A Complex Measure of Investment and Operating Aid to an Airport and Airlines (Part II)

A Complex Measure of Investment and Operating Aid to an Airport and Airlines (Part II) - Untitled design 9

Introduction

In July 2008, the Commission received complaints alleging that France granted State aid to the operator of La Rochelle airport and certain airlines. Almost four years later, in February 2012, the Commission decided to open the formal investigation procedure. It eventually adopted a decision in July 2022 [Commission decision 2023/1683] which found compatible State aid for the airport, incompatible on State aid for some of the airlines and no State aid for certain activities linked to tasks performed by public authorities.1

La Rochelle airport was classified as a small regional airport [category D]. The airport was owned by the local Chamber of Commerce and Industry which was also the operator. At the time the complaints were lodged with Commission, the airport had scheduled flights only to about ten destinations. The main airlines that operated at the airport were Ryanair, easyJet, and Flybe.

Because this decision is both very long [about 120 pages] and very rich [it examines several different measures], this article is divided into two parts. Part I reviews the assessment of the measures in favour of the airport operator. Part II reviews the assessment of the measures in favour of airlines.

Part II: Measures in favour of airlines

Use of state resources

Ryanair argued that the CCI was not a public authority. The Commission disagreed. “(410) Contrary to what Ryanair and the CCI maintain in their comments, it is irrelevant in this respect that chambers of commerce and industry are administered by persons elected by traders and business leaders with no position being reserved for a representative of the State. Chambers of commerce and industry are, in this respect, like local and regional authorities, which are managed by local elected officials independent of the State (in the strict sense), and not by civil servants appointed by other public authorities. Moreover, national parliaments are also composed of elected representatives. However, parliaments form one of the essential public authorities in a democratic State.”

“(411) In addition, the degree of influence or control exercised by the State (in the strict sense) over the activities of chambers of commerce and industry is also entirely irrelevant as these bodies are themselves public authorities. The situation of chambers of commerce and industry differs from that of public undertakings, in respect of which the Court clarified the criteria for imputability to the State in the Stardust Marine judgment. In the case of a measure taken by a public undertaking that has the primary vocation of carrying out an economic activity, it must be determined whether the public authorities controlling that undertaking, for example due to the capital share that they hold in said undertaking, are involved in the adoption of the measure in question. The situation of a chamber of commerce and industry is different in that such a body is itself part of the public administration, or an ‘intermediate State authority’, and therefore a public authority created by law to satisfy general interests. As a result, in order to determine whether a decision of a chamber of commerce and industry is imputable to the State (as broadly defined by the case-law on State aid), it is not necessary

to determine whether another public authority (for example, the State in the strict sense or a local authority) has been involved in the decision in question. In reality, such a decision necessarily meets the imputability criterion.”

Advantage

In determining whether airlines had received an advantage in the meaning of Article 107(1) TFEU, the Commission analysed together airport services agreements and marketing services agreements. The former were agreements on the services provided by the airports to airlines. The latter were agreements on the promotion of airports by airlines.

In response to the argument of Ryanair that the two sets of agreements had to be analysed separately, the Commission stated that it was “(431) appropriate to consider whether, as Ryanair states, the marketing services agreements have an interest that is distinct from that of the airport services agreements. To answer this question, the following questions must be addressed:

1. Should Ryanair and its subsidiary AMS be considered individually or jointly for the purposes of determining the existence of an economic advantage?

2. What was the task performed by the CCI when purchasing the marketing services?

3. Is there an indissociable link between the airport services agreements and the marketing services agreements?”

With respect to whether Ryanair and its subsidiary AMS could be considered individually or jointly, the Commission concluded that they had to be considered jointly because AMS was a wholly-owned subsidiary of Ryanair, the sole activity of AMS was to provide marketing services on Ryanair’s website and the marketing agreement was linked to Ryanair’s flights at La Rochelle. [paragraphs 433-437]

With respect the task that was performed by the CCI when it purchased the marketing services, the Commission considered whether it acted as a public authority or private operator. The Commission rejected French arguments that CCI was acting as a public authority seeking to promote the regional economy. This was because there was no tender to choose the most efficient advertiser at a market price [paragraph 441] and because there was no indicator of good performance or regional impact of advertising [paragraph 444]. Therefore, the Commission decided in favour of the latter option also because it was not unusual for airport operators to conclude such agreements with airlines.

In this case, in order to determine the existence of an advantage, it was necessary to compare “(447) the conduct of the CCI with that of a hypothetical market economy operator, motivated by the prospect of profits and operating La Rochelle airport in place of the CCI.”

With respect to whether there was an indissociable link between airport services agreements and marketing services agreements, the Commission concluded that that was the case because the two sets of agreements were concluded at about the same time, no tender procedure was organised by the CCI to choose the cheapest or best advertiser and the marketing performed by AMS took place only on Ryanair’s website. [paragraphs 450-464]

Comparative or incremental profitability analysis?

Once the Commission determined that the two sets of agreements had to be considered together, the next step was to choose one of two methods – the comparative or incremental analysis – to find out whether the agreements were profitable for the airport operator. The Commission, as is its practice – opted for incremental analysis.

It rejected a comparative analysis on the grounds that it was largely impossible to identify other small airports that were identical or very similar to La Rochelle. “(487) It should be noted in this regard that, in general, the application of the MEO test based on an average price observed in other similar markets (comparative analysis) may prove helpful where a market price can be reasonably identified or deduced from other market indicators. However, this method cannot be as relevant in the case of airport services. The costs and revenues structure tends to differ significantly from one airport to another. These costs and revenues depend on the airport’s state of development, the attractiveness of its catchment area, the number of airlines operating from/to the airport, available capacity in terms of passenger traffic, the state of the infrastructure and the regulatory framework, which may vary from one Member State to another, as well as the historical debts and obligations of the airport.”

“(488) Moreover, the liberalisation of the air transport market complicates any purely comparative analysis. As the present case amply demonstrates, commercial arrangements between airports and airlines are not necessarily based on a list of public prices for individual services. These commercial relationships vary widely. They include the sharing of risks in terms of traffic and any related commercial and financial liability, the generalised use of incentive mechanisms (for example, in the form of discounts connected with the number of routes or passengers carried), and variations in the spread of risk over the term of the agreements. As a result, it is difficult to compare transactions based on a price per rotation or per passenger.”

For the assessment of the profitability of the agreements, the Commission reiterated that the analysis “(497) should not take into account the general impact of such services on the region’s tourism and economic activity. Only the effects of these services on the airport’s profitability may be considered, as it is these alone that would be taken into account by the hypothetical MEO used in this analysis.”

Then, the Commission examined the potential benefits from the marketing services agreements and found they had little positive impact on the business of the airport.

“(498) Although the impact of the marketing services has not been proven, it is not inconceivable that they may slightly boost passenger traffic on the air routes covered by the marketing services agreements and corresponding airport services agreements, given that they are designed to promote those routes. However, Ryanair has indicated that the presence of a marketing services agreement had only a very slight impact on the load factor of its aircraft, as the yield management actions (adjusting prices to demand) were adjusted to achieve the load factor targets. The impact of the marketing services agreements on the increase in passenger numbers has thus not been confirmed by Ryanair. It therefore appears

that the main impact of the marketing services agreements is to encourage Ryanair to operate flights to La Rochelle airport.”

“(499) It should be determined whether a hypothetical MEO operating La Rochelle airport in place of the CCI could reasonably expect and quantify benefits other than those resulting from the positive effect on the opening, maintaining and passenger traffic of the routes covered by the marketing services agreement for the operating period of those routes, as set out in the marketing services agreement or airport services agreement.”

“(500) Ryanair supported this hypothesis in its study of 17 January 2014. This study is based on the theory that marketing services purchased by an airport operator, such as the CCI, may help to improve the airport’s brand and, as a result, permanently increase the number of passengers using this airport, and not just the numbers on the routes covered by the marketing services agreement and airport services agreement over the operating period of these routes, as set out in these agreements. In particular, Ryanair found in its study that these marketing services may have a lasting positive impact on passenger traffic at the airport, even after the marketing services agreement has expired.”

“(501) It should first be noted that there is nothing in this case to suggest that, when the marketing services agreements covered by the formal investigation procedure were signed, the CCI ever considered, and still less quantified, any positive effects of the marketing services agreements going beyond the routes covered by these agreements or, in terms of time, going beyond the expected operating period of the routes in question.”

“(503) Furthermore, the lasting nature of these effects also seems very doubtful. It is possible that advertising La Rochelle and its region on the Ryanair website may have encouraged people visiting this website to buy Ryanair tickets to La Rochelle when this advertising was first posted or just after. However, it is unlikely that the effect of this advertising on visitors lasted or had an influence on their ticket purchases for more than a few weeks after it was posted on the Ryanair website.”

Furthermore, the “(507) marketing activities provided for in the agreements concluded with Ryanair/AMS related only to the pages of Ryanair’s website covering the destination of La Rochelle. As a general rule, this last type of promotional activity is targeted only at an audience that is by definition limited, without frequent exposure to the advertising.”

It appeared that “(509) although the marketing services may have increased passenger traffic on the routes covered by the marketing services agreements for the period of those services, it is very likely that this effect after this period or on other routes was zero or negligible.”

The conclusion was that “(524) it is clear from the above that the only benefit that a prudent MEO would expect from a marketing services agreement and would quantify when deciding on whether or not to enter into such an agreement, together with an airport services agreement, would be of two kinds: (i) on the one hand, the prospect of airlines operating flights at La Rochelle airport in accordance with the airport services agreements which the airlines were motivated to conclude as a result of the marketing services agreements, and (ii) on the other, a potential marginal positive effect of the marketing services on the number of

passengers using the routes covered by the agreements in question (slight stimulation of traffic on the routes covered by the marketing services agreements and the corresponding airport services agreements). Any other benefits would be deemed too uncertain to be regarded as quantified, and there is nothing to suggest that they were taken into account by the CCI.”

That conclusion led the Commission to frame its profitability analysis as follows:

“(530) It is clear from all the above that, in order to apply the MEO test to the measures in question, the Commission must analyse each marketing services agreement together with the corresponding airport services agreement [[…]] and must assess whether a hypothetical MEO, motivated by the prospect of profits and operating La Rochelle airport in place of the CCI, would have signed these agreements. To this end, it is necessary to determine the incremental profitability of the agreements as it would have been assessed by the MEO at the time they were signed, by estimating, for the entire period of application of the agreements:

  • the future incremental traffic expected from the implementation of these agreements, possibly taking into account the effects of the marketing services on the load factors of the routes covered by the agreements;
  • the future incremental revenues expected from the implementation of these agreements, including revenue from airport charges and groundhandling services, generated by the routes covered by these agreements, as well as non-aeronautical revenue from the additional traffic generated by the implementation of these agreements;
  • the future incremental costs expected from the implementation of these agreements, including operating costs and any incremental investment costs generated by the routes covered by these agreements, as well as the costs of the marketing services.”

“(531) These calculations should provide the future annual flows corresponding to the difference between incremental revenues and costs, to be discounted, if necessary, by a rate reflecting the cost of capital for the airport operator. A positive net present value (NPV) indicates in principle that the agreements in question do not confer an economic advantage, whereas a negative net present value reveals the presence of such an advantage.”

“(532) It should be noted that, in this assessment, the arguments of the CCI and Ryanair that the price of the marketing services purchased by the CCI is equivalent to or less than what may be regarded as a ‘market price’ for such services are irrelevant. Indeed, a hypothetical MEO motivated by the prospect of profits would not be prepared to purchase such services, even at a price lower than or equal to the ‘market price’, if it foresaw that, despite the positive impact of those services on the routes concerned, the incremental costs incurred by the agreements exceeded the incremental revenues in discounted value terms. In such a case, it would not be willing to pay the ‘market price’ and it would therefore logically decide to do without the services in question.”

The profitability analysis

No profitability analysis had been carried out at the moment the agreements were signed, so France and the Commission had to reconstruct ex post the business plan of the airport according to the following model. [paragraph 534]

Revenue

Number of aircraft rotations per year: a

Number of aircraft seats: b

Number of seats offered: c = a*b*2

Average load factor: d

Total number of passengers [in-bound + out-bound]: e = c*d

Landing charge: f = a*unit charge

Aircraft parking charge: g = 0

Lighting charge: h = 0

Charge for disabled & reduced mobility persons: i = e*unit charge

Passenger charge: j = e*unit charge

Ground handling services: k = 0

Total aeronautical revenue: l = f+g+h+i+j+k

Non-aeronautical revenue: m= e*unit incremental margin

Total revenue: n = l+m

Costs

Incremental costs: o = e*unit incremental costs

Marketing costs: p = as per agreement

Total costs: q = o+p

Annual incremental cash flow [net revenue]: r = n–q

Net present value: Σ(r/(1+t)v

Where, v = time

t = discount rate

In a footnote, the Commission decision reveals that France proposed a discount rate of 6%. The Commission noted that since the annual incremental cash flows were all negative, the NPV was negative regardless of the discount rate.

The Commission’s reconstruction of the airport’s business plan showed that the agreements were loss-making and therefore conferred an advantage to Ryanair and other airlines, which constituted State aid.

Compatibility with the internal market

As explained in Part I, the aid that was granted to the airport was found to be compatible with the 2014 aviation guidelines. By contrast, most of the aid that was granted to airlines through the various agreements was operating aid that was incompatible with the internal market for not complying with the requirements of the aviation guidelines. Consequently, the Commission ordered France to recover the incompatible aid.

In addition, the Commission concluded that several other airlines, such as easyJet and Flybe, did not receive State aid.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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