EC caves in over Air France state aid: Dispute erupts over approval for steel and aviation subsidies

BRITAIN was last night heading for a fresh row over state subsidies after the European Commission caved in to demands for aid packages to the aviation and steel industries.

A pounds 2.3bn subsidy to Air France and a multi-million-pound aid deal for the German firm Kloeckner unleashed a wave of protest from companies including British Airways and British Steel.

The subsidies, coupled with approval for the restructuring of Olympic Airways, the Greek national airline, fuelled fears over the commission's commitment to the promotion of free and fair markets within the European Union.

The commission's approval of the Air France deal is likely to be challenged in the court by other airlines, including BA and Lufthansa. The decision has also prompted alarm in the US.

Conditions were attached to the capital injection but failed to give the tough signals on state aid that BA wanted. Two commissioners, Sir Leon Brittan and Henning Christophersen, fought for a tougher stance but were faced with stiff opposition.

The French business and political establishment lined up together in support of the stricken airline and were 'unstoppable', said commission officials.

France's transport minister, Bernard Bosson, called the deal perfectly balanced. The conditions to the aid stipulate that this must be the last such injection for Air France and must not be passed on to its domestic arm, Air Inter.

It says that Air France must sell its shareholdings in activities not directly related to air transport, in particular the hotel chain Meridien. The commission also said France must lift remaining obstacles to foreign airlines using Orly airport, something it has already committed in principle to do.

BA said the decision was deplorable and would distort the aviation market. Sir Colin Marshall, BA chairman, said: 'In the case of Air France there is no justification for a subsidy of this size, and the conditions imposed are wholly inadequate. Air France's problems are of its own making.'

His anger was echoed by Sir Michael Bishop, chief executive of British Midland. 'The sheer size of this latest package for Air France is grotesque,' he said. 'It is hard to believe that a capital injection of this size in needed only for restructuring and will not be used to cover operating losses.'

BA wanted Air France to raise its own money by disposing of its stakes in about 20 airlines round the world or to sell other assets apart from Meridien.

With the recession in the airline industry biting deep and governments under pressure to prop up the sector, it is unlikely that the present problems will be the last. But Karel Van Miert, the commissioner responsible for competition policy, has not so far been willing to confront governments in such a sensitive area.

In another controversial decision the EC approved a takeover plan for the German steel company Kloeckner that amounts to a pounds 70m state subsidy. British Steel has already appealed against aid for Italian and Spanish firms.

At British Steel's annual meeting yesterday Brian Moffat, chief executive, said he felt the commission was taking a stronger line against subsidies. Yet as he spoke to shareholders, Brussels was approving a plan under which Sidmar, of Belgium, and the city of Bremen investment bank Hibeg would take a stake in Kloeckner.

The commission, which faced tremendous pressure to approve the deal, ruled that it did not constitute illegal state aid. British Steel had already warned the commission that it would take action if the aid went through, according to sources in Brussels. Yesterday the company said: 'We will have to wait and see. But we are totally against state aid at a time of overproduction of European steel.'

As one of the most competitive producers in Europe, British Steel has been highly critical of what it sees as the commission's inability to get to grips with subsidies and overproduction in the steel sector.

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