UK: Developments In State Aid In European Aviation

The publication of the European Commission’s "Guidelines on the financing of airports and start-up aids to airlines departing from regional airports" provides a good opportunity to review the basic principles of state aid and examine several recent Commission rulings on state aid in the aviation sector.

Assistance provided by a public body to an undertaking is deemed to be state aid under EC Law if that assistance satisfies each the following four criteria, namely that it:

1. is granted by the state or through state resources;
2. favours certain undertakings or production of certain goods;
3. distorts or threatens to distort competition; and
4. affects trade between Member States.

Aid which satisfies each of the four criteria is incompatible with the common market and therefore generally prohibited.

However, the assistance may be exempt from the prohibition on state aid if it constitutes a normal commercial transaction which would be acceptable to a market economy investor (the ‘private investor’ principle).

Even if the private investor principle does not apply, there are a number of other potential exemptions. These include aid for companies in disadvantaged regions and aid for development of certain economic activities. Aid for restructuring undertakings falls within the latter exemption. The Commission’s 1994 "Guidelines on the Application of Articles 92 and 93 of the EC Treaty and Article 61 of the EEA agreement to State aids in the aviation sector" set out the conditions which will usually need to be met in order for the Commission to grant aid in the aviation sector. The principal conditions are that aid should only be granted:

• to restore an airline to health and to allow it to operate normally, without aid, within a reasonable period;
• on a "one time, last time" basis. Aid should only be granted to an airline which has previously received aid "under exceptional circumstances which are unforeseeable and external to the company"; and
• where such a grant is transparent and controlled.

Over the years, there have been a number of cases where these principles have been applied. Two notable cases have involved Olympia and Alitalia. In September 2005, the Commission ruled that Greece had provided illegal state aid to Olympic Airways in direct contravention of the "one time, last time" principle since 2002, and that Greece had failed to recover illegal state aid previously granted. As a result, Olympic Airways may now be ordered to repay as much as €540 million.

Equally, Alitalia, the Italian flagbearer, has consistently been saved from grave financial difficulty through the provision of state aid. Alitalia has accumulated net losses of €2.4 billion in the last six years. In 1997, Alitalia received state aid (which was approved) of nearly €3 billion. When, in October 2004, Italy made Alitalia a loan of €400 million for the restructure of the airline, other European airlines demanded that the Commission conduct an investigation on the basis that this loan was illegal state aid. In June 2005, the Commission cleared Alitalia of receiving illegal state funding stating that the private investor principle applied. There is, however, some scepticism as to whether a genuine private investor would have been willing to invest in Alitalia.

There has also been much controversy over the receipt of state aid by the low cost airline, Ryanair. In February 2004, the Commission ruled that subsidies provided to Ryanair by Brussels South Charleroi Airport, as an incentive to fly from Charleroi, breached the state aid prohibition. Ryanair was ordered to pay back €4.5 million of the €10.3 million subsidies granted to them. Ryanair contended that the assistance provided fell within the private investor principle and that any other airline could have taken advantage of the benefits allowed to Ryanair because the deal between the airport and the airline was non-exclusive. Ryanair is in the process of appealing against the decision.

However, despite Ryanair’s dissatisfaction with the Commission’s decision, it has nonetheless provided the impetus for the publication of a new set of guidelines, this time regarding the circumstances within which aid for the development of new routes can be provided. The "Community Guidelines on Financing of Airports and Start-up Aid to Airlines departing from regional Airports", published in September 2005, do not replace the 1994 Guidelines but supplement them.

There has, in recent years, been significant growth in the use of smaller airports, frequently by low cost airlines seeking to avoid the cost of the major national airports. The use of such airports has advantages in helping to avoid congestion at the larger airports, to increase mobility and to develop regional economies. However, these smaller airports face difficulties in establishing themselves as commercial airports: initially, they will often not have the passenger volumes necessary to break even. The Commission appreciates, therefore, that state aid may, in certain circumstances, be necessary on a temporary basis to create an incentive for airlines to fly to these smaller airports.

The new Guidelines clarify the circumstances in which aid may be granted. First, more transparency is required in the process by which aid is granted. Under the new Guidelines, any public body planning to grant state aid must make its plans public within good time and with enough publicity to allow other airlines to take up the offer of such aid.

The key test for granting aid is the private investor principle, but where aid does not fall within this test a conditional grant of aid may be made. Conditions to be attached to grant of aid include that the aid should be granted only:

• to routes linking regional airports to another EU airport (aid for routes between national airports will only be granted in exceptional circumstances);
• to routes which will ultimately prove profitable (in order to evidence this a business plan should be presented by the airline to the Commission); and
• for a maximum of three years (in disadvantaged areas for a maximum of five years) and in any event aid should be discontinued once the objectives of the airline have been achieved. The new Guidelines are required to be implemented by Member States by June 2007 at the latest.

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