JUDGMENT OF THE COURT OF FIRST INSTANCE (Second Chamber,Extended Composition)

15 September 1998 (1)

(State aid - Formal investigation procedure under Article 93(2) of the Treaty -Conditional decision approving aid in the form of a capital injection to becarried out in tranches - Precondition of payment of the second tranche notsatisfied - Subsequent decision authorising payment of the second tranche -Action for annulment)

In Case T-140/95,

Ryanair Limited, a company incorporated under Irish law, established in Dublin,represented by Trevor Soames and Alan Ryan, Solicitors, with an address forservice in Luxembourg at the Chambers of Arendt and Medernach, 8-10 RueMathias Hardt,

applicant,

v

Commission of the European Communities, represented by Nicholas Khan andAnders Christian Jessen, of its Legal Service, acting as Agents, with an address forservice in Luxembourg at the office of Carlos Gómez de la Cruz, of its LegalService, Wagner Centre, Kirchberg,

defendant,

supported by

Ireland, represented by Michael Buckley, Chief State Solicitor, acting as Agent,assisted by Joseph Finnegan SC, of the Irish Bar, with an address for service inLuxembourg at the Irish Embassy, 28 Route d'Arlon,

and by

Aer Lingus Group plc, a company incorporated under Irish law, established inDublin, represented by Paul Gallagher SC, of the Irish Bar, and by James O'Dwyerand Patrick McGovern, Solicitors, with an address for service in Luxembourg at theChambers of Maître René Faltz, 6 Rue Heine,

interveners,

APPLICATION for annulment of the Commission decision of 21 December 1994(OJ 1994 C 399, p. 1), authorising the Irish Government to pay the second trancheof the aid to the Aer Lingus group approved by Commission Decision 94/118/ECof 21 December 1993 concerning aid to be provided by the Irish Government tothe Aer Lingus group (OJ 1994 L 54, p. 30),

THE COURT OF FIRST INSTANCE

OF THE EUROPEAN COMMUNITIES (Second Chamber, ExtendedComposition),

composed of: A. Kalogeropoulos, President, C.P. Briët, C.W. Bellamy, A. Potockiand J. Pirrung, Judges,

Registrar: A. Mair, Administrator,

having regard to the written procedure and further to the hearing on 27 May 1998,

gives the following

Judgment

Background to the dispute

1.

    In August 1993 the Irish Government notified the Commission, in accordance withArticle 93(3) of the Treaty, of its intention to make a capital injection of IR £175million into the Aer Lingus group in the context of a restructuring plan entitled'Strategy for the Future‘ (hereinafter 'the Cahill plan‘). That injection was to bemade in three tranches: IR £75 million to be paid in 1993, IR £50 million in 1994and IR £50 million in 1995.

2.

    On 21 December 1993, following a procedure initiated pursuant to Article 93(2)of the Treaty, in which Ryanair Limited, a company governed by Irish law,established in Dublin, had participated, the Commission adopted Decision94/118/EC concerning aid to be provided by the Irish Government to the AerLingus group (OJ 1994 L 54, p. 30, hereinafter 'the 1993 Decision‘).

3.

    Article 1 of the operative part of the 1993 Decision provides as follows:

'The restructuring aid to Aer Lingus in the form of IR £175 million equity injectionto be awarded in three tranches in 1993, 1994, and 1995 is considered to becompatible with the common market pursuant to Article 92(3)(c), provided that theIrish Government:

(a)    fulfils its commitment not to proceed with the payment of the second andthird tranches should Aer Lingus fail to achieve the IR £50 million annualreduction in costs, and obtains an independent verification that the costreductions are implemented in full;

(b)    fulfils its commitment to provide a report to the Commission on theprogress of the restructuring programme, on the financial and economicdevelopment of the Aer Lingus group and its companies, in particular withregard to the productivity improvements as referred to in their letter of 24November 1993. The report will be given at least four weeks before thepayment of the second and third tranches of the aid in 1994 and 1995 inorder to give the Commission, if necessary, the possibility to comment;

...

(d)    fulfils its commitment not to expand Aer Lingus' operating fleet over theperiod of the restructuring plan other than for transatlantic operationswhere additional aircraft may be required to maintain capacity levels;

...

(g)    fulfils its commitment that the number of seats offered for sale to the publicon Aer Lingus' scheduled services will not exceed in the calendar year 1994,for United Kingdom/Ireland routes, 3.42 million seats as a whole and, forthe Dublin-London Heathrow route, 1.43 million seats for the same year;

(h)    fulfils its commitment that by agreement between the Commission andIreland, independent assessors will be appointed in mid-1994 to reviewactual and prospective performance for 1994. If the growth of theIreland/United Kingdom market so warrants, the figures set out in (g) willbe adjusted to reflect such growth. At the same time, an independentassessment of actual and prospective market growth will be drawn up inorder to determine Aer Lingus' additional capacity for 1995 in line with anyincrease in the total market;

...‘

4.

    On 23 December 1993 the Irish Government subscribed IR £75 million for newshares in Aer Lingus Group plc.

5.

    On 3 November 1994 the Irish Government submitted its first annual report, inaccordance with Article 1(b) of the 1993 Decision. At the Commission's request,it submitted additional information on 17 November 1994.

6.

    On 30 November 1994, in accordance with Article 1(h) of the 1993 Decision, theCommission adopted Decision 94/997/EC concerning the approval of the revisedfigures of Aer Lingus' seat capacity restrictions set out in the 1993 Decision (OJ1994 L 379, p. 21). By that decision, the Commission increased the limit on thenumber of seats, set out in Article 1(g) of the 1993 Decision, which Aer Linguscould offer on the Ireland/United Kingdom routes and on the Dublin-LondonHeathrow route in 1994 and 1995.

7.

    A meeting was held on 8 December 1994, at the request of the applicant, betweenthe applicant and Commission officials to consider, inter alia, whether Aer Lingushad complied with the 1993 Decision.

8.

    On 21 December 1994, the Commission adopted, in the form of a letter addressedto the Irish Government, the decision entitled 'Payment of the second IR £50million tranche of aid No C 34/93 approved by [the Commission in the 1993Decision]‘ (OJ 1994 C 399, p. 1, hereinafter 'the contested decision‘).

9.

    In that decision, the Commission found that the Aer Lingus group had not achievedthe IR £50 million reduction in costs required by Article 1(a) of the 1993 Decision. However, after studying the implementation of the restructuring plan as regards,inter alia, the airline itself and Team Aer Lingus, a maintenance subsidiary,(hereinafter 'Team‘) as well as the financial situation of the group, the anticipatedsale of the Copthorne hotel chain and the profitability of the various groups ofroutes operated by Aer Lingus, it concluded, in the 25th paragraph, that:

'... the progress of the restructuring and the results already achieved aresatisfactory, despite the fact that the objective of the annual cost reduction hasbeen achieved only by the airline and not by the whole group because of theabovementioned circumstances which could not have been anticipated in therestructuring plan. Therefore, the Commission has decided to derogate from its[1993 Decision] and to authorise the Irish Government to pay the second trancheof the aid to Aer Lingus. In order to ensure the effectiveness of the Decision of21 December 1993, Ireland shall, prior to payment of the third tranche:

-    submit, by 30 June 1995, a report to the Commission on the progress of therestructuring programme at Team and on its financial and economicdevelopment, including financial projections on which the company'sstrategy is based; Team's restructuring programme needs to be implementedwithout any further delay on the basis of an adequate business strategy anda sound capital structure,

-    provide the Commission, pursuant to Article 1(b) of the [1993 Decision],with a report at least eight weeks before payment of the third tranche in1995, setting out in detail the annual reduction in costs of IR £50 million,including a statement linking the cost savings to specific management action,detailed and fully evaluated annual financial projections for the group andits companies for the period to 31 December 1999 (and for the transitional12-month period to 31 March 1995 following the change in the end of thefiscal year), reflecting the effects of the restructuring measures, theconsequences of the revised plan for Team and of the eventual sale of theCopthorne hotel chain. The report should also include a route groupprofitability analysis.‘

10.

    On 22 December 1994 the Irish Government subscribed IR £50 million for newshares in Aer Lingus Group plc.

11.

    The Official Journal of the European Communities No C 399 of 31 December 1994,containing the text of the contested decision, was published on 13 April 1995.

Procedure and forms of order sought by the parties

12.

    The applicant brought the present proceedings by application lodged at theRegistry of the Court of First Instance on 5 July 1995.

13.

    By letter lodged at the Registry of the Court of First Instance on 18 December1995, the Commission withdrew the plea of inadmissibility raised in its defence,alleging that the action was out of time, and it subsequently stated, in its rejoinderdated 25 March 1996, that Commission officials had informed the applicant that thetime-limit for instituting proceedings laid down in Article 173 of the Treaty wouldstart to run on the date of publication of the contested decision.

14.

    By orders of 14 February 1996 the President of the Second Chamber (ExtendedComposition) granted Ireland and Aer Lingus Group plc leave to intervene in theproceedings in support of the forms of order sought by the Commission.

15.

    Acting on the report of the Judge-Rapporteur, the Court of First Instance (SecondChamber, Extended Composition) decided to open the oral procedure without anypreparatory measures of inquiry.

16.

    The parties presented oral argument and their replies to the Court's questions atthe hearing on 27 May 1998.

17.

    The applicant claims that the Court should:

-    annul the contested decision;

-    order the Commission to pay the costs.

18.

    The Commission and the interveners claim that the Court should:

-    dismiss the application;

-    order the applicant to pay the costs.

Admissibility

Arguments of the parties

19.

    Aer Lingus submits that the application was submitted outside the time-limit laiddown in the fifth paragraph of Article 173 of the EC Treaty. It notes that, in itsdefence, the Commission claimed that the applicant had known of the existence ofthe contested decision in December 1994, and at the latest on receipt of a letterfrom the Commission dated 12 January 1995, and had not asked for a copy of thefull text of the contested decision within a reasonable period.

20.

    The applicant contends that its application is admissible, since the time-limit laiddown in the fifth paragraph of Article 173 of the Treaty started to run when thecontested decision was published in the Official Journal of 13 April 1995.

Findings of the Court

21.

    The fourth paragraph of Article 37 of the EC Statute of the Court, which appliesto proceedings before the Court of First Instance by virtue of Article 46, providesthat an application to intervene is to be limited to supporting the form of ordersought by one of the parties. Furthermore, according to Article 116(3) of the Rulesof Procedure, the intervener is to accept the case as he finds it at the time of hisintervention.

22.

    Since the defendant withdrew its plea of inadmissibility by a letter received on 18December 1995, that is to say before Aer Lingus was granted leave to intervene insupport of the forms of order sought by the Commission, Aer Lingus is not entitledto raise an objection of inadmissibility and the Court is not therefore required toconsider the pleas of inadmissibility on which it relies (Case T-290/94 Kaysersbergv Commission [1997] ECR II-2137, paragraph 76).

23.

    However, since it concerns an absolute bar to proceeding, the Court of FirstInstance may at any time, of its own motion, consider the admissibility of theapplication, pursuant to Article 113 of the Rules of Procedure.

24.

    Under the fifth paragraph of Article 173 of the Treaty, proceedings must beinstituted within two months of the publication of the measure, or of its notificationto the plaintiff, or, in the absence thereof, of the day on which it came to theknowledge of the latter, as the case may be.

25.

    It is clear simply from the wording of that provision that the criterion of the dayon which a measure came to the knowledge of an applicant, as the starting pointof the period prescribed for instituting proceedings, is subsidiary to the criteria ofpublication or notification of the measure (see Case C-122/95 Germany v Council[1998] ECR I-973, paragraph 35, and, concerning State aid, the Opinion ofAdvocate General Capotorti in Case 730/79 Philip Morris v Commission [1980] ECR2671, 2695).

26.

    It is not disputed that, in the present case, the contested decision was published inthe Official Journal. Since the contested decision allows a derogation from the1993 Decision, which was itself published, and Commission officials informed theapplicant that the time-limit for instituting proceedings against the contesteddecision would start to run on the date of publication of the contested decision, itwas reasonable for the applicant to anticipate that the contested decision would bepublished in the Official Journal.

27.

    It follows that, in the present case, the time-limit for instituting proceedings beganto run on the date of publication, that is 13 April 1995.

28.

    The period of two months provided for by the fifth paragraph of Article 173 of theTreaty, calculated from the end of the 14th day after the date of publication of themeasure in the Official Journal, in accordance with Article 102(1) of the Rules ofProcedure, and extended by ten days on account of distance for an applicant livingin Ireland, in accordance with Article 102(2) of the Rules of Procedure, expired on7 July 1995. It follows that the application, which was lodged at the Registry of theCourt of First Instance on 5 July 1995, was submitted within the time-limit.

29.

    The application is therefore admissible.

Substance

Arguments of the parties

Arguments of the applicant

30.

    In its application, the applicant relies on two main pleas alleging, first, breach ofessential procedural requirements in so far as the Commission failed to re-open theprocedure under Article 93(2) of the Treaty and to hear the applicant beforeadopting the contested decision and, second, that the Commission's finding thatpayment of the second tranche of the aid was compatible with the common marketwithin the meaning of Article 92(3)(c) of the Treaty was vitiated by manifest error. It also raises certain other grounds of challenge.

31.

    As regards the first plea, alleging breach of essential procedural requirements, theapplicant submits that the Commission was not entitled to adopt the contesteddecision without re-opening the procedure under Article 93(2) of the Treaty or, atthe very least, without again hearing the applicant. Article 1(a) of the 1993Decision prohibited the payment of the second tranche of aid, since the annualreduction in costs of IR £50 million foreseen in that decision had not beenachieved. It follows that the second tranche of aid could be paid only if theCommission took a new decision following a de novo examination of thecircumstances of the case, and finding the aid to be compatible with the commonmarket in accordance with Article 92(3)(c) of the Treaty.

32.

    The applicant refers to the case-law of the Court, according to which theCommission is obliged to initiate the procedure under Article 93(2) of the Treatyif its initial examination of the aid does not enable it to overcome all the difficultiesinvolved in determining whether it is compatible with the common market (CaseC-198/91 Cook v Commission [1993] ECR I-2487, paragraph 29). In the presentcase, the Commission's initial examination of the compatibility with the commonmarket of the second tranche of aid could not, and did not, overcome all thedifficulties, particularly as regards the question whether the conditions laid downin Article 92(3)(c) of the Treaty were satisfied.

33.

    In support of its assertion that the Commission should have had doubts as to thecompatibility of the second tranche of the aid with the common market, theapplicant relies on a number of factors concerning Team, the United Kingdomprovincial routes, the BAe 146 aircraft, the financial situation of the Aer Lingusgroup and of the airline and the sale of the Copthorne hotel chain.

34.

    The applicant relies on those same factors as the basis for its second plea, allegingthat the Commission committed a manifest error of assessment when it decidedthat payment of the second tranche of the aid would be compatible with thecommon market within the meaning of Article 92(3)(c) of the Treaty.

35.

    The arguments put forward by the applicant in the context of those two pleasshould be dealt with together.

- Team

36.

    As regards the subsidiary Team, the applicant submits that it is clear from thecontested decision that the Commission itself had doubts as to whether theconditions laid down in Article 92(3)(c) of the Treaty were satisfied and, inparticular, the condition that the aid should facilitate the development of certaineconomic activities. It points out in that respect that, in the 14th paragraph of thecontested decision, the Commission considers that 'failure to address the problemof continuing losses at Team might have an impact on the restructuring plan‘.

37.

    The Commission thus acknowledged that it did not know whether Team wouldimplement the necessary cost reductions. It was consequently not able to verifywhether the second tranche of the aid would indeed be used for 'restructuring‘purposes and would facilitate 'the development of certain economic activities‘within the meaning of Article 92(3)(c) of the Treaty.

38.

    Furthermore, the very fact that the Commission required the Irish authorities, inthe contested decision, to submit, by 30 June 1995, a report on the progress of therestructuring programme at Team, and the proposed strategy for resolving thecompany's difficulties in the longer term, demonstrates that, when the contesteddecision was adopted, the Commission was not in a position to establish that thesecond tranche of the aid would facilitate the development of certain economicactivities, within the meaning of Article 92(3)(c).

39.

    Moreover, the Cahill plan had been abandoned as regards Team following a strikein the summer of 1994 and pursuant to the Labour Court's recommendations inNovember 1994, which prevented cost reductions and, in particular, additionalredundancies. At the time of the contested decision, Aer Lingus and the IrishGovernment did not therefore know whether Team could be restructured. Insupport of that assertion, the applicant refers to statements made by the Chairmanof Aer Lingus in the company's annual report for the period ended 31 December1994, approved on 31 March 1995, and to a statement made by the Minister forTransport, Energy and Communications to the Dail on 21 February 1995.

40.

    It follows that, at the time of the contested decision, Team and, consequently, AerLingus, were not viable and there was no restructuring plan which would allowTeam to achieve viability. In the absence of any such restructuring plan, theCommission was not authorised to approve the second tranche of aid (see, forexample, the Commission guidelines on the application of Articles 92 and 93 of theEC Treaty and Article 91 of the EEA Agreement to State aids in the aviationsector, OJ 1994, C 350, p. 5, paragraph 38) and, a fortiori, was not able toovercome the difficulties in such a way as to justify its not initiating the procedureunder Article 93(2) of the Treaty.

41.

    Furthermore, the applicant disputes the following assertion, in the 13th paragraphof the contested decision:

'According to the latest projections, Aer Lingus envisages that Team will return toprofitability at the operating level in 1995.‘

42.

    The conditions for the return to work agreed following the involvement of theLabour Court prevented implementation of the Cahill plan and, therefore, the costreductions necessary in order for Team to become profitable.

43.

    For the same reasons, the applicant challenges the assertion immediately followingthat passage in the contested decision, that '[t]his forecast is based on thecontinued reduction in the cost base of the company, combined with the securingof additional maintenance contracts with third parties ...‘.

44.

    In the applicant's assertion, Team did not reduce its cost base at all in 1994,because of union resistance. In that respect it refers to a newspaper article (IrishIndependent, 27 March 1995), according to which the Minister for Transport,Energy and Communications stated that Team's workforce had never been below1 750. Similarly, Team had allegedly lost all of its maintenance contracts with thirdparties, including those with Virgin Atlantic Airways and Federal Express, as aresult of the strike in 1994.

45.

    Finally, the applicant considers that the finding, in the 25th paragraph of thecontested decision, that Team's difficulties could not have been anticipated in therestructuring plan is clearly erroneous. Notwithstanding the assertion in the 1993Decision that the cost cutting programme had been agreed between the companyand the unions, there was no agreement with the unions at Team. It was thereforeforeseeable that no such agreement would be reached by the management ofTeam.

- Competition on the United Kingdom provincial routes

46.

    The applicant considers that, when examining the compatibility of the secondtranche of aid with the common market, the Commission was unable to overcomethe difficulties relating to Aer Lingus' activities on the routes between Dublin andUnited Kingdom provincial cities.

47.

    The applicant points out that, according to the contested decision, (pp. 3 and 4)Aer Lingus was operating those routes at a loss and the strategy adopted appeared'to be justified by short-term considerations‘ (21st paragraph). In thosecircumstances, the Commission should have considered whether Aer Lingus wasable to restructure its activities on those routes in such a way as to enable it toachieve a certain level of viability, in accordance with Article 92(3)(c). Instead, theCommission simply imposed a new condition that 'the Irish Government [would]justify the operation of the routes in the longer term‘, at the same time askingIreland to submit to it detailed information concerning the profitability of theroutes in question 'to demonstrate that, as initially projected, the aid it [had]received [would not be] used to subsidise routes, or a group of routes, which in alllikelihood [would] not become profitable in the foreseeable future‘ (22ndparagraph).

48.

    It follows that, at the time the contested decision was adopted, the Commission haddoubts as to the long-term viability of Aer Lingus' activities on United Kingdomprovincial routes and was therefore unable to verify whether the aid would facilitatethe development of certain economic activities.

49.

    Furthermore, the routes in question were operating at a loss because, following the1993 Decision, Aer Lingus had significantly increased the number of low-fare seatsavailable on its services between Dublin and Birmingham, (a route which theapplicant had entered in November 1993), which prompted the applicant to submita formal complaint to the Commission under Article 86 of the Treaty. Aer Lingusdid the same on the routes between Dublin and Glasgow and Dublin andManchester, on which it was also subject to competition from the applicant. AerLingus thus pursued a policy of low fares and high volumes, intended to captureas large a share of the market as possible, in particular in the leisure market, whichis the applicant's main market, contrary to the assurances of the Irish Governmentrecorded in the 1993 Decision.

50.

    The applicant submits furthermore that the justification, put forward in the 21stparagraph of the contested decision, for the 'short-term‘ strategy adopted by AerLingus on those routes, namely 'for example, bringing additional passengers ontoits North Atlantic routes from feeder services from the United Kingdom‘ wasclearly erroneous, since only two out of the 16 daily flights linking Birmingham,Manchester and Glasgow with Dublin carried transatlantic feeder passengers.

- The new BAe 146 aircraft

51.

    The applicant submits that, at the time the contested decision was adopted, theCommission was aware that Aer Lingus was proposing to use the aid to acquire afleet of three 110-seat BAe 146-300 aircraft to replace its fleet of four 34-seat SaabSF 340 aircraft for use in particular on the provincial routes between the UnitedKingdom and Ireland. In the 22nd paragraph of the contested decision theCommission stated that 'the replacement of small turbo-prop aircrafts by jets onUK commercial routes could give rise to concerns as to whether the increase incapacity offered is appropriate‘. The Commission thus asked Ireland (in the sameparagraph) to submit to it detailed information setting out the profitability of theroutes at issue, to demonstrate that the aid '[would not be] used to subsidise routes... which in all likelihood [would] not become profitable in the foreseeable future‘. It follows that the Commission had doubts as to whether the aid created orexacerbated a situation of surplus capacity which could affect trading conditions toan extent contrary to the common interest (Philip Morris v Commission, paragraph26, and Joined Cases 62/87 and 72/87 Exécutif Régional Wallon and Glaverbel vCommission [1988] ECR 1573, paragraphs 30 and 31).

52.

    The applicant adds that, since Aer Lingus suffered a pre-tax loss of IR £128.8million in the period ended 31 December 1994, it did not have sufficient cash toacquire the BAe 146 aircraft and must have used the second tranche of aid in orderto do so. Furthermore, it is clear from Aer Lingus' annual report that it had madea provision of IR £6.5 million for costs relating to the termination of the contractsfor the four Saab SF 340. Aer Lingus could not have done so without the aid atissue.

53.

    The applicant also refers to statistics to establish that an increase in capacity on theroutes at issue was totally inappropriate in view in particular of Aer Lingus'declining passenger traffic on those routes and its low load factors. TheCommission has no authority to approve aid pursuant to Article 92(3)(c) of theTreaty where such surplus capacity exists (Philip Morris v Commission, ExécutifRégional Wallon and Glaverbel v Commission and Case C-303/88 Italy v Commission[1991] ECR I-1433, paragraph 38).

54.

    Finally, the applicant submits that the introduction of the BAe 146 aircraftinfringed Article 1(d) of the 1993 Decision. That provision should be interpretedas prohibiting Aer Lingus from increasing the total seat capacity of its fleet duringthe period of the restructuring programme. Since, on the one hand, in the 1993Decision the Irish Government is reported as stating that Aer Lingus would notincrease its market share and would not pursue a policy of expansion and, on theother, market share does not depend on the number of aircraft allocated to aparticular route, but on the number on seats available, Article 1(d) can only beinterpreted as meaning that it was intended to ensure that Aer Lingus would notincrease the total number of seats offered by its operating fleet. Otherwise, AerLingus would be in a position to pursue a policy of unlimited 'over-expansion‘.

- The financial situation of the airline and of the Aer Lingus group

55.

    According to the applicant, the Commission committed a manifest error byconcluding, in the contested decision, that the IR £50 million cost reduction targethad been achieved by Aer Lingus' airline business.

56.

    Although the 1993 Decision anticipated 1 280 redundancies within the airline, AerLingus' annual report for the period ended 31 December 1994 indicates that only841 redundancies had been made. In the applicant's view, even if theCommission's assertion that 935 employees left under the severance scheme isaccepted, that is still less than two thirds of the target set in the Cahill plan.

57.

    The introduction of market rates for maintenance services paid to Team, and theresulting forecast of increased losses for Team, which are mentioned in thecontested decision, probably means that the prices had been adjusted to levelsbelow market rates. Maintaining that practice of transfer pricing jeopardises therestructuring of the airline. It also indicates that it was not possible to determinethe airline's true costs - and thus any cost reductions made.

58.

    Furthermore, the conclusion in the 23rd paragraph of the contested decision, that'the results of the airline business, in line with the final objective of therestructuring, demonstrate the group's potential to achieve a viable position‘ is notsupported by any explanation or indication of the data analysed by the Commission. Such an explanation was particularly necessary because of Aer Lingus' previousopaque accounting practices.

59.

    The manifestly incorrect nature of the Commission's conclusion that the Aer Lingusgroup had the potential to achieve a viable position is, furthermore, demonstratedby the amount of operating aid from which the airline benefited in 1994, which isindicated by the exceptional items of IR £30 million ('repositioning - air transportand Team‘) and IR £5.4 million ('other‘) in the published accounts for the periodended 31 December 1994. Furthermore, Aer Lingus' accounts showed pre-taxlosses of IR £147 million (excluding the write-off of an investment in an aircraftleasing company) for the 12 months to 31 March 1993, and IR £128.8 million forthe 21 months to 31 December 1994. Those figures contrast with the forecast inthe Cahill plan of a loss of IR £63 million in the 12 months to 31 March 1994 anda profit of IR £1 million in the 12 months to 31 March 1995.

- The sale of the Copthorne hotel chain

60.

    The applicant argues that the sale of the Copthorne hotel chain by Aer Lingus wasmentioned in the 1993 Decision as an integral part of the Cahill plan. In the 18thparagraph of the contested decision, the sale of that chain was described as theprime asset disposal provided for in the restructuring programme.

61.

    In the contested decision, however, the Commission stated that the sale had beendelayed, thus also delaying achievement of the March 1997 gearing and interest-cover ratios until mid-1999. Furthermore, it simply stated, in the 19th paragraph,that 'the chain should be sold as soon as market circumstances are appropriate‘,thereby releasing Aer Lingus from any obligation to sell the Copthorne hotelswithin a specified period of time. That is confirmed by Aer Lingus' annual reportfor the period ended 31 December 1994, which states that its directors 'intend toretain this investment for the foreseeable future, based on expert advice, to ensurethat the sale proceeds of this investment will be optimised‘.

62.

    In those circumstances, the Commission could not have concluded that the grantof the second tranche of aid would facilitate the development of certain economicactivities. It did not know when, or indeed if, Aer Lingus could achieve a healthybalance sheet. The aid could not therefore be approved as restructuring aid. Moreover, Aer Lingus' failure to reduce its high debt burden by disposing of thehotel chain resulted in the use of the State aid to finance its short term liabilities,including high borrowing costs. For that further reason, the second tranche of aidwas not genuine restructuring aid.

63.

    In any event, the disposal of the Copthorne hotels would not have been sufficientto give Aer Lingus a healthy balance sheet. The Sunday Independent of 10 July1994 reported that, 'Accountants preparing the results are also said to beconcerned that the balance sheet may be overstating the value of the Aer LingusCopthorne Hotel chain‘. In that respect, Aer Lingus wrote off IR £17.2 million inits accounts for the period ended 31 December 1994. The Commission thuscommitted a manifest error in concluding that disposal of the Copthorne hotelswould reduce Aer Lingus' debts to the level originally planned, and in not requiringAer Lingus to divest additional assets of IR £17.2 million. The Commission alsofailed to explain how the anticipated gearing and interest-cover ratios could beachieved.

64.

    The applicant concludes from all the foregoing, either that the Commission was notable to overcome its difficulties as regards the compatibility of the second trancheof aid with the common market and thus committed a breach of proceduralrequirements by failing to initiate the procedure under Article 93(2) of the Treaty,or that it committed a manifest error of assessment in deciding, in the contesteddecision, that the second tranche of aid was compatible with the common market. It follows that the applicant's two main pleas alleging, respectively, breach ofessential procedural requirements and manifest error of assessment are wellfounded.

65.

    In addition to its two main pleas, the applicant also puts forward the followingadditional grounds of challenge:

-    it is clear from the contested decision that the Commission never reallyexamined the effect of the aid at issue on competition nor did it takeaccount of the development of the competitive situation following the 1993Decision;

-    Ireland infringed Article 1(b) of the 1993 Decision, which required the IrishGovernment to ensure that Aer Lingus implemented the Cahill plan asnotified to the Commission;

-    the Commission committed an error of law in that, in approving the secondtranche of aid notwithstanding the infringement of Article 1(a) of the 1993Decision, it necessarily applied a different test from that applied in thatdecision;

-    the contested decision is vitiated by a failure to state reasons, in particularas regards the following: the Commission's request to the Irish Governmentto supply an additional report concerning Team and Aer Lingus by 30 June1995; the conclusion that the Aer Lingus group had the potential to achieveviability; the conclusion that the second tranche of aid could be compatiblewith the common market in the absence of any restructuring plan intendedto restore Aer Lingus to long-term viability; the reason for which theCommission did not require Aer Lingus to sell the Copthorne hotels; theconclusion that the aid could be approved notwithstanding the financialsituation of the Aer Lingus group and of the airline; and the amount of timenecessary to complete the restructuring plan.

Arguments of the Commission and the interveners

66.

    The Commission submits first that the contested decision is a hybrid instrument inthat it contains both a derogation from Article 1(a) of the 1993 Decision and alsosome comments made pursuant to Article 1(b) of that decision. Such commentsdo not constitute an actionable measure under Article 191 of the Treaty, and arenot therefore open to review by the Court (Case 35/80 Denkavit Nederland [1981]ECR 45, paragraph 35).

67.

    The basic assessment of the compatibility of the aid as restructuring aid within themeaning of Article 92(3)(c) of the Treaty was made in the 1993 Decision. Thatdecision had already authorised the payment of IR £175 million to Aer Lingus.

68.

    It follows that, when considering the release of a subsequent tranche of aid undera restructuring plan which has already been approved, the Commission is notauthorised nor, a fortiori, obliged to examine de novo whether payment of thatsubsequent tranche would be compatible with Article 92(3)(c) of the Treaty (seeCase C-47/91 Italy v Commission [1994] ECR I-4635). It is entitled to carry outsuch an examination only if it has either made a specific reservation to that effectin its initial approval or if, following a preliminary examination, it concludes thatthe conditions laid down in the initial decision have not been fully complied with.

69.

    Consequently a new decision was necessary only if the cost reduction of IR £50million required by Article 1(a) of the 1993 Decision had not been achieved. Inits re-examination of the compatibility of the aid under those specific circumstances,the Commission was required to take into account the circumstances alreadyconsidered in the 1993 Decision and the obligations which that previous decisionmay have imposed on the Member State (Case C-261/89 Italy v Commission [1991]ECR I-4437). Thus the Commission was not required to re-examine de novo all theelements of the restructuring plan. It was sufficient for it to focus only on thefactors which had changed since its initial assessment.

70.

    Furthermore, the Commission is required to initiate the procedure under Article93(2) of the Treaty only if it entertains doubts as to the compatibility of aid andthose doubts cannot be overcome in the course of the preliminary examination. According to the Commission, whatever doubts it may initially have entertainedwere never serious and were in any event overcome in the course of thepreliminary examination.

71.

    The Commission points out that, before adopting the contested decision, it receiveda report from the Irish Government dated 3 November 1994 confirming that theconditions laid down in the 1993 Decision had been complied with (except asregards the IR £50 million cost reduction at group level) together with a statusreport from Aer Lingus on the restructuring programme and a report by ArthurAndersen & Co, who had been appointed by the Irish Government as independentaccounting experts to verify the financial information provided by Aer Lingus. Furthermore, the Commission itself verified the information provided by instructingCoopers & Lybrand, experienced consultants in the field, who submitted theirreport on 9 December 1994.

72.

    It is clear from those reports that significant progress had been made as regards thevarious restructuring measures described in the Cahill plan. The verificationscarried out by Arthur Andersen & Co and Coopers & Lybrand showed, inparticular, that the profitability of the airline and debt reduction were ahead of thetargets set in the plan. Although exceptional items were higher than expected -due to higher severance payments than forecast - the consultants concluded thatthe results were consistent with the objective of restoring Aer Lingus to viability,notwithstanding difficulties and delays as regards Team.

73.

    As regards the annual reduction in costs of IR £50 million, it is clear from theexperts' reports that the airline had achieved a IR £61.1 million reduction in costs. The target of IR £50 million had not however been achieved at group level becausesome of the savings made by the airline were at the expense of Team. Whilst, untilthe revision of the airline's maintenance contracts with Team in 1993, the airlinepaid above the market rate, cross-subsidising Team, following the revision of thecontracts the airline paid the market rate for maintenance by Team. TheCommission considered that the savings made by the airline in the context of itscontract with Team could not be regarded as a true cost reduction for the groupand concluded that the actual cost reduction at group level was IR £42.4 million,or IR £7.6 million below the target of IR £50 million. Subject to that reservation,the Commission considered that Aer Lingus had broadly achieved the objectivesof the Cahill plan, and that all the other conditions of the 1993 Decision had beensatisfied.

74.

    In those circumstances, given the complexity of a reorganisation such as thatundertaken by Aer Lingus and the fact that, by its very nature, any reorganisationis based on forecasts, some of which may subsequently prove to be incorrect, theCommission found that the deviations from the Cahill plan were relatively minorand concerned only one of the conditions under which the restructuring aid hadbeen authorised, with the result that the feasibility of the Cahill plan and therealisation of the objective of restoring the Aer Lingus group as a whole to self-sustaining financial viability were not threatened.

75.

    As regards more specifically the question whether the aid facilitates thedevelopment of certain economic activities within the meaning of Article 92(3)(c)of the Treaty, the Commission concluded that the restructuring programme wasprogressing well and that the overall objective could still be achieved, even if thecost reduction target had not been fully achieved.

76.

    As regards the effect of the aid on trading conditions, the fact that the restructuringcosts were higher than anticipated did not affect competition between carriers. Most of the first tranche of aid (IR £57 million out of IR £75 million) had beenused to finance redundancies and related costs and the balance used to reducedebt. The fact that the cost reduction target of IR £50 million had not beenachieved had no negative consequences for Aer Lingus' competitors.

77.

    Finally, the Commission challenges the validity of the applicant's specific argumentsconcerning Team, the United Kingdom provincial routes, the BAe 146 aircraft, thefinancial situation of the airline and of the Aer Lingus group, and the Copthornehotel chain. It considers that the decision is not vitiated by a failure to statereasons.

78.

    Aer Lingus and Ireland support the Commission's arguments. Aer Lingus pointsout, in particular, that there was no strike at Team but, rather, the managementlaid off a large proportion of the staff. The restructuring plan has since beencompleted, the third tranche of the aid having been authorised by the Commissionin its decision of 20 December 1995 entitled 'Payment of the third tranche of aidin favour of Aer Lingus approved by [the] Commission Decision of [1993]‘ (OJ1996 C 70, p. 2). The Copthorne hotels were sold in 1995. Aer Lingus adds, asregards the BAe 146 aircraft, that they were not introduced until May and June1995. The monthly leasing charges for the BAe 146 aircraft are lower than theprevious charges relating to the Saab aircraft which they replaced.

Findings of the Court

The nature of the contested measure

79.

    It is first necessary to consider the Commission's argument that the contesteddecision has a 'hybrid‘ character and contains, on the one hand, some findingsconcerning Aer Lingus' failure to comply with the condition set out in Article 1(a)of the 1993 Decision and, on the other hand, mere 'comments,‘ which are notopen to review, made by the Commission on other aspects of the progress of therestructuring programme and the Aer Lingus group pursuant to Article 1(b) of the1993 Decision.

80.

    In that respect, it is clear from the contested decision that, before approvingpayment of the second tranche of aid, the Commission considered not only thereasons for which Aer Lingus had been unable to comply with the condition set outin Article 1(a) of the 1993 Decision, but also the progress of all aspects of therestructuring plan, the financial situation of the Aer Lingus group and of the airline,the strategy adopted on the United Kingdom provincial routes, the proposedchanges to the Aer Lingus fleet and the progress of the proposed sale of theCopthorne hotel chain. It is also clear from the 25th paragraph of the contesteddecision that it was only 'in the light of‘ its assessment of all those elements, thatthe Commission derogated from its 1993 Decision and authorised the IrishGovernment to pay the second tranche of aid to Aer Lingus.

81.

    It is also clear from the same paragraph of the contested decision that theadditional obligations imposed on Ireland related not only to the cost reduction ofIR £50 million referred to in Article 1(a) of the 1993 Decision, but also to all thematters assessed by the Commission in that decision.

82.

    Consequently, the grounds of the contested decision, other than those relatingdirectly to the annual reduction in costs of IR £50 million referred to in Article 1(a)of the 1993 Decision, cannot be regarded as being mere 'comments‘ devoid oflegal effect, but form an integral part of the contested measure in the present case. It also follows that, by its very nature, it is the contested decision as a whole whichadversely affects the applicant.

83.

    It follows that the whole of the contested decision is subject to judicial review bythe Court of First Instance, under the conditions laid down in the second paragraphof Article 173 of the Treaty.

The plea alleging a breach of essential procedural requirements

84.

    It is not disputed that, pursuant to the condition imposed by Article 1(a) of the1993 Decision, Ireland undertook not to release the second tranche of aid if AerLingus did not achieve a cost reduction target of IR £50 million per annum. It isalso clear from the Section VI of the 1993 Decision that the conditions referred toin Article 1(a) were imposed 'to ensure that the aid [would] not adversely affecttrading conditions to an extent contrary to the common interest‘. According toSection V, (21st paragraph, point 4) of that decision, the cost reduction envisagedin the restructuring plan was, for the Commission, 'an essential condition‘ of thepayment of the second and third tranches of the aid.

85.

    In the present case the question therefore arises as to which administrativeprocedure should be followed by the Commission when it has approved State aidpayable in tranches under Article 92(3)(c) of the Treaty, following a procedureunder Article 93(2), subject to the fulfilment of a certain number of conditions, butit subsequently becomes apparent that one of those conditions has not beenfulfilled.

86.

    First, the Court considers that the effect of failure to comply with a conditionimposed in a decision approving aid under Article 92(3)(c) of the Treaty is to raisea presumption that subsequent tranches of the aid are incompatible with thecommon market. It follows that the subsequent tranches cannot be releasedwithout a new Commission decision granting a formal derogation from thecondition in question.

87.

    In those circumstances, the Commission must initially consider whether such aderogation can be granted, whilst ensuring that the subsequent tranches of the aidare still compatible with the common market under the conditions laid down byArticle 92(3)(c) of the Treaty (see, by analogy, C-47/91 Italy v Commission, citedabove, paragraphs 24 to 26). If such an examination leads the Commission toconclude that the subsequent tranches of the aid are no longer compatible with thecommon market, or if it does not enable it to overcome all the difficulties involvedin determining whether the subsequent tranches of the aid are compatible with thecommon market, the Commission is under a duty to carry out all the requisiteconsultations and, for that purpose, to initiate or, where appropriate, to re-open,the procedure under Article 93(2) of the Treaty (see, by analogy, Cook vCommission, cited above, paragraph 29, and Case C-367/95 P Commission vSytraval [1998] ECR I-1719, paragraphs 38 to 40). It also follows, by analogy withArticle 93(3) of the Treaty, that in such a case payment of the aid at issue must besuspended until the Commission adopts its final decision.

88.

    Furthermore, the Court considers that, once the Commission has adopted adecision approving aid subject to conditions at the end of a procedure underArticle 93(2), it is not entitled to depart from the scope of its initial decisionwithout re-opening that procedure. It follows that, if one of the conditions to whichapproval of an aid was subject is not satisfied, the Commission may normally adopta decision derogating from that condition without re-opening the procedure underArticle 93(2) of the Treaty only in the event of relatively minor deviations from theinitial condition, which leave it with no doubt as to whether the aid at issue is stillcompatible with the common market.

89.

    It should be added that in respect of aid already approved in principle, paid insuccessive tranches over a relatively long period in association with a restructuringplan, the results of which will be achieved only after a number of years, as in thepresent case, the Commission must enjoy a power to manage and monitor theimplementation of such aid in order, in particular, to enable it to deal withdevelopments which could not have been foreseen when the initial decision wasadopted. It is therefore possible that, in the light of a change in externalcircumstances which occurs after the initial decision, the Commission might, interalia, vary the conditions governing the implementation of the restructuring plan orof its monitoring, without re-opening the procedure under Article 93(2) of theTreaty, providing none the less that such variations do not give rise to doubts as tothe compatibility of the aid at issue with the common market.

90.

    It is therefore necessary to ascertain whether, in the present case, the applicant hasestablished either that the Commission departed from the scope of the 1993Decision without re-opening the procedure under Article 93(2) of the Treaty, orthat the findings on which the Commission based the contested decision raiseddifficulties such as to justify re-opening that procedure (Case C-225/91 Matra vCommission [1993] ECR I-3203, paragraph 34). It is settled case-law that, asregards the application of Articles 93(3) and 92(3)(c) of the Treaty, theCommission enjoys a wide discretion, the exercise of which involves assessments ofan economic and social nature. Review by the Court of First Instance musttherefore be restricted to determining whether the Commission has exceeded thelimits of its discretion or committed a misuse of powers or abuse of process (Matrav Commission, cited above, paragraphs 23 to 25). That judgment applies byanalogy to the present case.

91.

    As regards the question whether the Commission departed from the scope of the1993 Decision by granting a derogation from the condition set out in Article 1(a),the Court notes, first, that it is clear from the contested decision that theCommission drew the following conclusions, on the basis of the verifications carriedout by Arthur Andersen & Co and by Coopers & Lybrand:

-    'the results of the airline business, in line with the final objective of therestructuring, demonstrate the group's potential to achieve a viable positionallowing it to contribute to the development of air transport activity in aperipheral area of the Community‘, so that, 'subject to the matters set outabove, which mainly address the problem of structural and strategic changes,the Commission concludes that Aer Lingus has met the reasonably expectedobjectives of the programme for the period under review‘ (23rd paragraph);

-    the conditions laid down in Article 1 of the 1993 Decision have beencomplied with, except for those in Article 1(a) (24th paragraph);

-    'the progress of the restructuring and the results already achieved aresatisfactory, despite the fact that the objective of the annual cost reductionhas been achieved only by the airline and not by the whole group becauseof the abovementioned circumstances ...‘ (25th paragraph).

92.

    Second, the Court notes that in the contested decision the Commission did notdispense Aer Lingus from compliance with the condition laid down in Article 1(a)of the 1993 Decision but merely extended the time-limit within which that conditionwas to be fulfilled. It is clear from the contested decision as a whole that, eventhough the Commission derogated from the wording of Article 1(a) of the 1993Decision, according to which a IR £50 million annual reduction in costs was to beachieved before payment of the second tranche of the aid, anticipated for the endof 1994, it stressed the fact that that requirement was to be satisfied beforepayment of the third tranche of aid, anticipated for the end of 1995.

93.

    Third, the Court considers that the purpose of the condition in Article 1(a) of the1993 Decision was broadly respected even if the annual cost reduction thresholdof IR £50 million was not achieved. Indeed there is no reason to question theCommission's assertion that, at the end of 1994, the airline had achieved areduction in costs of IR £61 million. However, since that result was due in part toa reduction in the prices stipulated in the maintenance contract between the airlineand Team (see paragraph 73 above), which had the effect of increasing the latter'slosses, the Commission concluded that the true reduction in costs, at group level,was IR £42.4 million. It follows that the cost reductions obtained at group level atthe end of 1994 were only IR £7.6 million below the formal threshold of IR £50million. The Court considers that to be a relatively minor deviation from thecondition set out in Article 1(a) of the 1993 Decision.

94.

    Fourth, as is not disputed, the fact that the annual cost reduction threshold of IR£50 million was not achieved is due, essentially, to the social conflict which occurredat Team in the second half of 1994. Although it is regrettable that negotiationsbetween Aer Lingus and its unions, within the framework of the Cahill plan, didnot involve the representatives of employees of Team, the Court considers that thesocial conflict which took place at Team in 1994, and the resulting reference to theLabour Court, were not foreseeable at the time the 1993 Decision was adopted.

95.

    Fifth, the Court points out that the contested decision does not comprise only aderogation from Article 1(a) of the 1993 Decision but also contains conditionswhich are more stringent than those originally laid down by Article 1(b) of the 1993Decision. The contested decision imposes new conditions, requiring Aer Lingus,first, to submit, by 30 June 1995, a detailed report on the progress of therestructuring programme at Team and to implement that programme without delayand, second, to provide the Commission with an extremely detailed financial report,at least eight weeks before payment of the third tranche of aid, relating, inparticular, to the reduction in costs of IR £50 million, the sale of the Copthornehotel chain and the profitability of Aer Lingus' various route groups.

96.

    It follows from the foregoing that, by granting a temporary derogation from Article1(a) of the 1993 Decision, the Commission did not depart from the scope of thatdecision. It merely rebalanced the conditions in Article 1(a) and (b) of the 1993Decision in order, inter alia, to deal with unforeseen developments in the situationsince the adoption of that decision and to take into account factors revealed by thedetailed examination carried out by the Commission, and its experts, of theprogress of the restructuring plan up to the end of 1994. The Court considers thatsuch an approach was, furthermore, consistent with the purpose of the restructuringplan approved by the 1993 Decision, namely to restore the Aer Lingus group and,in particular, the airline, to viability.

97.

    In those circumstances, the Court considers that the Commission was justified inadopting the contested decision provided that it was able to overcome all thedifficulties involved in determining whether the tranche at issue was compatiblewith the common market.

98.

    It is therefore necessary to establish whether, notwithstanding the considerationsset out above, the specific factors relied on by the applicant should have led theCommission to entertain doubts as to the compatibility of the second tranche of theaid with the common market, thus obliging it to re-open the procedure underArticle 93(2) of the Treaty.

- Team

99.

    As regards the applicant's arguments concerning Team (see paragraph 36 et seq.above), it is true that the Commission stated, in the contested decision, that 'failureto address the problem of continuing losses at Team might have an impact on therestructuring plan‘. It is also true that, at the end of 1994, there was no adequaterestructuring plan intended to restore Team to viability, as is confirmed both by thestatements by the Chairman of Aer Lingus and the Minister for Transport, Energyand Communications (see paragraph 39 above) and the fact that the Commissionitself required such a plan to be submitted to it before 30 June 1995.

100.

    Nor is it disputed that, in order to overcome those difficulties, the Commissiondecided to subject Ireland to the new condition set out in the contested decision(25th paragraph, first indent) pursuant to which, prior to payment of the thirdtranche of the aid, Ireland was, on the one hand, to 'submit, by 30 June 1995, areport to the Commission on the progress of the restructuring programme at Teamand on its financial and economic development, including financial projections onwhich the company's strategy [was] based‘, and, on the other, to implement Team'srestructuring programme 'without any further delay on the basis of an adequatebusiness strategy and a sound capital structure‘.

101.

    The Court considers that, by applying itself to resolving Team's problems in thatway, rather than by initiating the procedure under Article 93(2), the Commissiondid not exceed the limits of its power to manage and monitor aid payable intranches.

102.

    First, the Court can establish no reason to question the assertion in theCommission's pleadings that, after the return to work at Team following therecommendations of the Labour Court, cost reductions evaluated at IR £18 millionhad been made at Team, which consequently no longer constituted an obstacle tothe achievement by the Aer Lingus group of an annual reduction in costs of IR £50million.

103.

    Second, the applicant has not provided any concrete evidence such as to underminethe contested decision in so far as it states that Team 'will return to profitability... in 1995‘ taking into account Aer Lingus' latest projections and new maintenancecontracts. It is clear, in particular, from the Commission's pleadings that, by theend of 1994, 250 of Team's employees had been made redundant since 1992/93, ata cost of IR £24 million. Similarly, the applicant has not challenged the list ofmaintenance contracts held by Team at the end of 1994, which was produced to theCourt by the Commission.

104.

    Third, although it is true that the social conflict in 1994 was provoked by theimplementation of the Cahill plan with regard to Team, it is not disputed that thesubsequent need to prepare a new plan for Team, at the beginning of 1995, aroseas a result of two other external factors which could not have been foreseen,namely fluctuations in the exchange rate against the dollar and a recession on theglobal maintenance market (see the statements by the Chairman of Aer Lingus inthat respect in Aer Lingus' annual report for the period ended 31 December 1994).

105.

    Fourth, Team was only a subsidiary activity of the Aer Lingus group, representing12% of its turnover.

106.

    In those circumstances, the Court considers that, having regard in particular to thesecondary importance of Team in the context of the overall activities of the AerLingus group and the unforeseeable nature of the factors which resulted in Team'slosses, the Commission was justified in deciding that the difficulties presented byTeam's situation could be overcome by imposing the aforementioned additionalcondition, without there being any need to re-open the procedure under Article93(2) of the Treaty.

107.

    Such a solution enabled the Commission to satisfy itself, on the one hand, thatTeam's problems did not jeopardise the restructuring plan for the group as a wholeand, on the other, that the success of the restructuring plan would not bejeopardised by the suspension of the payment of the second tranche of the aid,which would have resulted from initiation of the procedure under Article 93(2) ofthe Treaty.

- The United Kingdom provincial routes

108.

    As regards the applicant's arguments concerning the United Kingdom provincialroutes (see paragraph 46 et seq. above) it is clear from the 21st paragraph of thecontested decision that, at the time it was adopted, those routes were operating ata loss, in contrast to Aer Lingus' services to North America, the route betweenDublin and London and the European routes, where the results were satisfactory. It is also clear from the 1993 Decision (section II, 1st paragraph, point 5) that theIrish Government confirmed that the equity injection '[would] not be used tosubsidise loss-making routes‘ and that, '[a]s a follow-up to the restructuring, [itwould] require the airline to operate on each major route group in a commerciallyviable fashion‘.

109.

    It must none the less be pointed out that Article 1 of the 1993 Decision does notcontain any express provision intended to ensure that a group of Aer Lingus routeswould never operate at a loss.

110.

    The Court considers, furthermore, that the Irish Government did not undertake,even implicitly, to take the necessary steps to ensure that all Aer Lingus' loss-making routes were eliminated prior to payment of the second tranche of the aid,that is to say during the first year following approval of the restructuring planwhich, it was anticipated, would be implemented over three years.

111.

    Furthermore, it is clear from the parties' pleadings that competition on the UnitedKingdom provincial routes has evolved since the adoption of the contested decision,in particular because of the introduction of new services by the applicant itself.

112.

    As was confirmed before the Court, it was in those circumstances that theCommission had considered, on the basis of the study carried out at its request byCoopers & Lybrand at the end of 1994, that it was premature to decide whetherAer Lingus' strategy on the United Kingdom provincial routes would be justifiedin the long term.

113.

    It therefore stated in the contested decision (21st and 22nd paragraphs):

'... The Irish Government will justify the operation of the routes in the longer term. This justification is to be made on the basis of a comparison of revenues againstthe fully allocated costs for the route in question, and the need to generate anadequate return on its capital investment. In this respect, the year 1995 will bedecisive in confirming that Aer Lingus will continue to move in the right direction,leading to sustained commercial viability.

Aer Lingus will have therefore to demonstrate that it can operate on these routesat an acceptable level of profitability ...‘

114.

    Even if it is true that the strategy referred to in the contested decision, accordingto which the United Kingdom provincial routes are used to feed Aer Lingus' NorthAtlantic routes, is only partial justification for accepting the continuing losses on theprovincial routes at issue, the evidence adduced by the applicant is not such as toenable the Court to reject the Commission's explanation that, at the time, itconsidered it to be premature to take a decision as to the long-term justificationfor Aer Lingus' policy on those routes.

115.

    In view of all those circumstances, and in particular the way in which competitionevolved after the adoption of the 1993 Decision, and the fact that the UnitedKingdom provincial routes represented only a part of Aer Lingus' airline activity,the Court considers that the applicant has not established that the Commissionexceeded the limits of its power to manage and monitor aid payable in tranches,in deciding that it should address any problems raised by Aer Lingus' operation ofthe United Kingdom provincial routes by requiring detailed justification of theoperation of those routes in the long term before payment of the third tranche ofthe aid, rather than initiating the procedure under Article 93(2) of the Treaty priorto payment of the second tranche.

116.

    The solution adopted by the Commission enabled it to satisfy itself in anappropriate manner that the routes at issue would become profitable beforepayment of the third tranche, that is to say during the period prescribed forcompleting the restructuring plan, without running the risk of jeopardising thesuccess of that plan by re-opening the procedure under Article 93(2) of the Treaty.

- The BAe 146 aircraft

117.

    The Court considers, first, that it cannot accept the applicant's argument that theacquisition by Aer Lingus of three 110-seat BAe 146 aircraft to replace four 34-seatSaab SF 340 aircraft was in breach of Article 1(d) of the 1993 Decision because ofthe resulting increase in seat capacity (see paragraph 54 above).

118.

    The Court considers that the commitment 'not to expand Aer Lingus' operatingfleet‘ referred to in that provision concerned only the number of aircraft which thatcompany had at the time the 1993 Decision was adopted.

119.

    Such an interpretation is consistent, inter alia, with the wording of the 1993Decision which:

-    refers (section II, first paragraph, point 5) to the indication by the IrishGovernment that 'Aer Lingus will not expand its existing operating fleetover the restructuring period, other than for the transatlantic routes whereadditional aircraft may be required for the peak summer season to maintaincapacity levels, in the event that the 747-100 aircraft currently operated isreplaced by a smaller aircraft‘;

-    specifies (in a footnote) the aircraft involved at the time.

120.

    By contrast, the Court notes that the number of seats is referred to in Article 1(g)of the 1993 Decision, adjustable in accordance with the procedure referred to byArticle 1(h). It is those provisions which reflect the Irish Government's undertaking(section II, first paragraph, point 5, of the 1993 decision) to limit the number ofseats offered for sale on Aer Lingus' scheduled services on Ireland/United Kingdomroutes.

121.

    Since the replacement of the four Saab SF 340 aircraft by three BAe 146 aircraftserves to reduce Aer Lingus' fleet by one aircraft, there has been no breach ofArticle 1(d) of the 1993 Decision. As to the fact that the number of seats wasthereby increased, it is sufficient to note that Aer Lingus has not exceeded theceilings laid down in Article 1(g) of the 1993 Decision, as adjusted in accordancewith Article 1(h) by the Commission's decision of 30 November 1994 (seeparagraph 6 above).

122.

    As regards the applicant's argument that the use of the aid had the effect ofincreasing surplus capacity on the routes at issue, even though Aer Lingus' loadfactors on some of those routes were relatively low at the time, the Court considersthat the applicant has not established that the aid was used to subsidise theacquisition of the aircraft in question. It is clear from the discussions before theCourt that the BAe 146 aircraft were not purchased by Aer Lingus, but wereleased. Furthermore, the applicant has not adduced any evidence such as to rebutthe assertions of the Commission and Aer Lingus that the lease charges for theBAe 146 aircraft were lower than those paid for the Saab SF 340 aircraft.

123.

    The mere fact that, in its annual report for the period ended 31 December 1994,Aer Lingus made a provision of IR £6.5 million for the costs resulting fromtermination of the contracts for the Saab SF 340 is not sufficient to establish thatthe aid to which the 1993 Decision relates was used as operating aid. As theCommission stated in its pleadings, without being contradicted by the applicant onthat point, most of the first tranche of the aid (IR £57 million out of IR £75million) was used to finance redundancies, and the balance was used to reducedebt.

124.

    Nor has the applicant challenged Aer Lingus' assertion that the new BAe 146aircraft were not introduced until May and June 1995, six months after theadoption of the contested decision.

125.

    In those circumstances, the fact that the Commission expressed certain reservations,in the contested decision, as to whether it was appropriate to increase Aer Lingus'capacity on certain United Kingdom routes and stated that, in view of that increasein capacity, it would require certain detailed information concerning the profitabilityof the Ireland/United Kingdom routes before approving the third tranche of aid,is not sufficient to establish that it had doubts as to whether the second tranche ofthe aid was compatible with the common market.

- The financial situation of the Aer Lingus group and the airline

126.

    As regards the applicant's arguments concerning the financial situation of the AerLingus group and the airline (see paragraph 55 et seq. above), the Court pointsout, first, that the applicant's claim that the IR £50 million cost reduction objectivewas not achieved by the airline is contradicted by the Commission's contention thatthe airline achieved a reduction in costs of IR £61 million. Similarly, there isnothing in the documents before the Court to support the applicant's assertion thatthe transfer prices between Team and the airline were adjusted to levels belowmarket rates.

127.

    Similarly, the mere fact that the accounts for the periods ended 31 March 1993 and31 December 1994 showed that Aer Lingus suffered considerable losses, inparticular in respect of Team, does not establish that the Commission committedan error in holding, in the 10th paragraph of the contested decision, on the basisof the reports prepared by Arthur Andersen & Co and Coopers & Lybrand, that'the airline business has improved its profitability ahead of the programme ...Viability is now forecast earlier than in the programme and could be achieved in1994 ... this trend should be considered encouraging and should indicate asuccessful completion of the restructuring programme‘.

128.

    In fact, it appears from Aer Lingus' accounts for the period ended 31 December1994, which is the relevant period for the purposes of the contested decision, thatthe Aer Lingus group made a profit of IR £71.1 million before tax and exceptionalitems. The profits of the airline, after tax but before deduction of exceptionalitems, was IR £40.9 million. It follows that the applicant has in no waydemonstrated that the airline's situation was not satisfactory at the end of 1994.

129.

    As regards the Aer Lingus group, although it is true that it had not yet achieveda healthy financial situation at the end of 1994, it is not disputed that that was dueto a combination of factors, in particular the continuing losses at Team, higherrestructuring costs than anticipated and the postponement of the sale of theCopthorne hotels. Furthermore, the group losses of IR £129.9 million for theperiod ended 31 December 1994, after tax and exceptional items, can be explainedto a large extent by the exceptional items of IR £139.2 million which were notrecurring.

130.

    As regards more specifically the higher restructuring costs than anticipated, it isclear from the 15th paragraph of the contested decision that that state of affairscan be explained by the fact that '[m]ost of the additional costs arise from theredundancy costs, which were higher than anticipated, the remainder arisingprincipally from the disposal of surplus aircraft‘. The Commission then accepts,in the 16th paragraph of the contested decision, that 'the additional costs were, formost part, a consequence of the restructuring measures and, in so far as theyconcern redundancy payments, do not affect competition between carriers‘. Nothing that the applicant has put before the Court undermines that conclusion bythe Commission.

131.

    It follows that the applicant's arguments concerning Aer Lingus' financial situationdo not suffice to establish that the Commission should have entertained doubts asto whether payment of the second tranche of the aid would be compatible with thecommon market. On the contrary, the fact that the restructuring costs were higherthan anticipated, and the disposal of the surplus aircraft, indicates that therestructuring referred to in the Cahill plan had indeed been implemented. In thosecircumstances, it is clear that Aer Lingus had even greater need for the secondtranche of the aid in order to complete the restructuring and to reduce its debts,in accordance with the plan approved by the Commission.

132.

    Similarly, the fact that the Commission strengthened the condition in Article 1(b)of the 1993 Decision, by requiring that it should receive, eight weeks beforepayment of the third tranche of the aid, a report setting out in detail the annualreduction in costs of IR £50 million, the cost savings linked to specific managementaction and the financial projections for the period to 31 December 1999 (25thparagraph, second indent, of the contested decision), does not in itself establish thatit entertained doubts as to the compatibility of the second tranche of the aid withthe common market. On the contrary, that new condition, imposed by theCommission in accordance with its power to manage and monitor aid payable intranches, is intended merely to ensure that Aer Lingus maintained the progress sofar achieved, and to enable the Commission to carry out a new assessment of AerLingus' financial situation at the appropriate time before payment of the thirdtranche of the aid.

- The sale of the Copthorne hotel chain

133.

    As regards the applicant's arguments based on the fact that, at the time thecontested decision was adopted, the Copthorne hotels had not yet been sold inaccordance with the Cahill plan (see paragraph 60 et seq. above), it should bepointed out that:

-    the 1993 Decision did not lay down any precise time-limit for the sale of theCopthorne hotels;

-    the contested decision reminded Aer Lingus (19th paragraph) that 'thechain should be sold as soon as market circumstances [were] appropriate‘

-    it is not disputed that the Copthorne hotel chain was sold before thepayment of the third tranche.

134.

    In those circumstances, the applicant has not established that the fact that theCopthorne hotels were not sold before the payment of the second tranche of theaid gave rise to such doubts concerning the compatibility of that tranche with thecommon market that the Commission should have re-opened the procedure underArticle 93(2) of the Treaty.

135.

    It follows from all the foregoing that the applicant has not established that, in thecircumstances of the present case, the Commission should have re-opened theprocedure under Article 93(2) of the Treaty. Similarly, the Court considers that theCommission was not required to hear the applicant before adopting the contesteddecision (see Commission v Sytraval, paragraph 58).

136.

    The applicant's plea alleging breach of essential procedural requirements musttherefore be dismissed.

The plea alleging manifest error of assessment

137.

    In support of its plea alleging manifest error by the Commission in its assessmentof the compatibility of the aid with the common market in accordance with Article92(3)(c) of the Treaty, the applicant essentially relies on the arguments alreadyraised in respect of Team, the United Kingdom provincial routes, the BAe 146aircraft, the financial situation of the airline and of the group, and the sale of theCopthorne hotel chain. It follows from all the foregoing that the applicant has notestablished any such manifest error of assessment, either as regards whether the aidfacilitated certain economic activities or whether it operated in a manner contraryto the common interest. It should be pointed out that, to the extent that theCommission's examination at the end of 1994 revealed certain difficulties in theimplementation of the restructuring plan, in particular as regards Team and theUnited Kingdom provincial routes, the Commission was correct in imposingadditional conditions intended to ensure that the aid would continue to becompatible with the common market.

138.

    It follows that the plea alleging manifest error of assessment as regards thecompatibility of the second tranche of the aid with the common market must bedismissed.

The other grounds of challenge raised by the applicant

139.

    As regards the applicant's other grounds of challenge (see paragraph 65 above), theCourt notes, first, that, contrary to the applicant's assertion, the Commission didconsider the effects of the aid at issue on competition, in particular as regards thevarious route groups operated by Aer Lingus, as is clear from the contesteddecision itself.

140.

    The Court cannot detect any error of law in the Commission's application ofArticle 92(3)(c) of the Treaty.

141.

    The Court considers that Article 1(b) of the 1993 Decision cannot be interpretedas imposing a legal obligation on Aer Lingus to implement every detail of theCahill plan without any possibility of adjusting it in the light of circumstances whichwere not foreseen at the time it was adopted. The applicant's argument allegingan infringement of Article 1(b) of the 1993 Decision must therefore be rejected.

142.

    As regards the statement of reasons for the contested decision, it is settled case-lawthat the statement of reasons required by Article 190 of the Treaty must disclosein a clear and unequivocal fashion the reasoning followed by the institution in sucha way as to enable the persons concerned to ascertain the reasons for the measureand to enable the competent court to exercise its power of review (Commission vSytraval, paragraph 63).

143.

    The Court's examination has not revealed any failure to state reasons such as tolead to the annulment of the decision.

144.

    It follows from all the foregoing that the application must be dismissed in itsentirety.

Costs

145.

    Under Article 87(2) of the Rules of Procedure, the unsuccessful party is to beordered to pay the costs if they have been applied for in the successful party'spleadings. Since the applicant has been unsuccessful, it must, having regard to theforms of order sought by the Commission and the intervener, Aer Lingus, beordered to pay the costs incurred by those two parties.

146.

    Pursuant to the first subparagraph of Article 87(4) of the Rules of Procedure theMember States and institutions which intervened in the proceedings are to beartheir own costs. Ireland must therefore bear its own costs.

On those grounds,

THE COURT OF FIRST INSTANCE (Second Chamber, ExtendedComposition)

hereby:

1.    Dismisses the application;

2.    Orders the applicant to pay the costs incurred by the Commission and AerLingus Group plc;

3.    Orders Ireland to bear its own costs.

Kalogeropoulos Briët Bellamy             Potocki                    Pirrung

Delivered in open court in Luxembourg on 15 September 1998.

H. Jung

A. Kalogeropoulos

Registrar

President

1: Language of the case: English.

ECR