The European Commission (EC) has launched an in-depth investigation into the recapitalization of Scandinavian airline SAS during the Covid crisis in 2020. Brussels has no other option but to review the SEK 11 billion state aid package after the European Court of Justice annulled the original approval in May. However, the commission is positive that the aid package conforms with EU regulations.
After the first Covid wave in early 2020, SAS immediately launched a restructuring to reduce costs by laying off 4.000 staff, outsourcing some ground operations, and renegotiating contracts. This would eventually lead to the SAS FORWARD transformation plan in February 2022, which SAS hopes to successfully complete after exiting Chapter 11 bankruptcy protection later this year.
But in 2020, the Swedish and Danish governments as stakeholders of SAS offered SEK 11 billion ($1.0 billion) as part of the recapitalization plan. This included SEK 2.0 billion in equity participation through new shares, a rights issue of SEK 3.0 billion through the subscription and underwriting of new shares, and SEK 6.0 billion in state hybrid notes. The Danish government would participate with SEK 3.5 billion and the Swedish government with SEK 2.5 billion.
The two countries notified the European Commission of the package on August 11, 2020. Within a week, on August 17, the EC approved the state aid under the terms and conditions of the Covid Temporary Framework Plan (TFEU).
Complaint from Ryanair
In a complaint submitted to the European General Court of Justice in Luxemburg, Ryanair stated that the aid to both SAS and Lufthansa Group was illegal and discriminatory. As reported, the Court largely agreed with Ryanair on May 10, which means it annulled the approval for the June and August 2020 state aid packages to Lufthansa and SAS.
In the case of Lufthansa, the General Court considered that the EC had based its approval on incomplete and wrong considerations. In the SAS ruling, it said that the recapitalization measure granted to SAS did not meet one of the conditions set out in the Covid Temporary Framework.
“In particular, it ruled that the Commission failed to require the inclusion of a step-up mechanism (or an alternative mechanism with the same effect as a step-up mechanism) to ensure that Denmark and Sweden would receive a sufficient remuneration for their investment and that SAS would have incentives to buy back the shares acquired by Denmark and Sweden as soon as possible,” the Commission said today in a media statement.
Vestager is confident
The EC will now have to review its decisions on Lufthansa and SAS, which is expected to take months to reach a final decision. While this includes an in-depth investigation, the Commission is confident that the recapitalization aid has been justified after all. In the press statement, Executive Vice President for Competition, Margrethe Verstager, says:
“Today’s opening decision confirms, on a preliminary basis, that the recapitalization measure is largely in line with the conditions set out in the COVID Temporary Framework. The opening addresses the General Court’s judgment on the absence of a step-up mechanism. If this aspect satisfactorily is addressed, the concerns as expressed by the General Court would be resolved. On process, it should be possible to conclude the analysis by the end of the year.”
The Commission notes that the opening of the investigation gives Denmark and Sweden and third parties the opportunity to submit comments. “It does not prejudge in any way the outcome of the investigation.”
In response to the decision of the Commission, SAS says that it “welcomes the EU Commission’s decision to open a formal investigation following the General Court’s ruling on 10 May 2023. It is important to reach a robust solution to the issue identified by the General Court as quickly as possible. SAS will continue to assist the states of Sweden and Denmark as well as the EU Commission in this process.”
Equity procedure
Meanwhile, SAS is currently in an advanced stage of its equity solicitation procedure that was launched in May. The airline wants to secure some SEK 9.0 billion in fresh equity to restructure debts. SAS said last month that it has seen “substantial interest from potential financial and strategic investors to participate in the process.”
With final bids now expected four weeks later until September 18, SAS said it hopes to complete the Chapter 11 procedure a little later now by year-end.
