A Comment on the Proposed 2014 State Aid Guideline Changes within the EU’s Aviation Sector

Robert Miklós Babirad

1        Introduction

 On July 3, 2013, the European Commission invited public comments concerning the adoption of new guidelines for the application of State aid within the EU’s aviation sector.[1]  The criteria upon which State aid will be assessed by the Commission with regard to its application to airlines and airports within the European Union is offered by the proposed guidelines.[2]  Mr. Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy has suggested that the new 2014 guidelines will also represent a constituent element of the continued development of the State aid modernisation agenda (SAM)[3] in their application.[4]  One of the key underlying objectives of the proposed guidelines as well as the State Aid Modernisation Agenda’s influence is that State aid should only be provided where economic development is enhanced by its provision and where common goals of European interest are furthered by providing the aid.[5]

The issue is whether the changes being proposed to the existing 1994 and 2005 guidelines will be helpful in furthering a more beneficial and effective application of State aid within the EU’s aviation sector.  Additionally, it must be assessed whether EU citizens will be able to more effectively benefit under these new arrangements from the continued liberalisation of the air transport sector, with regard to an enhancement of services that are responsive to their needs, as well as the providing of greater regional connectivity throughout the European Union.[6]

This article will begin by discussing the general principles surrounding State aid in the EU’s aviation sector as well as existing challenges, which have brought forth the need for the new guidelines.  Key changes being proposed for the 2014 guidelines will then be offered.  The article will continue by assessing the helpfulness of these proposed changes and whether they represent a more effective overall application of State aid within the EU’s aviation sector.

 2        State Aid Guidelines in the Aviation Sector and Existing Challenges

 The rules concerning State aid under Article 107 TFEU are only applicable to “undertakings,” which will be the recipients qualifying for the aid within the aviation sector.[7]  This provision also sets forth the conditions concerning the aid that “shall” or “may” demonstrate compatibility with regard to the EU’s internal market and is not otherwise prohibited as an unlawful distortion of competition.[8]  Additionally, it is important to note that the concept of “undertakings” is given a broad definition by the EU courts and will extend to those entities involved in the pursuit of activities of an economic nature without regard to the entity’s legal status, financing or its ownership.[9]

In this context, the ECJ has stated in Aéroports de Paris that providing airport facilities to both providers of services as well as airlines in exchange for compensation will be considered an activity of an economic nature.[10]  The State aid provisions under Article 107 TFEU are subsequently applicable.  The proposed guidelines also cite the General Court’s judgment in Leipzig-Halle airport[11]for the principle that an airport’s operation as well as the building of its infrastructure have been found to constitute an “economic activity” for purposes of determining the applicability of State aid.[12]  However, activities of a non-economic nature within an airport such as customs or police, which are also in receipt of public funding, will not be considered as activities subject to State aid control.[13]

The new guidelines reflect a concern with the challenge of an ineffective allocation of capacity within the European Union’s aviation sector.[14]  A concern is present regarding inefficiently used or unused regional airports as well as the presence of difficulties within larger airport hubs with regard to congestion.[15]  A new market has also developed concerning airport activities of a non-aeronautical nature, which have the potential to constitute half of an airport’s revenue.[16]  Additionally, privately run companies have expanded their respective control over this revenue, which is the product of an airport’s non-aeronautical activities, raising increased concerns with regard to competition and the application of State aid within this sector.[17]

The proposed guidelines subsequently attempt to address the challenge of providing State aid within the aviation sector only with regard to situations where needed infrastructure and services fail to be supplied by the market itself.[18]  A predominant objective is to foster European competitiveness and ensure that the distribution of State aid only occurs where needed.[19]  The guidelines also address the challenge of preventing airports that are unprofitable from being duplicated, restricting the establishing of capacity which fails to be used, and the prevention of State aid being distributed to create connections, which agents of a private nature would instead be able to finance without depending upon public resources.[20]

The guidelines attempt to direct their efforts at creating a “level playing field” with regard to airlines and airports and to serve in their applicability without regard to the business model underlying the airline or airport’s financing.[21]  Finally, the objective of preventing overcapacity at airports within the EU is pursued in the new guidelines in an effort to hinder the enabling of airlines to “shop around” seeking favourable subsidies through the use of alternative facilities.[22]

3        Proposed Changes for 2014 Guidelines

 A revision of existing rules for State aid with regard to airline start-ups is at issue in the new guidelines as well as the provisioning of public financing for airports.[23]  The 1994 and 2005 applicable guidelines in the EU’s aviation sector will be replaced by the proposed 2014 guidelines.[24]  Additionally, an emphasis is placed on establishing guidelines with a progression that is more “market-oriented” in its approach.[25]

A key aspect is that if a “genuine transport need” is present, with regard to public financing being essential for providing access to a particular region, State aid may be made available for an investment in the infrastructure of an airport.[26]  However, dispersing State aid will mandate a transport demand being present and this demand will be negated by the presence of other forms of available transport, which provide for adequate access to a region.[27]

The existing guidelines fail to provide guidance with regard to the intensity of the investment aid that may be applied.[28]  An airport’s size will now determine the availability of maximum aid intensity and airports that are smaller will benefit from a greater likelihood of being able to avail themselves of the ability to receive State aid.[29]  Where an airport’s volume of passengers is in excess of five million for the year, State aid for investment will fail to be considered as meeting the requirement of being considered compatible with the EU’s single market.[30]  A key idea underlying the new guidelines is that the costs associated with operating airports and airlines should not be subsidised, but rather recovered from passengers and airlines who take advantage of the services provided by the airport.[31]

An existing prohibition with regard to airport operating aid provided under the present guidelines in effect will also be altered.[32]  Aid may now be provided to airlines for the starting up of a new air route with the stipulation that the time period in which this aid is granted be of a limited duration.[33]  A ten year period of transition will be considered compatible with the dispersing of operating aid.[34]  At this time, it has been determined that the complete removal of subsidies for airport operating costs constitutes a proposition that would be unworkable in its application.[35]  Therefore, a transitional period of ten years is provided, leading to a point where small airports serving a particular regional area will be able to receive assistance, until they reach a “steady state,” which does not necessitate the continued dispersing of subsidies.[36]

However, it is important to note that an exception to the rules concerning the granting of State aid subsidies will be provided where there is evidence of a “genuine public service need” present.[37]  A degree of State aid may be offered where the region served by the airport would be otherwise isolated without the facility’s operation.[38]  Additionally, State aid will not be available under the new guidelines where a private investor would be in acceptance of a proposed arrangement between an airline and an airport under market conditions that are normal.[39]

The proposed guidelines have also been adapted to reflect current developments and “streamlined” with regard to the conditions for start-up aid, which will subsequently be considered compatible with the EU’s single market.[40]  The State Aid Modernisation Agenda[41] is also embodied by the new guidelines.[42]  The goal of the Commission’s Agenda is reflected with regard to directing the use of State aid more effectively toward rectifying failures in the market, furthering economic expansion, and the fostering of shared European goals within the aviation sector.[43]  Additionally, the guidelines seek to inhibit the granting of aid, which has the ability to distort competition as well as aid that does not contribute to creating actual value within the Single Market.[44]

4        Helpfulness of Proposed Changes

An approach that is more “market oriented” will be helpful for increasing European competitiveness and economic efficiency if it doesn’t come at the expense of preventing aid being available when and where it may be needed with regard to airports and airlines.[45]  The continued availability of State aid if a “genuine transport need” is evident serves as a helpful aspect of the new guidelines.[46]  However, concerns arise over how a “genuine transport need” will be defined and under what specific conditions State aid will subsequently be made available.[47]

The size of an airport as a determining factor with regard to the granting of State aid is a positive aspect of the new guidelines as well as the potential beneficial aspects that smaller airports in greater need of aid can expect to obtain from this approach.[48]  The underlying idea that costs connected with the operation of airports and airlines should be recovered from those using these services is also a helpful foundational concept offered by the new guidelines.[49]  Establishing a ten year transitional period will also be beneficial with regard to the starting up of new air routes in which State aid will continue to be attainable while at the same time providing a more economically efficient model for applying State aid.[50]

However, there is a danger that this ten year transitional period will be too rigidly enforced at the expense of needed State aid being provided where it is still essential for the continued development of a new air route.  The manner for determining the conditions for establishing a “genuine public service need” could also pose a challenge and lead to a failure in aid being provided where it is needed.[51]  The incorporation of the State Aid Modernisation Agenda’s objectives as well as the continued working toward the goal of preventing aid being dispersed that has the potential to distort competition also emerges as a positive aspect of the proposed guidelines.[52] Additionally, the provision of aid being made available in the new guidelines where there is a “genuine public service need” will in all likelihood be beneficial in its application.[53]

The key danger is that State aid may not be available when and where it is needed if the proposed guidelines are ineffectually interpreted, and applied in a manner that focuses predominantly on moving toward an approach that is more market oriented and with an emphasis on increasing European competitiveness, at the exclusion of additional and equally important public service objectives with regard to airports and airlines.  The new guidelines do appear to contain appropriate safeguards such as a “genuine public service need” enabling the continued granting of State aid, but the actual effectiveness of the guidelines in practice can only be evaluated based upon their future application in practice within the EU’s aviation sector.[54]

 5        Conclusion

The Commission’s 2014 proposed guidelines for the provision of State aid to airlines and airports have the potential to increase economic efficiency, enhance European competitiveness and positively impact EU citizens by providing services that are more responsive to their needs while minimizing the unnecessary and ineffective application of State aid.  However, the actual effectiveness of the guidelines and the safeguards being provided, such as that of the presence of a transport demand, a “genuine public service need” or a ten year transitional period in which aid may continue to be provided, can only be determined based upon how these provisions are interpreted and applied with regard to their practical application in the forthcoming years when the guidelines are put into effect.

It is also interesting to note additional ongoing investigations concerning the application of State aid within the EU’s aviation sector.  One such investigation by the European Commission concerns the Niederrhein-Weeze and Altenburg-Nobitz airports in Germany, the Pau airport in France and the Västerås airport in Sweden with regard to arrangements of a financial nature between these airports and public authorities.[55]  The Commission will assess marketing and rebate arrangements between selected airlines using the aforementioned airports and the compatibility of these arrangements with EU rules on State aid in the aviation sector.[56]

Subsidies relating to an investment in infrastructure within the aviation sector may be considered compatible with the State aid aviation sector guidelines where the subsidies are “necessary, proportionate, pursue an object of general interest, ensure non-discriminatory access for all users and do not unduly affect trade in the internal market.”[57] However, here the Commission has not negated the possibility of incompatible State aid being present and the existence of uneven advantages with regard to these airports and their respective airlines.[58]

An additional State aid investigation in the EU’s aviation sector, which is being pursued by the Commission concerns the extension of a 2002 investigation relating to Ryanair’s provision of services at Charleroi airport and possible advantages of which Ryanair was the recipient.[59]  The Commission has also proceeded with new investigations concerning financing received by Angoulême and Dortmund airports as well as their respective airlines and is considering whether  unfair competitive advantages have been established, which fail to be compatible with the EU’s single marketplace.[60]

Additionally, the European Commission has pursued an investigation relating to arrangements of a financial nature between France’s La Rochelle airport and public officials.[61]  The Commission has called into question whether distributed subsidies for the financing of projects relating to infrastructure at the airport are compliant with the guidelines on State aid within the EU’s aviation sector.[62]

The Commission’s assessment will consider whether contracts for marketing support and airport charge discounts relating to new airline routes would have been entered into by a “market economy investor” and whether those benefiting from the subsidies have received an advantage of an economic nature, which is unfair and not otherwise afforded to their marketplace competitors.[63]