Many thanks to Gian Marco Galletti of Kings College for sending in this commentary on the new Aviation Guidelines
In recent years, the market environment of the aviation industry has undergone considerable change. Regional airports, which frequently rely on public support to finance their operations, have been set up with the effect of duplicating airport capacity at local level. The partial privatisation of certain airports and competition for the management of publicly-owned airports has resulted in the growing involvement of private undertakings in the operation of airports. Diverse practices have materialised in the commercial relationship between airports and airlines, including long-term contracts with differentiated tariffs and incentives, and marketing support paid by the former to the latter. As regards airlines, a tremendous increase of traffic has been generated by the emergence of low-cost carriers, whose “low cost – low fares” business model has developed successfully. All these reasons indicated the need for revision of the rules on State aid in the aviation sector. The new guidelines on State aid to airports and airlines (replacing both the 1994 and 2005 aviation guidelines) were finally adopted by the Commission in February and been in force since 4th April 2014.
The main changes introduced by the new guidelines are as follows:
- Considerable space is given to clarifying the dividing line between economic and non-economic activities in light of the recent developments of the case law, such as the Leipzig Halle ruling. The issue of cross-subsidisation between the two types of activity is also tackled.
- Regarding the application of the market economy operator test to the commercial arrangements between airports and airlines, the new guidelines largely dismiss the “benchmark method” – whereby the fees charged by the airport under assessment are compared to those charged by “comparable airports providing comparable services” – due to the substantial presence of State subsidies in the airport market. The alternative method proposed involves ascertaining whether the commercial arrangement concerned incrementally contributes to the profitability of the airport from an ex ante perspective. In practice, when concluding the arrangement, the airport operator is now called upon to prove its capacity to cover all costs stemming from the arrangement (including a reasonable margin of profit) throughout its duration. Expected non-aeronautical revenues stemming from the airline’s activity should be included in this calculation, together with airport charges net of any rebates, marketing support or incentive schemes.
- Whereas the previous guidelines left open the issue of investment aid, the new guidelines make clear that their lawfulness is subordinated to the presence of a “genuine transport need” and to the necessity of public support in order to ensure the accessibility of a region. Furthermore, the new guidelines define maximum permissible aid intensities depending of the size of the airport (from 75% to 25% of eligible costs). In order to ensure proportionality, the maximum permissible aid intensities are higher for smaller airports than for larger airports. However, the ceiling for investment aid to finance airport located in remote regions may be increased by up to 20% irrespective of the airport size.
- Mindful of the need to give small airports enough time to adjust to the new market situation, the new rules authorise operating aid to regional airports with less than 3 million passengers per year for a transitional period of 10 years (up to 50% of the initial operating funding gap of the airport). In order to receive operating aid, an airport would need to set out a business plan which provides for full coverage of operating costs by the end of the transitional period. In this respect, the guidelines include a special regime for airports with an annual passenger traffic of below 700 000 units, allowing for higher aid intensities and providing for a reassessment of the situation after 5 years.
- Airlines departing from airports with fewer than 3 million passengers per year can receive aid for increasing the connectivity of a region by launching a new route (“start-up aid”). The eligible costs are the relevant airport charges and the maximum allowed aid intensity is 50% of such charges. Furthermore, a preliminary business plan must show that the route will become profitable after the start-up period.
- Although the new guidelines do not lay down new rules with respect to Service of General Economic Interest, they clarify that an SGEI has to be defined in conformity with the provisions of Regulation No. 1008/2008 on common rules for the operation of air services in the EU and the situations where a public service obligations can be applied. For air transport services, public service obligations may only be imposed for specific routes that are not adequately served by the market and for which there are no alternative means of transport in the catchment area. For airports, public service obligations can legitimately be imposed when a particular region would be isolated without the airport.
- As regards the temporal application of the new guidelines, the revised provisions on investment aid to airports and start-up aid will not apply to unlawful investment aid granted before their entry into force. Conversely, the rules concerning operating aid will apply to all relevant cases (pending notifications and non-notified existing aid) even where the aid was granted before 4 April 2014.
The new guidelines are to be commended for a number of reasons. First, they align State aid regime with the developments that have occurred in the aviation sector. Second, they make considerable effort to increase the clarity and transparency of the rules. Third, they contribute towards expediting State aid decisions by encouraging Member States to set up national schemes for aid granted to small regional airports.
However, some specific points raise concerns. For instance, the definition of “genuine transport need”, which is critical to the lawfulness of investment aid, does not appear sufficiently clear cut. Another example is the inconsistency emerging from the classification of “non-aeronautical activities”. While the new guidelines do not allow State aid aimed at supporting non-aeronautical activities, revenue stemming from those activities is among the elements that must be taken into account for the purpose of the market economy investor assessment.
The actual virtues and drawbacks of the new guidelines will however be determined based upon how their provisions will be applied and enforced by the Commission in the years to come.