5 Jul, 2013

Europe Plans To Change Rules To Allow State Subsidies For Airports, Airlines

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Brussels, 3 July 2013, European Commission – In a major policy shift, the European Commission has initiated a review of EU state aid rules so as to pave the way for public financing of airports and start-up aid to airlines. The draft review proposal has now been placed for public comment. The following are the full texts of the official announcements placed on the European Commission website on July 3.

During the last ten years, the market environment of the aviation industry has changed considerably. The Commission proposal takes account of this evolution and provides guidance on how Member States can support airports and airlines in line with EU state aid rules. In light of the submissions received, the Commission will adopt revised guidelines in the beginning of 2014.

Joaquín Almunia, Commission Vice-President in charge of competition policy, said: “Our aim is to ensure that taxpayers’ money is well-spent and goes where it is truly needed. The next state aid guidelines will be a key ingredient for a successful and competitive European aviation industry, preserving fair competition regardless of the business model – from flag carriers to low-cost airlines and from regional airports to major hubs”.

The Commission has published a draft of revised state aid rules for the public funding of airports and start-up aid to airlines. The main provisions of the proposed guidelines (see MEMO/13/639) are:

• State aid for investment in airport infrastructure is allowed if there is a genuine transport need and the public support is necessary to ensure the accessibility of a region. Whereas the current guidelines leave open the issue of investment aid intensities, the revised draft rules define maximum permissible aid intensities depending on the size of an airport, in order to ensure the right mix between public and private investment. The possibilities to grant aid are therefore higher for smaller airports than for larger airports.

• For operating aid to airports, which is not allowed under the current guidelines, the Commission proposes to allow such aid for a transitional period of 10 years under certain conditions, in order to give airports time to adjust their business model. Operating aid will decrease during this period. The path will depend on the financial situation of each airport.

• Start-up aid to airlines to launch a new air route is permitted provided it remains limited in time. In the draft new guidelines, the compatibility conditions for start-up aid to airlines have been streamlined and adapted to recent market developments.

The proposal takes into account the results of a first public consultation in 2011. It also reflects the principles of the Commission’s agenda for State Aid Modernisation (IP/12/458): state aid policy should focus on facilitating well-designed aid aiming at boosting economic growth and furthering other objectives of common European interest, while discouraging harmful aid that does not bring real value added and create distortions to competition in the Single Market.

The full proposal is available at: http://ec.europa.eu/competition/consultations/2013_aviation_guidelines/index_en.html

Comments should be sent by 25 September 2013 to: Stateaidgreffe@ec.europa.eu

Background

Air transport contributes significantly to the European economy, with more than 15 million flights per year, 822 million passengers transported to and from European airports in 2011, 150 scheduled airlines, a network of over 460 airports and work for some 2.3 million people. Airlines and airports contribute more than €140 billion to the EU’s Gross Domestic Product. Linking people and regions, air transport plays a vital role in the integration and the competitiveness of Europe.

Member States’ public funding of airports and airlines is currently assessed under the 1994 and 2005 Aviation Guidelines. The 1994 Aviation Guidelines were adopted in the context of the liberalisation of the market for air transport services and contain provisions for assessing social and restructuring aid to airlines in order to provide a level playing field for air carriers. They were complemented in 2005 by guidelines on the public financing of airports and on the start-up of airline services from regional airports.

Neither of the guidelines has an expiry clause, but in view of the significant market changes that have taken place in the last decade, the Commission has initiated this review, with a first public consultation in 2011 aiming in particular to determine whether a revision would be necessary (see IP/11/445). The main conclusions were:

1. The existing guidelines need to be reviewed to take account of market developments. Stakeholders emphasised the need for more clarity and active enforcement of the applicable rules.
2. In particular, the rules for the financing of airports need to become more transparent.
3. Stakeholders sought more guidance on the application of state aid rules to rebates or other advantages granted by regional airports to certain airlines and considered that rules concerning start-up aid should be simplified.

The draft new guidelines take stock of the new legal and economic situation concerning the public financing of airports and airlines and specify the conditions under which such public financing may constitute State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”), and when it does constitute State aid, the conditions under which such aid can be declared compatible with the internal market. The Commission’s assessment is based on its experience and decision-making practice, as well as on its analysis of current market conditions in the airport and air transport sectors; it is therefore without prejudice to its approach towards other infrastructures or sectors.

At the same time the Commission is working on around 60 state aid investigations in the aviation sector. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Introductory remarks on new state aid rules for airports and airlines

Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy

Press conference, Brussels, 3 July 2013

The Commission is launching today a public consultation on the next guidelines for State aid in the aviation sector. We are seeking the views of Member States and stakeholders – airlines, airports, business users and passengers – on the draft we have prepared.

This process will lead the Commission to adopt new guidelines at the beginning of 2014. They will set out the rules based on which the Commission will assess state aid to airports and airlines throughout the EU.

These guidelines are a further component of the State aid modernisation agenda. Its philosophy is simple: the state aid control carried out by the Commission should encourage aid that boosts economic growth and furthers other objectives of common European interest, while it should discourage harmful aid that does not bring real value added and introduces distortions to competition in the Single Market.

Let me recall briefly the backdrop against which we are launching this discussion.

Since 2001 the market environment of the air transport sector has changed quite considerably. The security challenge posed by 9/11, the oil price increases and the current economic crisis have all deeply affected the industry.

When we look at airlines, three major developments have taken place:

1) Concentration among airlines has stepped up.

2) In some countries, flag carriers of smaller size have run into serious financial trouble. We have taken several rescue and restructuring decisions in this area, and we still have a number of cases pending.

3) Thanks to the liberalisation of air transport at EU level, the “low cost low fares” model, has developed successfully and passengers enjoy now more opportunities to travel cheaply.

This is the landscape for airlines. When we look at airport infrastructure, important transformations have also taken place. We are witnessing a situation of wrong allocation of capacity in Europe.

1) Many new regional airports have been set up in the EU. Although they are important for the accessibility needs of some of Europe’s regions, they are sometimes within a short distance from other airports. As a result, infrastructure sometimes remains unused or under-used.

2) By contrast, in large hubs, congestion problems have arisen. Some regional airports have helped to decongest these hubs.

3) The landscape of airport activities has also evolved; they have become a new market, with half of their revenues stemming from non-aeronautical activities, and increasingly in the hands of private companies.

Against this backdrop, to maintain a dynamic and competitive European aviation industry we need to ensure that public money is spent where it is actually needed; that is, where the market alone does not supply the necessary services or infrastructure.

This means we should avoid encouraging the duplication of unprofitable airports, the creation of unused capacities or the public financing of connections that private agents could afford anyway.

We must ensure that regional airports are viable and sustainable economic activities.

We must also make sure that a level playing field is guaranteed – both between airports themselves, and between airlines, regardless of their business models.

We should avoid that airport overcapacity gives airlines an opportunity to shop around for subsidies at taxpayers’ expense.

Achieving all these objectives is only possible if we put in place an adequate framework of State aid control in the aviation sector.

So let me sum up the main orientations I am proposing.

The new rules should continue to allow State aid for investment in infrastructure. Of course, if public authorities invest in the same way as a private investor in the same situation would, there is no State aid. State aid is justified if there is a genuine transport need and public money is needed to ensure accessibility to a region. State aid should only be used to create additional transport capacity where demand for it exists. If an area is already well connected by other modes of transport – such as high-speed trains, – public money would be wasted.

Moreover the possibilities to grant investment aid should be higher for smaller airports than for larger airports.

Let me now move to aid to finance the operation of airports. The practice of subsidising the operating costs of airports through public money has become widespread over the last years.

Operating costs should normally not be subsidised by the taxpayer. Just like other economic activities, airports should recover their operating costs from those that use them: airlines and passengers.

This is where we want to go. But it would not be realistic to apply this principle already today. So what I propose to do is rather to accompany regional airports in the transition towards a steady state where they will no longer need operating subsidies. So during a 10 year transitional period, these small regional airports will be given time to adjust to the new market situation.

There will also remain an exception, where a genuine public service need is identified – this could be the case in particular if a region would be isolated without the operation of the airport. In this case state aid can be granted to cover operating costs provided that it complies with our rules on services of general economic interest.

The draft guidelines I propose also address the issue of the State aid that airlines may receive through their arrangements with airports. If these arrangements would have been accepted by a private investor operating under normal market conditions, then there is no State aid. In other words, if those arrangements are profitable for the airport, then they comply with our rules.

Finally, the proposal maintains the possibility for Member States to grant start-up aid to airlines, but under strict conditions. Such aid may be needed to launch a new route for a temporary period.

In sum, what we seek to achieve with these new guidelines is to make sure citizens – who may be taxpayers or passengers, or both – can reap all the benefits of air transport liberalisation and improved connectivity through affordable services responding to their transport needs.

I am seeking the views of interested parties on all the proposals I am making today. I am looking forward to receiving these comments. Of course we will look at them carefully before adopting new guidelines, at the beginning of next year.

State aid: Commission consults on new state aid rules for airports and airlines- Frequently asked questions.

A – GENERAL QUESTIONS

What is the aim of today’s consultation?

The revised draft rules published today are a crucial step towards completing a review of the state aid rules for airports and airlines beginning of 2014.

Neither the 1994 nor the 2005 Aviation Guidelines have an expiry clause. However, in view of significant market changes that have taken place in the last decade, the Commission has initiated this review with a first public consultation in 2011 aiming in particular to determine whether a revision would be necessary (see IP/11/445).

Why is there a need to revise the 1994 and 2005 Aviation Guidelines?

During the last ten years, the market environment of the aviation industry has changed considerably. Experience in applying the current set of rules has shown the need for an update of the rules. An update of the guidelines is necessary in order to safeguard fair competition and to ensure a level playing field for airlines and airports irrespective of their business model.

Also the observations received from stakeholders in the previous consultation carried out in 2011 acknowledge the clear need to update the current State aid rules for airports and airlines. Stakeholders emphasised the need for more clarity and active enforcement of the applicable rules. In particular, the rules for the financing of airports need to become more transparent. Stakeholders sought also more guidance on the application of state aid rules to rebates or other advantages granted by regional airports to certain airlines and considered that rules concerning start-up aid should be simplified.

What is the objective of the revision in context of the State Aid Modernisation and the Europe2020 strategy?

The revision of the 1994 and 2005 Aviation Guidelines takes into account the objectives of the Europe2020 Strategy and the State Aid Modernisation (see IP/12/458). The Europe 2020 Strategy (EU 2020) underlines the importance of transport infrastructure as part of the EU’s sustainable growth strategy for the coming decade. In particular, the Commission has emphasised that the internalisation of externalities, the elimination of unjustified subsidies as well as free and undistorted competition are an essential part of the effort to align market choices with sustainability needs. In its Communication on State Aid Modernisation (SAM), the Commission points out that State aid policy should focus on facilitating well-designed aid targeted at market failures and objectives of common European interest, and avoiding waste of public resources.

State aid control in the airport and air transport sectors should therefore promote sound use of public resources for growth-oriented policies, while limiting competition distortions that would undermine a level playing field in the internal market, in particular by avoiding duplication of unprofitable airports and creation of overcapacities.

What are the main proposed changes with regard to the Commission’s current guidelines?

In light of a first public consultation in 2011, the main proposed changes with regard to the Commission’s current guidelines are:

For airport infrastructure, whereas the current guidelines leave open the issue of investment aid intensities (i.e. the level of aid that can be granted in relation to eligible costs of a project), the revised draft rules define maximum permissible aid intensities depending on the size of an airport.

Operating aid to airports is not allowed under the current guidelines. However, the Commission proposes to allow such aid for a transitional period of 10 years under certain conditions, in order to give airports time to adjust their business model.

The compatibility conditions for start-up aid to airlines have been streamlined and adapted to recent market developments.

What is the Commission’s timeline for the adoption of the new Aviation Guidelines?

The Commission envisages adopting the new Aviation Guidelines at the latest beginning of 2014. The detailed planning depends on the results of the public consultation.

B – STATE AID RULES FOR AIRPORTS

Why is public financing of airport infrastructure regarded as State aid?

The ruling of the European Courts in the Leipzig/Halle airport case (see MEMO/11/191) has confirmed the longstanding (since 2001) decision practice of the Commission that building and commercially operating airport infrastructure constitutes an economy activity. Public support to such activities may therefore constitute state aid in the meaning of EU rules.

Are all infrastructure measures of an economic nature?

The European Courts confirm that not all activities of an airport are necessarily of an economic nature. Activities that normally fall under State responsibility in the exercise of its official powers as a public authority are not of an economic nature and do not fall within the scope of the rules on State aid. Such activities include air traffic control, police, customs and activities necessary to safeguard civil aviation against acts of unlawful interference.

Under which conditions is public funding of infrastructure considered free of state aid?

Public funding granted to an airport manager is considered free of aid, if in similar circumstances a private operator, having regard to the foreseeability of obtaining a return and leaving aside all social, regional-policy and sectoral considerations, would have granted the same funding (Market Economy Operator Principle, MEOP). This assessment should be in principle based on a business plan taking into account available information and foreseeable developments at the time when the public funding was granted and it should not rely on any analysis based on a later situation. Public funding granted in circumstances which correspond to normal market conditions is not regarded as State aid in the meaning of EU rules.

Will Member States be able to grant investment aid to finance infrastructure investments at airports?

Yes. If a genuine transport need and positive externalities for a region can be established, investment aid to airports will continue to be accepted with maximum aid intensities in order to ensure a level-playing field across the EU. When assessing the existence of a genuine transport need the Commission will take into consideration whether the region is already served by another airport (including also other modes of transport, for example high speed train or train connections to other airports). The Commission will also analyse whether the infrastructure has prospects to meet in medium-term the forecasted demand of airlines, passengers and freight forwarders in the catchment area of the airport. The key element for the compatibility assessment of the investment aid will be an ex ante business plan based on sound passenger and freight traffic forecasts. In order to ensure overall proportionality the maximum permissible aid intensities will be higher for smaller airports than for larger airports. For large airports with a passenger volume of over 5 million per annum, investment aid should not be declared compatible with the internal market, since investments in infrastructure of this size can be privately funded.

What is the Commission’s view on the development of regional airports?

The Commission shares the view that the development of regional airports is important for economic growth and territorial cohesion. At the same time, a proliferation of regional airports which leads to the creation of unused or not efficiently used airport infrastructures should be avoided.

Will the revised rules forbid Member States to grant operating aid to airports?

No. However, operating aid constitutes a very distortive form of aid and can only be authorised under exceptional circumstances. The Commission considers that airports, as any other undertaking, should normally bear their operating costs. The 1994 and 2005 Aviation Guidelines, do not allow the granting of operating aid to airports. Nevertheless, many regional airports depend today on public support to finance their operating losses.

The revised draft rules provide compatibility conditions for operating aid to smaller regional airports for a limited period of time (i. e. transitional period, for further details see question 12).

In addition airports may be under certain conditions entrusted with Services of General Economic Interest (SGEI, see question 15 further below) and receive compensation for services to be discharged.

Why will operating aid to airports be allowed only during the transitional period?

During the transitional period the managers of smaller regional airports will be given time to adjust to the new market situation, e.g. by gradually increasing airport charges to airlines, by introducing rationalisation measures, by differentiating their business models or by attracting new airlines and customers to fill their idle capacity. During the transitional period, operating aid will be gradually phased out. At the end of the transitional period, all airports should, in principle, be able to cover their operating costs.

Under which conditions will regional airports be able to benefit from operating aid?

The key element for the compatibility of operating aid to airports will be an ex ante business plan that will pave the way towards full operating cost coverage at the end of the transitional period. The path towards full operating cost coverage will be different for every airport and depend on the financial situation of the airport at the beginning of the transitional period. The operating aid amount should be established ex ante as a fixed lump sum covering the funding gap resulting from expected operating costs determined on the basis of an ex ante business plan.

Will the duration of the transitional period be different for each airport? How will the duration of the transitional period be established for each airport?

The revised draft rules foresee that the duration of the transitional period for each airport will depend on its financial situation at the beginning of the transitional period. The duration of the transitional period for each airport will be established on the basis of the initial operating cost coverage, defined as the average of the three years that precede the beginning of the transitional period (i.e. 2011 to 2013). The airport shall progressively increase this initial operating cost coverage by at least an average of 10 percentage points (pp) per annum until full operating cost coverage is reached.

For example, if the initial operating cost coverage of an airport amounts to 60%, it shall be increased by at least 10 pp per annum over a period of 4 years. If the initial operating cost coverage of an airport amounts to 30%, it shall be increased by at least 10 pp per annum over a period of 7 years. After this period, no more operating aid shall be paid to the airport.

At the latest 10 years after the beginning of the transitional period, airports must have reached full coverage of their operating costs and no operating aid to airports will be allowed from then on (except for Services of General Economic Interest – see question 15 below).

Is there another possibility for Member States to grant State aid to airport?

Yes. Certain airports have an important role to play in terms of regional connectivity of isolated, remote or peripheral regions of the EU and can be entrusted with a Service of General Economic Interest (SGEI). Subject to case-by-case assessment the overall management of an airport can be declared SGEI, if part of the area potentially served by the airport would be, without the airport, isolated from the rest of the EU to an extent that would prejudge its social and economic development. The assessment will depend on the particular characteristics of each airport and of the region which it serves. Such a situation may in particular occur in respect of the outermost regions referred to in Article 349 of the TFEU, as well as for islands or other areas of the EU.

Do Member States have to notify all investment and operating aid measures individually to the Commission?

The Member States are strongly encouraged to notify national schemes, rather than individual aid measures for each airport. This is intended to reduce the administrative burden both for the Member States’ authorities and for the European Commission. At the same time measures which are potentially more distortive of competition might need to be notified to the Commission individually (e. g. investment aid to airports above 3 million passengers per annum).

Will the Commission apply the revised rules to past cases, such as the on-going investigations into several regional airports?

The revised guidelines provide compatibility criteria for operating aid granted to the airport before the entry into force of these guidelines. The Commission will however not apply the new guidelines to investment aid to airports and start-up aid to airlines granted before the entry into force of the guidelines. For aid of this type the Commission will apply the previous guidelines.

When will the Commission take its final decisions in the on-going formal investigation procedures?

The Commission’s aim is to reach a final view on these cases as quickly as possible. We have made progress in the on-going investigations. However, many cases involve past operating aid to airports and there is a need to wait for the adoption of the new Aviation guidelines.

B- STATE AID RULES FOR AIRLINES

Is the Commission questioning the successful business model of Low Cost Carriers?

No. Low Cost Carriers have brought extremely important benefits to passengers, enabling millions of European citizens to travel cheaply. The Commission fully recognises this and does not question this business model, which has proved extremely successful. The revised rules will apply to all airlines and airports irrespective of their business model in order to preserve a level playing field in the internal market. The revised guidelines provide guidance under which conditions airport/airline arrangements can be considered free of aid.

How can arrangements between an airport and an airline qualify as state aid?

Airports are still predominately publicly owned and most often rely on public support to finance their operations. Public authorities are often directly or indirectly involved in attracting airlines through marketing support, rebates or incentive schemes with the objective to increase the connectivity of the region.

Under which conditions are arrangements between airports and airlines considered free of state aid?

Airport/airline arrangements can be considered free of state aid when it can be established that a private investor, operating under normal market conditions, would have accepted such terms (the market economy operator principle, MEOP). The most relevant criterion to assess this are the ex ante profitability prospects over the expected duration of the arrangements. The revised rules provide guidance how the MEOP should be applied to airport/airline arrangements.

The airport manager should demonstrate that through the revenue stemming from the airline’s activity at the airport (e. g. airport charges, non-aeronautical revenues) it is capable of covering the costs stemming from the arrangement with an airline (e.g. an individual contract or an overall scheme of airport charges) with a reasonable profit margin on the basis of sound medium-term prospects when setting up the arrangement.

Will the revised rules forbid price differentiation in airport/airline arrangements?

No. The Commission considers that commercially justified price differentiation – including marketing support, rebate and incentive schemes – is a standard practice in the Aviation industry, as long as it complies with all relevant competition and sectoral rules.

Does the Commission consider that individual airlines have to cover all the costs of an airport?

No. On the contrary, costs which the airport manager would have to incur anyway independently from the arrangement with the airline do not need to be taken into account in the assessment of the particular arrangement.

Does the airport/airline arrangement constitute aid, if it is expected to result in a loss at the beginning of the arrangements, which will be offset by expected further benefits?

No. An expected initial loss stemming from an airport/airline arrangement can be offset by expected future benefits generated by the arrangement.

What are the consequences for airlines, if the airport/airline arrangement will not be profitable for the airport manager from an ex ante perspective?

If the airport/airline arrangement incrementally decreases the profitability of the airport manager, it contains incompatible aid, unless the compatibility conditions for start-up aid are met. The benefiting airline would need to pay back any incompatible aid.

Under which conditions will Member State be able to grant start-up aid to airlines?

The revised draft rules foresee the possibility for Member States to grant start-up aid to airlines under strict and more streamlined conditions. Only airlines departing from airports with fewer than 3 million passengers per annum (in outermost regions also airports with more than 3 million passengers) can be granted start-up aid for launching a new route or a new schedule involving more frequent services, which increase the connectivity of a region for a limited duration of up to 24 months. The start-up aid may cover only 50% of the start-up costs and should be allocated on a non-discriminatory basis. An ex ante business plan of the routes should show that the route will become profitable for the airline after the start-up period of 24 months.

Do Member States need to notify the Commission of all airport/airline arrangements?

No. Airport/airline arrangements that are in line with the MEOP do not need to be notified to the Commission. Only if a Member State decides to grant aid to airlines that is not in line with MEOP, such aid needs to be notified. At the same time the Member States are strongly encouraged to notify national schemes for start-up aid to airlines, rather than individual aid measures for each airport. This is intended to reduce the administrative burden both for the Member States’ authorities and for the European Commission.

Under which conditions will Member States be able to grant social aid in the field of transport services?

The revised draft rules contain compatibility conditions for aid of a social character for air transport services. Aid of a social character must be effectively granted for the benefit of the final consumer. The aid should in principle cover only certain categories of passengers travelling on the route. Where the route concerned links with remote regions (such as outermost regions, islands and sparsely populated areas) the aid can cover the entire population.