder air traffic to the
Paris-CDG hub may be considered very slight.
Consequently, the position of the small airlines
serving the Paris-CDG airport and the other major
European hubs will hardly be affected.

(31) On the markets made up of indirect flights via
Paris-CDG between other EEA countries and
non-EEA countries there is a certain competition
between Air France and its principal Community
competitors also operating hubs. However,
the
conditions of this competition are likewise limited
by restrictive provisions of bilateral agreements
concluded between EEA member countries and
non-member countries, whose effects have been
explained above. These agreements usually do not
allow a ‘second freedom' airline to act as a price
leader in air fares. Moreover, the services in ques-
tion are only partly mutually substitutable since a
direct link is hard to compare with an indirect
flight involving waiting time in transit, often a
change of planes, and sometimes a transfer to

(33) With regard to the third point, it follows from what
the restrictions
has been said previously about
imposed by bilateral agreements concerning desig-
nation that any limitation of capacity or price
imposed on Air France on routes between France
and non-member countries would basically benefit
air carriers resident in the EEA in cases where the
bilateral
room for
manoeuvre. On the market for transatlantic routes
between France and the United States, where Air
France has been in difficulty for several years as it
is confronted by more powerful US airlines
covering two thirds of this market in 1993, limiting

allow some

agreements

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12. 3. 1999

(34)

Air France’s capacity would in fact directly benefit
the airlines from across the Atlantic as the French
authorities would not be able to impose the
constraints incumbent on Air France to the same
extent on the American airlines. Such a situation
would be contrary to Community interest which
calls for the development of the civil aviation sector
in the Community.
Limiting, beyond the level of the bilateral agree-
ments, the possibilities given to France to adapt its
pricing or quantities available on intercontinental
routes from France would furthermore hamper the
airline’s return to viability. Air France is one of the
four Community airlines, with KLM, British
Airways
and Lufthansa, with an international
network encompassing all parts of the world from
its own country. The existence of this network and
the ‘Air France' trade mark are two of the principal
the airline which is faced with ever
assets of
increasing competition from airlines of non-EEA
countries, in particular on transatlantic routes.

The Commission refers in this connection to the
statement of grounds in the letters it sent to the
French authorities on 5 July 1995 (31), 31 July
1996 (32) and 10 June 1997 (33), which must also be
this
regarded as
Decision,

forming an integral part of

HAS ADOPTED THIS DECISION:

Article 1

The aid granted to Air France by the French State in the
period 1994 to 1996, in the form of a FRF 20 billion
capital increase to be paid in three tranches, is compatible
with the common market and the EEA Agreement by
virtue of point (c) of Article 92(3) of the Treaty and point
(c) of Article 61(3) of the Agreement, account being taken
of the commitments and conditions of Articles 1 and 2 of
this
Decision 94/653/EC,
Decision.

reproduced in Part

I of

III. CONCLUSION

Article 2

(35) All of the above meets the demand for a statement
of reasons on the two points on which the 1994
Decision was found to be wanting because of insuf-
ficient reasoning. With regard to the other points,
the Commission refers to the recitals of the text of
the 1994 Decision that must be regarded as
forming an integral part of this Decision without
the need to repeat them here in full.
The Commission also notes that the annulment of
the 1994 Decision removes the legal basis of the
three decisions it adopted on 21 June 1995, 24 July
1996 and 16 April 1997 regarding the payment of
the second and third tranches of aid to Air France.
Under these conditions, it is proper not to object
once again to the payment of the relevant tranches.

(36)

The Commission does not object to the payment of the
second and third tranches of the capital increase of Air
France effected in 1995 and 1996.

Article 3

This Decision is addressed to the French Republic.

Done at Brussels, 22 July 1998.

For the Commission

Neil KINNOCK

Member of the Commission

(31) OJ C 295, 10. 11. 1995, p. 2.
(32) OJ C 374, 11. 12. 1996, p. 9.
(33) OJ C 374, 10. 12. 1997, p. 6 (incorporation of the FRF 1

billion previously blocked).