EFTA Surveillance Authority Competition and State Aid Directorate Rue Belliard 35 1040 Brussels Belgium

Reykjavík September 25, 2020 Reference: FJR20030062/5.1 Your reference: 85190

Subject: Comments on a letter received by ESA regarding Decision No 101/20/COL

Introduction Reference is made to an invitation from the EFTA Surveillance Authority (the Authority; ESA), dated 16 September 2020, to comment on a letter received by ESA calling for a revocation of Decision No 101/20/COL on compensation to for the damage caused by the COVID-19 outbreak. The letter received by the Authority argues that the decision was based on “incorrect or incomplete information”. The Icelandic authorities take the opportunity to underline the compliance of the decision, and the notification on which was it was based, with the EEA rules on State aid. 1. Basis for the Authority’s letter According to Article 9 of Part II of Protocol 3 to the Surveillance and Court Agreement (SCA), the Authority can decide to initiate a formal investigation procedure if it encounters documents or observations that give rise to doubts as to the “well-founded and sound nature”1 of information which constituted a determining factor for the decision. That procedure can lead to revocation of the decision if it turns out that it was indeed based on incorrect information. The Icelandic authorities note that the undertaking that has requested ESA to contemplate revocation of the decision, Fly ehf., does not have standing to bring the decision before the EFTA Court. The undertaking neither holds an Icelandic Air Operator Certificate (AOC)2, nor has it taken delivery of any airplanes. Thus, it is not active in the aviation sector despite its plans to become a competitor of the aid beneficiary at some time in the future. Its non-existent position on the market is therefore not affected by the decision. Like any other legal entity, Fly Play can request information from and submit general market information to ESA. It does not however have a status of an “interested party”, in the meaning of Article 1(h) of Part II of Protocol 3 of the SCA, that can play an active role in administrative proceedings concerning the decision. Such status is confined to “undertakings whose interests might

1 Cf. Commission Decision of 16 September 1998 in case NN 178/97 (Verlipack). 2 See: https://www.icetra.is/aviation/operation/aoc-holders/.

1 be affected by the granting of aid”. The Authority may nevertheless need to review information received by third parties and it has the power to act on the basis of it. In the Authority’s letter the Icelandic authorities are invited to comment on “new information”. The information provided in Fly Play’s letter to ESA does not constitute new information but rather legal theories and contemplations. The Icelandic authorities are willing to address and correct these to some extent.3 2. Submissions provided by Fly Play 2.1 Legal basis Fly Play’s calling into question the legal basis upon which the measure was notified can be rebutted by reference to textbooks and judgments of EEA Courts. It is settled case law that Article 61(2) EEA “covers aid which is, in law, compatible with the common market, provided that it satisfies certain objective criteria” and that the Authority “is bound, where those criteria are satisfied, to declare such aid compatible with the [functioning of the EEA Agreement], and that it has no discretion in that regard”.4 The objective criteria of Article 61(2)(b) with regard to exceptional occurrences is clear from the provision’s wording: there must be an exceptional occurrence, a causal connection between the occurrence and the damage (the occurrence must cause the damage), and the aid must also be proportionate by not covering more than the extent of the damage. The Authority is obliged to verify that the conditions laid down in the provision are met.5 Article 61(2)(b) is of course a standalone provision and its application does by no means constitute an exception “from the general framework provided by the Temporary Framework”, as Fly Play argues. That interpretation is incoherent with fundamental features of the EEA Agreement and well- established decision-making practice of the Authority and the European Commission, concerning the application of Article 61(2). Whilst the approved measure undoubtably aims to partly compensate Icelandair for losses suffered due to the COVID-19 outbreak, the decision to provide the guarantee was not borne out of reasons of fairness or sympathy with the airline, for it occurring losses. Obviously other justifications than making good damages must also come into play in deciding whether to intervene in the operations of an airline by way of a state guarantee. 2.2 Application of Article 61(2)(b) or 61(3)(b) EEA, cf. Article 107(2)(b) and 107(3)(b) TFEU In its reference to paragraph 15bis of the Temporary Framework (TF) Fly Play seems to maintain that it is the intended effect of the aid on the economy in general that guides which EEA legal basis must be chosen for state aid related to the ongoing pandemic. This is likely based on an incorrect reading of said paragraph. The paragraph underlines that damage compensated under Article 107(2)(b) TFEU must be directly caused by the outbreak. Thus, if damage to an undertaking’s operations is not directly caused by the outbreak, but by the general economic downturn which has resulted from the outbreak, Article 107(3)(b) should be used along with the TF.

3 Deliberations in section (A) of Fly Play’s information letter about the Government’s presumptions and intentions do need to be sorted as they simply have no basis in fact. Furthermore, Fly Play’s reference of a “hurried approval” by ESA indicates an unfamiliarity with the pre-notification procedure of State aid cases. 4 See judgment in case T-268/06, Olympiaki Aeroporia Ypiresies AE v Commission, ECLI:EU:T:2008:222, para. 52, and the case law cited. 5 An event must fall outside normal entrepreneurial risk to be considered an exceptional occurrence. As provided in section 6.2 of the Authority’s Decision, this must be examined on a case-by-case bases. As for the Covid-19 outbreak, it has been deemed to qualify as an exceptional occurrence for the purpose of Article 107(2)(b) TFEU and Article 61(2)(b) EEA by the Commission and the Authority, respectively.

2 Safeguarding the economy is by far an ulterior or hidden motive in granting State aid to Icelandair. On the contrary, the Icelandic authorities submit that all aid granted in the EEA which serves the objective described by Article 61(2)(b) EEA and Article 107(2)(b) in 2020 is likely to be also for the benefit of the economy in a wider sense. By no means do such additional benefits alter the compatibility of the measures with the functioning of the EEA Agreement or the internal market, as Fly Play seems to indicate (page 5)6. The Icelandic authorities submit that it is rather the fact that aid under Article 61(2)(b) – exceptional occurrence – is restricted to actual and quantifiable damage, that might lead public authorities to prefer Article 61(3)(b) – serious disturbance in the economy – in some cases, in particular where the amounts of aid are relatively excessive. The latter provision is much less restrictive when it comes to amounts of aid and easier to apply as there is no requirement of a direct causal link. This is also the interpretation of Professor Phedon Nicolaides in a recent article, which inter alia provides the following:7 “Article 107(3)(b) is likely more suitable to address the impact of the pandemic because aid on the basis of that Treaty provision can be granted both in order to remedy the actual effect of a serious disturbance and to prevent the worsening of the disturbance in the future. In other words, aid can be both ‘retrospective’ and ‘prospective’. In both instances of retrospective intervention and prospective intervention, the amount of aid that may be granted depends not just on the magnitude of the effect of the serious disturbance but also on how aid recipients intend to address their problems. By contrast, aid on the basis of Article 107(2)(b) may only be granted for the purpose of compensating quantifiable damage. The amount of damage must be objectively measured. It does not depend on what the aid recipient was hoping to do before the exceptional occurrence or what it intends to do in order to improve its situation in the future. Article 107(2)(b) aid may be granted only for damage that has already been suffered. This implies that the exception in Article 107(2)(b) to the prohibition of state aid in Article 107(1) is not useful when the intention of the government is to offer to undertakings enough resources to enable them to implement preventive measures to avoid a further deterioration in their financial situation.”8 Article 61(2)(b) and its counterpart Article 107(2)(b) only suit as a legal basis if a direct link can be established, the damage is quantifiable, and the aid needed is limited to the damage caused. As is the case with regard to the measure assessed and approved by Decision No 101/20/COL. 2.3 Measures undertaken by other EEA Contracting Parties The Icelandic authorities find fault in the contemplation that the application of Article 61(2)(b) EEA (and Article 107(2)(b) TFEU) must be for the sole purpose of loss compensation. It suffices to study support to airlines within the EEA in the context of the coronavirus crisis to see that this is rarely, if ever, the case. The Icelandic authorities can help shed light on the issue through a few examples of

6 In reference to alleged amendments to the purpose of the measure and subsequent change in “its nature and its compatibility with the internal market”. 7 Nicolaides, Phedon. “Application of Article 107(2)(b) TFEU to Covid-19 Measures: State Aid to Make Good the Damage Caused by an Exceptional Occurrence.” Journal of European Competition Law & Practice, 16 June 2020. 8 The author is inaccurate in stating that damage must have “already been suffered”. In practice the calculation of damage can be based on an estimation that is verified ex-post. See inter alia cases SA.57375 (Hungary) COVID- 19 – Compensation scheme related to future investment, section 2.9.2 and SA.57291 () COVID-19 – Compensation Scheme: Directive for fixed cost subsidies, section 2.6.2.

3 measures that have had multiple purposes whilst being designed to remedy damage caused by the pandemic: i. On 6 July 2020 the Commission approved Austria’s support to Austrian Airlines on the basis of Article 107(2)(b) TFEU. A month before, the Minister of Finance provided the following reasoning for the foreseen State aid: “Securing the future of Austrian Airlines is a measure to support Austria as a centre of economic activity. Austrian Airlines is our gateway to the world, with around 130 destinations and almost 20 long-haul routes, and around 17,500 jobs depending either directly or indirectly on the airline company.” This remains the position of the Austrian authorities, cf. the following statement from last August by the Minister for Climate Action, Environment, Energy, Mobility, Innovation and Technology of Austria (translation by the Icelandic authorities9): “Around 7,000 jobs are directly attached to Austrian Airlines, and many more relate to indirect effects and supply chains. The saving of these numerous jobs as well as the securing of Austria as the place of business were the main motivations behind the Federal Government’s support of Austrian Airlines in its difficult economic situation.” ii. On 8 September 2020 the Commission approved ’s support to Condor on the basis of Article 107(2)(b) TFEU. Before the approval, the following statements were made on behalf of the aid grantors, by Germany’s Economic Affairs Minister and Hesse’s Minister of Finance, respectively: “The Federal Government and the State of Hesse will continue to support Condor in these difficult times. The company was operationally healthy and profitable in normal times and has good prospects. We have agreed on a KfW loan totalling €550 million.” --- “The aviation industry is of vital importance to Hesse’s economy. It is therefore in our interest to make sure that Condor, as a major employer and company headquartered in Hesse, will weather this crisis. This is the second time Condor has been hard hit through no fault of their own. Recently, the tourist carrier was doing quite well. This is why we stand side by side with the Federal Government in our continued support for the airline as we meet the need for further financing created by the coronavirus crisis. We hope this will allow Condor to weather this crisis.” iii. On 15 April 2020 the Commission approved ’s and Sweden’s support to SAS on the basis of Article 107(2)(b) TFEU. Before the approval, the Danish Minister of Finance made the following statement in relation to the guarantee: “SAS har stor betydning for både Skandinaviens og Danmarks tilgængelighed. Det vedrører i høj grad også arbejdspladser, virksomheder og hele økonomien generelt. Det er baggrunden for, at den danske og den svenske stat som de to største ejere i fællesskab har besluttet at støtte op om SAS ved i første omgang at stille garantier for i alt 3 mia. SEK. Der er tale om et første skridt, og den danske stat vil som en langsigtet og ansvarlig medejer af SAS følge udviklingen tæt og gøre, hvad end der er

9 In the original: “An den Austrian Airlines hängen direkt rund 7000 Arbeitsplätze, durch Umwegrentabilitäten und Lieferketten wesentlich mehr. Die Rettung dieser zahlreichen Arbeitsplätze sowie die Sicherung des Standorts Österreich waren die Hauptbeweggründe, der Bundesregierung, die Austrian Airlines in ihrer schwierigen wirtschaftlichen Lage zu unterstützen.”

4 nødvendigt for, at SAS kommer igennem krisen og fortsat vil være operationel herefter.” Sweden has opted to grant guarantees to airlines through a program that utilises both a scheme based on Article 107(3)(b) and ad hoc measures based on Article 107(2)(b) for undertakings not eligible for the scheme:10 ”Ett garantiprogram – två olika möjligheter till stöd EU-kommissionen har godkänt att stöd ges i enlighet med artikel 107(3)(b) i fördraget om Europeiska unionens funktionssätt (EUF). Artikeln förutsätter bland annat att förluster bärs proportionellt och på samma villkor för kreditinstitutet och staten (pari passu). De flygföretag som kan visa att de saknar möjlighet att nyttja garantiprogrammet enligt villkoren i denna artikel kan istället ansöka om en kreditgaranti enligt villkoren i artikel 107(2)(b) EUF. EU-kommissionen måste godkänna varje enskilt fall när det gäller kreditgarantier som ges ut enligt artikel 107(2)(b) EUF. En kreditgaranti som ges ut under artikel 107(3)(b) behöver inte prövas av kommissionen eftersom detta stöd redan prövats och godkänts.” The underlying rationale for Sweden’s approach is the same for both, cf. the following extract from a press release by the Government, dated 17 March 2020:11 “Flyget är idag av stor betydelse för att fungerande kommunikationer i hela landet ska kunna upprätthållas. Det är viktigt för det svenska näringslivet men också ur krisberedskaps- och totalförsvarshänseende samt för flera olika typer av samhällsviktiga transporter, som till exempel sjuktransporter, räddnings- och brandflyg. För att underlätta flygföretagens möjligheter att låna på kapitalmarknaden ska staten kunna garantera lån från kommersiella banker under den period som flygföretagen påverkas av spridningen av det nya coronaviruset. Regeringen föreslår därför idag att riksdagen beslutar om att statliga kreditgarantier ska få ställas ut. Samtidigt beslutar regeringen om ett uppdrag till Riksgäldskontoret om att vidta förberedande åtgärder och, när riksdagen fattat beslut och kommissionen godkänt stödet, inleda arbetet med att ställa ut kreditgarantier. Syftet med åtgärden är att värna i grunden livskraftiga svenska flygföretag från att slås ut till följd av den nu rådande situationen. Den pågående krisen påverkar även samhällsviktig infrastruktur i bredare bemärkelse. För sjöfartsnäringen kan liknande kreditgarantier hanteras genom Exportkreditnämnden. För att nämnden snabbt ska kunna uppfylla sin uppgift att

10 Instructions on how the State is to proceed under Article 107(2)(b), if 107(3)(b) is not applicable, are available at riksgalden.se. Credit risk margins are set the same for both types. 11 Sweden and Denmark have since decided to recapitalise SAS, cf. the Commission’s decisions thereto from August 2020. It is the intention of the two countries to cancel the revolving credit facility after the recapitalisation. The underlying reasoning behind the recapitalisation is the same as the reasoning behind the facility, as can be seen by the press releases from the relevant ministers. From Denmark: “SAS er afgørende for både Skandinaviens og Danmarks internationale tilgængelighed, dansk eksport og erhvervsliv samt danske arbejdspladser.” From Sweden: “SAS är viktigt för att tillgodose samhällets grundläggande behov av tillgänglighet med flyg i Sverige, Danmark och Norge.” Safeguards to limit competition distortions resulting from the recapitalisation are not rigorous.

5 främja svensk export och genom detta även sjöfarten kommer det också att föreslås att Exportkreditnämndens kreditgarantiram utökas med 50 miljarder kronor. Situationen förändras just mycket snabbt och beredskapen är hög att snabbt vidta fler åtgärder om de behövs. Ytterligare information Riksgäldskontoret får i uppdrag att vidta förberedelser för att ställa ut kreditgarantier under 2020. Kreditgarantierna får uppgå till högst 5 miljarder kronor för lån till flygföretag som den 1 januari 2020 hade ett svenskt tillstånd att bedriva kommersiell verksamhet inom luftfart och som har sin huvudsakliga verksamhet eller sitt säte i Sverige. Av dessa 5 miljarder riktas 1,5 miljarder kronor till SAS. SAS är viktiga för att tillgodose samhällets grundläggande behov av flyginfrastruktur både i Sverige och Danmark. Den svenska och danska staten har därför enats om att den danska regeringen kommer att gå fram med en liknande åtgärd avseende SAS. Staterna utesluter inte att det kan behövas fler åtgärder framöver.” The insinuations in section (B)(a) of Fly Play’s information letter have neither basis in law nor practice. In fact, implying that the aim to alleviate an airline of some of the costs it had incurred due to the COVID-19 pandemic in accordance with Article 61(2)(b) is not reconcilable with general economic considerations is unrealistic and turns the underlying rational of the provision upside down. It fails to understand that aid interventions by public authorities are generally multi-faceted in nature. That aside, when applying Article 61(2)(b) ESA is only tasked with examining whether the conditions of the provision are met, not examining other simultaneous lines of reasoning that may be in play and that do not alter the compensatory character of the aid. 2.2 Alleged additional aid elements Part (B)(b) of Fly Play’s arguments can be summed up in the undertaking’s assertion that Icelandic company law and the legal framework concerning the state ownership of financial undertakings has been violated by the Icelandic authorities, by them “ordering [state owned banks] to lower the normal market investor requirements”. The allegation seems to be related to the state’s announcement regarding a bill to parliament seeking authorisation to grant a state guarantee for a credit facility to Icelandair provided by the airline’s key domestic banking partners, Landsbankinn and Íslandsbanki. The facility is available to the company as a last resort if its operations remain at a minimum level for a longer period than is expected. The two banks are indeed state-owned but are also two of only three large commercial banks in . The third, Arion bank, was the key domestic banking partner to both Wow Air and .12 The aforementioned announcement was published on the website of the Ministry of Finance and Economic Affairs, along with documents specifying the terms of the state guarantee and the key terms by the banks of the underlying credit lines. In the latter document there is a reference to operational credit lines by the same banks to Icelandair and that the only financial requirement for keeping those lines open is that the company maintain at least 8% equity ratio. Those credit lines were part of the company’s financing before the COVID-19 pandemic and formed an integral part of the ongoing business relationship between the banks and the airline. According to information provided by Icelandair in preparation of the state guarantee, the company negotiated new terms with all its creditors during its financial restructuring process, including minimum equity ratio conditions with its

12 The two airlines ceased operations in October 2018 and March 2019, respectively.

6 Icelandic and US based bank creditors. The state did not have any role in deciding the terms to be provided by these banks for their operating lines at any point in the process. As regards Fly Play’s assertion that a market operator would or should require a 30% equity ratio, this assertion is not substantiated. The 8% equity ratio requirement set by the two domestic banks seems to form part of their overall commitment to work with the company on its financial restructuring case. Icelandair’s operating scenario presented to creditors and prospective new shareholders during the financial restructuring process does show a significant reduction in the equity ratio of the company, in particular over the initial 12-18 months. According to the same scenario, the equity ratio will increase rapidly following this initial period of decline. As mentioned above, the understanding of the Icelandic authorities is that both the domestic banks and Icelandair’s US bank creditor agreed to new terms, including new equity ratio conditions as part of the financial restructuring process. It is clear however that the terms for the credit lines guaranteed by the state will have been decided by the banks based on the state guarantee and this is of course the basis for the notification by the state to ESA. In general, the question whether measures by state owned undertakings, including banks, can be attributable to the State needs to be examined in relation to the measure in question and its circumstances. Among the indicators that can be taken into account to assess whether the measure reflects commercial conduct on the part of the bank are the ones set out in Stardust Marine:13 Could the body in question not adopt the measure without taking account of the requirements of the public authorities? Is there any supervision exercised by public authorities over the management of the body and if so, what is the intensity of the supervision? Are there other indicators showing an involvement by the public authorities in the adoption of an individual measure or the unlikelihood of their not being involved? In regard to Icelandair’s financial restructuring there are no indications of state imputability with regard to the involvement of the two commercial banks. The Icelandic authorities refer in general to available information on the conditions and circumstances of the banks’ involvement in the process.14 Further to provisions in company law15, the legal framework set up by Act No. 88/2009 on Bankasýsla ríkisins (the Icelandic Financial Investments) and the State ownership policy for financial undertakings ensure that the state acts as a credible owner of the financial undertakings and the State’s holding is administered by a body operating at arm’s length from the Ministry. There is no room for political interference in the day-to-day decision-making process of the financial undertakings owned by the State.16

13 Case C-482/99 v Commission (Stardust Marine), ECLI:EU:C:2002:294. For a more complete list of indicators, see the Authority’s Notion of Aid Guidelines, section 3.1.1. 14 See for example ‘s Information Memorandum of 10 September 2020: Appendix A - Supplemental financial information (Covenant adjustments, page 61) and Appendix D - Questions and answers (creditors‘ category page 111). The information was for the most parts available in the Information Memorandum of 18 August 2020 as well. 15 Article 76(1) of Act No 2/1995 respecting Public Limited Companies (i. lög um hlutafélög) reads as follows: „A Company's Board of Directors, Manager and those others being authorized to represent the Company may not make any such arrangements as are […] suited to acquire improper interests for specific shareholders or others at the expense of other shareholders or the Company.“ The word “obviously” was deleted in 2010 to further prevent decisions that are not in the interest of the company. 16 See inter alia section 6 in part I of the Authority‘s Dec. No 145/13/COL on alleged state aid to Landsbankinn through the forgoing of an expected return on public funds.

7 With reference to the above and on the basis of publicly available information on the involvement of the two commercial banks, the Icelandic authorities submit that there is no indication of them acting on behalf of the state in any way. Fly Play’s concerns in this regard are not substantiated by any evidence or credible indication and are thus without merit. 3. Conclusion Fly Play’s letter does not identify any information that was not available before the Authority adopted its decision. The information on which the decision was based was both correct and complete and no aid elements were omitted in the notification on which the decision is based on. The provisions of Article 61(2)(b) constitute a suitable legal base for support measures granted to specific companies that have been particularly hard hit by the ongoing crisis. Such measures can of course contribute to mitigating the impact of Covid-19 on specific sectors and the economy as a whole. Should any further clarifications be needed, the Iceland authorities are at the Authority’s disposal. As this response concern a decision that has already been adopted and not an open state aid case, the Icelandic authorities invite the Authority to make this response available to Fly Play and other third parties.

On behalf of the Minister

Haraldur Steinþórsson Jón Gunnar Vilhelmsson

(Electronically signed)

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