Corona state aid

Corona state aid – is the tie-in with environmental conditions making aviation greener?

Reiner Hertl
14.09.2020
5 minutes

In the Corona crisis, airlines and aircraft manufacturers, airports and suppliers are harnessing corona state aid, subsidies, grants and loans. These financial injections are enormous and necessary in equal measure. That being said, environmental considerations are also important – how green are the conditions tied to the payments? Can the financial boost both stimulate the economy and help to protect the environment?

Retaining competitiveness, avoiding competitive distortions

Corona state aid at the levels that have been paid out requires the approval of the EU Commission. The otherwise strict subsidy framework was relaxed to enable the green light to be given to the bailout programmes. The EU competition regulators are working with the Member States to stabilise the economy and retain market competition simultaneously. The objective is to fend off the consequences of the Covid-19 crisis by pumping in liquidity – the life-saving tonic – in a targeted matter.

Aviation on the other hand (international and domestic) accounts for approximately 2.8 per cent of global CO2 emissions. CORSIA has also been hatched in 2020 to adhere to the Paris Climate Agreement’s objective of carbon neutrality by 2050 (CARBON OFFSETTING AND REDUCTION SCHEME FOR INTERNATIONAL AVIATION). This climate protection instrument is due to be watered down on an interim basis:

Corona and carbon: ICAO and IATA changing course

The climate programme CORSIA – intended to make aviation fly with more consideration for climate neutrality – will thus not be implemented until later due to the massive slump in business. The pressure to invest in more frugal aeroplanes is initially softened thanks to this decision by the International Civil Aviation Organization. It is thus reacting to the IATA, which brings together airlines and aircraft manufacturers. As a consequence, climate protection measures are being kicked down the road: the associated conditions are being loosened, the growth in CO2 emissions will be re-calculated. Starting in 2021, these were due to be offset by way of a certificate trade – this will now start at a later date.

And what about other negotiations to fly with a smaller carbon footprint and compensate for aviation deficits in this regard? The state aid awarded to the airlines during the Corona grounding sometimes comes with green caveats. Mostly, however, green credentials take a back seat. As an example, let’s take a look at the set-up for the environmental stipulations for airline state aid:

Air France, a textbook example?

Brussels has rubber-stamped the state aid for Air France. Running to some seven billion euros, the airline is due to become the ‘most sustainable in the world’. In so doing, the flag carrier shall shed a tranche of its current domestic routes: Air France will no longer offer flights within France for distances that can be equally covered by rail within a few hours. The TGV high-speed train network offers this domestic alternative to flying.

Ecological transformation also includes reducing the pollution emissions on domestic flights by half within four years. The stipulation of slashing the entire CO2 emissions in half within ten years is in fact not new. Air France had committed itself to this objective even before the crisis. The conditions for state aid and the consensus of government and Air France management can be summarised by saying:

The condition is that Air France becomes the most environmentally friendly airline in the world.

Bruno Le Maire, French Minister for Economics and Finance
Corona State Aid - Ties

Corona state aid – intervention and/or guidance

The strings attached to Air France’s state aid are just one example of the fundamental dilemma: to what extent could or should a state become a back-seat driver to steer an airline’s environmental policy? To what extent does it have an obligation to get involved in airline operations – or even take a shareholding? What was the attitude of Lufthansa when pondering its bailout package? Before we look at how the parent company ultimately acquiesced to the conditions for state aid (and permitted re-capitalisation with the state participating in its share capital), we firstly need to consider one of its subsidiaries. Austrian Airlines is a further flag carrier (previously a state airline, now part of the Lufthansa Group):

The AUA bailout, a further exemplary case?

Austria is also using financial means to bail out its flag carrier – linked to ecological measures in domestic transport. Destinations that can be reached by rail in ‘significantly less than three hours’, so-called ‘local’ transport destinations, will lose their flights. An affordable ticket for unrestricted use of trains and public transport is in the pipeline. And a ‘cheap flight anti-dumping bill’ is already in the offing. This would block airlines from offering tickets below the cost of the statutory taxes and fees. Taken in the round, more rail and road transport will improve the environment.

Our next spotlight from the skies:

Test case: Lufthansa bailout, how green was the green light?

Staff breathed a huge sigh of relief when the shareholders gave their consent to the state rescue package of some nine billion euros. This was the result of hard negotiations. In this vein, Lufthansa has to relinquish, among other concessions, 24 take-off and landing rights. After all, the slots determine the market power.

The EU Commission’s position attracted strong criticism in Germany. EU Commissioner for Competition, Margrethe Vestager, defended such by saying that it is not creating “any additional hurdles”, rather that it is ensuring that “any competition disturbance is alleviated.” Even now, such inequity is being criticised: Ryanair, for example, has already announced that it will take legal action against the Lufthansa bailout.

WingMag has previously reported on the state bailout plan for Germany’s national airline, viewed to be ‘system relevant’, on multiple occasions. We also reported on the complex path to reach agreement, requiring compromise among the stakeholders. The aim was for the airline to leave negative territory. The climate is not able to post much profit here, as the agreed measures involve only a slight ecological aspect. The support from the state was barely conditional on specific climate protection conditions; there was also no major commitment agreed to secure jobs. Lufthansa wants to lay off around 22,000 full-time staff around the world.

We are experiencing a turning point in global air traffic.

Carsten Spohr, Lufthansa CEO, August 2020

To remain with our example airlines, Air France is planning to cut around 7,500 jobs by the end of 2022. The airline may also ultimately choose to replace the Airbus 380 with more efficient A-350 and Boeing 787 models. Speaking of the Big Two aircraft manufacturers, whom is Boeing counting upon in this crisis?

State bailout packages across the pond

The loans to fight the crisis are being dispersed widely; in March, approximately 25 billion dollars was ploughed into saving the American aviation sector. American Airlines, Delta Air Lines and United Airlines were among the recipients. Boeing itself was able to turn the corner on the capital market, also obtaining approx. 25 million dollars with a bond issue.

The (bitter) climate consequences from the Corona state aid conditions

In conclusion, it has to be said that the billions in bailout Corona state aid have been distributed around the world without really having been specifically tied to climate stipulations. Environmental caveats and the need to save money in the crisis have forced the airlines to reduce domestic traffic (which does have some benefit for the climate – short haul is ultimately the quintessential environmentally unfriendly form of transport). Where strings have been attached to loans from the state, environmental groups say that the airlines’ CO2 figures have modestly improved. Around 80 per cent of aviation CO2 emissions are caused by international connections.

The lockdown led to CO2 emissions reducing by up to 30 per cent at times between February and June 2020. Fleet modernisations are intended to make aviation more ecologically efficient with models using less fuel. In addition, there’s fleet renewal. This involves older aircraft, which are less environmentally friendly, being taken out of service. The long-term Corona stress test affects airlines and aircraft manufacturers in equal measure – continuously testing their microclimates.

by Reiner Hertl

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