A European Union court said in a landmark ruling that the Commission had wrongly approved the rescue package to the French national airline in 1994. In one of the 15-nation bloc's most controversial state aid cases, the Luxembourg-based Court of First Instance attacked the Commission's written approval for the aid as flawed.
Although competition has come to Europe's skies, many airlines have been recipients of large slabs of cash from national governments. The ruling could mean that part of the pounds 8bn granted in aid to European airlines since 1991 is returned to national governments.
The sums could be huge. Since 1990, Spain's Iberia has received more than pounds 1.5bn in state aid despite, according to consultants McKinsey, having the most "inefficient" pilots in the world. Other major beneficiaries have been Greece's Olympic and Air Portugal - each received more than pounds 1bn.
The court pointed out that the Commission failed to provide adequate written reasoning for Air France's purchase of 17 new aircraft, which gave the airline a considerable advantage over rivals on long-haul transatlantic routes.
The multi-billion pound subsidy to the loss-making French carrier was approved on the condition that the carrier sold off a stake in Meridien Hotels, separated the operations of domestic airline Air Inter, and paid back a pounds 100m loan obtained under preferential rates.
However, its rivals were not impressed and six European airlines, headed by British Airways, launched a court challenge last year.
Both the Commission and Air France dismissed speculation the ruling may mean that the pounds 2bn handout would have to be paid back to the French government.
A spokeswoman for Neil Kinnock, the EU Transport Commissioner who approved the subsidy, said there was no question of Air France being asked to repay the money, at least while the Commission was "examining" what action to take.
The legal wrangling is likely to continue. The Commission, which has to respond by the end of July, could appeal to a higher court or might "re-argue" its case differently.
BA said that some monies could be returned - and pointed out that the cash spent on the new aircraft should be clawed back from the company.
Air France's rivals were quick to applaud the judges' decisions. "This sends a clear message to every state airline in Europe that the future lies in private hands, not in the pocket of the taxpayer," said BA's spokesman in Brussels, Andre Clodong.
Hans Ollongren, director of European and public affairs at Scandinavian airline SAS, said it was a "a legal landmark". SAS had complained because state aid distorted competition.
However, the Commission said the ruling had no bearing on any other state aid decisions in the aviation sector nor on state aid policy in general.
Outlook, page 19Reuse content