The European Commission is considering allowing limited state aid to assist airlines struggling with the widespread closure of European air space following the Icelandic volcanic ash cloud.

During a recent European Policy Centre breakfast policy briefing, EU competition commissioner Joaquín Almunia said that he was "ready to consider" EU governments' requests to compensate airlines for losses amassing from the closures. This followed from the launch by EU Commission President of an ad-hoc group to assess the impact of the volcanic ash on the air travel industry and general economy.

Government financial aid to selected national companies is generally prohibited as anti-competitive, because it may distort competition by favouring certain companies over others. However, an exception to the rule under Article 107 2(b) of the Treaty on the Functioning of the European Unionpermits aids to make good the damage caused by natural disasters or exceptional circumstances.

Alumina said that “we are indeed facing exceptional circumstances”. The Commission is considering limited state aid measures modelled on those following the September 11 attacks.

State aid measures taken in the EU after September 11 included compensation for costs arising directly from the closure of American airspace and, for a limited period, the extra cost of insurance. The EU permitted the measures on the condition they were applied in a non-discriminatory manner to all airlines in the member state.

Alumina confirmed that volcanic ash aid will carry strict conditions to prevent discrimination in favour of a particular airline. “Member states should demonstrate need for the aid and its proportionality,” Alumina said.

Permitted financial aid will be carefully limited. The September 11 compensation was calculated, taking into account the actual costs incurred and those avoided during the four days of airspace closure, with maximum compensation capped at 4/365 of the airline’s annual turnover.

The current aviation industry crisis may also affect the level of any financial penalty the commission may impose in the pending case of alleged price fixing cartels in air freight forwarding. The decision, ordinarily involving substantial financial penalties on the participating airlines, is expected in the next few weeks.

Extracted from Jones Day's Antitrust Alert, authored by Jarleth M Burke and Natasha Hall In London