A Market Operator, unlike a Public Authority, Does not Have to Treat all Customers Equally

In managing infrastructure, a public authority acts as a private operator when it seeks a reasonable return on its investment and also takes into account the alternative of not operating the infrastructure. The manager of an infrastructural project may charge different fees to different users to optimise usage and increase revenue.

 

Introduction

This article reviews Commission decision 2015/506 concerning Flughafen Berlin-Schönefeld.[1] It is a rich decision dealing with a complex infrastructural project. It examines whether the manager of the airports in Berlin acted as a market operator by shifting revenue between airports and by offering discounts and special treatment to certain airlines. The Commission found that this behaviour was similar to that of a market operator and, therefore, no airline derived any abnormal advantage. The Commission explained at length the legal principles underlying that finding.

Background

Between 2003 and 2006, the Commission received complaints that certain airlines and the manager of Berlin Schönefeld airport received illegal State aid. After the reunification of Germany in 1990, Berlin had three airports: the West Berlin but basically inner-city airports of Berlin Tegel and Berlin Tempelhof and the East Berlin airport of Schönefeld.

Tempelhof had a short runway and could only be used by small aircrafts. It could not be modernised and expanded because it was located on a listed historical site and was surrounded by residential areas. Tempelhof ceased operations in October 2008.

Tegel was the main airport of the then West Berlin and was congested and operating at full capacity. Expansion was not possible because it was surrounded by residential areas. Any increase in traffic at Tegel would increase noise pollution for residents.

With the reunification of Germany, the three airports were brought together under a single holding company, now called Flughafen Berlin Brandenburg [FBB], which is owned by the Länder of Berlin and Brandenburg and the Federal Government.

In early 1990s it was also decided that Schönefeld was to be developed to become the main Berlin airport with the name Berlin-Brandenburg Willy Brandt [BER]. In addition to Tempelfhof, Tegel would be closed too.

Following the complaints and after an initial exchange with the German authorities, the Commission opened the formal investigation procedure with respect to the following measures:

  1. The transfer of profit from Tegel to Schönefeld which was making losses.
  2. Lower airport charges at Schönefeld, which were intended to induce airlines, especially low cost ones, to transfer their operations from Tegel which was congested to Schönefeld.
  3. An agreement with EasyJet concerning exclusive use of a terminal.

Existence of State aid

Because Germany argued that the airport manager acted as a market operator guided by profitability, the Commission had to examine whether a prudent operator would have taken the same decisions.

It began by summarising the principle of the market economy operator test. “The comparison between the conduct of a public company […] and a hypothetical prudent market economy operator must be made by reference to the attitude which the market economy operator in question would have had at the time of the conclusion of the transaction in question, having regard to the available information and foreseeable developments at that time, and regardless of subsequent events.” [Paragraphs 136-138]

“Thus the concept of foreseeable profitability for the public company concerned is of central importance. This does not necessarily mean that for a transaction to be free of State aid, the operator must enter into it only for the purposes of short-term profitability. However, the Court has also ruled that the conduct of a public investor may be compared with that of a private investor guided by prospects of profitability in the longer term.” [Paragraphs 136-138]

“In the present case, the Commission has first of all assessed whether in the medium to long-term the LCC [low-cost carrier] Strategy […] appeared potentially capable of generating positive results, as well as whether it would have been rational, from a profitability perspective, to close down Schönefeld.” [Paragraphs 136-138]

In its analysis of the behaviour of the airport manager the Commission took into account the following constraints:

  • Tegel was operating at full capacity and could not be significantly expanded.
  • An earlier attempt to shift traffic from Tegel to Schönefeld in the 1990s had failed.

And the following possibilities:

  • Schönefeld was largely under-utilised and could be expanded.
  • With sufficient upgrading, Schönefeld could replace all Berlin airports.

In view of the above, the Commission considered that the available options that a market operator would have considered were:

Option 1: Pursuing the LCC strategy.

Option 2: Maintaining Schönefeld as it was.

Option 3: Closing down Schönefeld until the new Berlin airport would open.

After examining the expected revenues and costs of each option, the Commission concluded that “(173) […] from a prudent market economy operator perspective, it would not have been rational to close Schönefeld down […]. Furthermore, […], a prudent market economy operator guided by profitability prospects would have chosen option 1, namely the LCC Strategy, rather than options 2 or 3. As part of this strategy, it would have offered attractive airport charges (and/or financial incentives mitigating the costs of airport charges) to LCCs in order to attract them to Schönefeld.” The Commission then went on to assess the measures that were the subject of the formal investigation.

Profit transfer agreement

In the opening decision, the Commission doubted that the airport manager had acted like a prudent market economy operator when it offset the losses generated by Schönefeld with profits from operations at Tegel.

In this connection the Commission recalled that with respect to market economy operator test, “(177) a wide margin of judgement must come into entrepreneurial investment decisions. The principles [of the market economy operator test] have however to be applied when it is beyond reasonable doubt that there is no other plausible explanation for the provision of public funds other than considering them as State aid. This approach will also have to be applied to any cross-subsidisation by a profitable part of a public group of undertakings of an unprofitable part. This happens in private undertakings when either the undertaking in question has a strategic plan with good hopes of long-term gain, or that the cross-subsidy has a net benefit to the group as a whole. In cases where there is cross-subsidisation in public holding companies the Commission will take account of similar strategic goals.” [This was stressed in the Commission Communication to the Member States on the Application of Articles 92 and 93 of the ECC Treaty and of Article 5 of Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings (OJ C 307, 13/11/1993, p. 3), recital 29.]


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The Commission found that “(179) […] it was rational to maintain Schönefeld in operation instead of closing it down even if it generated losses for many years. Indeed, Schönefeld’s closure would have caused serious economic harm to BER airport (which as the future single Berlin airport was expected to generate profits at least in the long term, and even put the viability of this major strategic project into question. Indeed, the decision to build a sole airport in Berlin was not only driven by land planning or environmental considerations, but also with the view to absorbing potential increase in traffic and increasing revenues. As recognised by the 2009 Commission decision approving the aid to the financing of the BER airport, the success of the project relied on the expected traffic growth in Berlin in a single airport. In order to maintain Schönefeld in operation, possibly with a view to transforming Schönefeld into a profitable airport (first by inviting airlines to relocate at Schönefeld and later by implementing the LCC strategy), it was necessary to ensure its economic viability by using part of the profits generated by Tegel and Tempelhof to finance it. Therefore, the cross-subsidisation occurring in this case is part of ‘a strategic plan with good hopes of long-term gain’, and in any event, it is beneficial to the FBS group as a whole in the long run compared to a counterfactual situation where Schönefeld would be closed down. These long-term benefits – the successful opening and profitable operation of a new single airport for the Berlin agglomeration (plus the expected profits from the operations of Schönefeld after some years of implementing the LCC strategy) – could be expected to exceed the losses accumulated by Schönefeld before the opening of BER.”

Lower airport charges

Before assessing the agreements with a number of airlines, the Commission considered it useful to explain pertinent principles that emanated from the landmark Charleroi judgment [T-196/04, Ryanair v Commission]. The Commission thought that that was necessary because some of the complainants argued that those agreements conferred an economic advantage to the airlines involved because of lower charges than the general airport charges at Schönefeld or because the same conditions were not offered equally to all airlines.

According to the Commission, “(183) the crucial question raised by these arguments is the following. If there is a system of published charges at a given airport run by a public company and if the airport manager offers discounts to these charges or financial incentives having the same effect as such discounts, do such discounts and incentives confer by themselves and in all circumstances an economic advantage on the airlines concerned?”

“(184) The answer to this question is no. Indeed, in the Charleroi judgment which concerned in particular a discount offered by the Walloon region to an airline at an airport for which the region was responsible for setting airport charges, the General Court stated: ‘The mere fact that, in the present case, the Walloon Region has regulatory powers in relation to fixing airport charges does not mean that a scheme reducing those charges ought not to be examined by reference to the private investor principle, since such a scheme could have been put in place by a private operator.’ It follows from this statement that discounts to airport charges (or financial incentives which reduce the net financial flows from the airlines to the airport manager) do not automatically confer an economic advantage. In order to determine whether they do so, it is necessary to assess whether a prudent market economy operator guided by profitability prospects would have accepted to grant similar discounts and incentives to the particular carrier concerned.”

It is important to note at this point that the answer in paragraph 184 does not really correspond to the question posed by the Commission in paragraph 183. The General Court in the Charleroi judgment was only concerned whether the airport of Charleroi and the Walloon region engaged in an economic activity. Since it concluded that setting airport charges and offering discounts to those charges were economic in nature, it censured the Commission for not having examined whether the discounts could have been actually offered by a private operator. The Court was silent on whether the discounts had to be open to all airlines or could be offered selectively only to some airlines.

The Commission, however, proceeded to argue that “(185) for a prudent market economy operator running an airport, there can be many reasons for not offering the same conditions to all airlines. In particular, it can be rational to offer specific financial incentives (including in the form of marketing grants) and specific discounts to the published airport charges to airlines that bring a high number of passengers to the airport. These favourable conditions can be objectively justified by the expected additional traffic, in view of the non-aeronautical revenues brought about by that additional traffic and also because, even if the margin per passenger generated by the airport charges paid by the airline is reduced by the discounts and financial incentives, this margin may be significant in absolute terms in light of the numbers of passengers at stake.”

“(186) Numerous factors can be taken into account by a prudent market economy operator running an airport to determine the conditions offered to airlines, not only the expected additional traffic but also the moment in which the agreement with the airline is negotiated (and the situation of the airport in that period, in particular in terms of capacity utilisation), the routes on which the airline considers operating, the airline’s operational requirements at the airport, the types of services required from the airport and their characteristics, the pressure exerted by airlines during negotiations etc.”

“(187) For a prudent market economy operator running an airport, it can thus be justified to offer different conditions to different airlines in terms of airport charges and financial incentives, whether through bilateral agreements or through discount and financial incentive schemes embedded in the acts setting the charges. For the purposes of assessing whether such discounts and financial incentives confer an economic advantage, it must be determined whether, when the airport manager took the decision to offer them, it could reasonably expect this decision to be profitable, or in other words, to lead to a higher profit (or lower losses) than would be achieved in the counterfactual situation.”

“(188) Furthermore, contrary to what certain third parties have suggested, when it comes to conditions offered by airport managers to airlines through bilateral agreements (for instance specific grants for the opening of new routes) and not resulting from general discount or financial incentive schemes embedded in a published schedule of charges, a prudent market economy operator has no reason to ensure that such conditions are based on a set of general and transparent criteria applicable to all carriers. When negotiating a bilateral arrangement with an airline, a prudent market economy operator is expected to take into account all the relevant features of the airline’s proposed services rather than a set of pre-determined transparent criteria which may constrain its margin of negotiation. Therefore, the comments made by certain third parties as regards the alleged lack of transparency of the discount and financial incentives offered by FBS in this case are irrelevant in the context of the application of the market economy operator principle.”

The above paragraphs are very important policy statements. Two comments are in order here. First, from an economic point of view it is correct that an airport operator could in theory charge a different fee to every single airline because the fee that maximises revenue for the airport ultimately depends on the demand of that airline and that demand can vary from airline to airline.

However, in principle the airport manager would charge the same fee to all airlines that have similar demand and generate the same revenue for the airport. This means that the Commission should have examined whether the airlines that were subject to differential treatment were indeed different or whether they were very similar. In fact the Commission only examined whether the Berlin airport manager could increase its revenue from charging lower fees, but did not examine whether other, non-qualifying, airlines could have brought the same benefits to the airport. [Please see below paragraph 197]

Second and rather ironically, the Commission here seems to be saying that an airport, such as that of Berlin, which has a dominant market position can be justified to price discriminate. Normally, this would constitute abuse of dominance under Article 102 TFEU. The Commission reiterated part of the Charleroi judgement about the irrelevance of national law but abuse of dominance is an infringement of EU law. “(190) Besides, the question of whether [the airport manager] had the right, under national law, to enter into bilateral agreements that would set conditions deviating from the applicable schedule of charges is equally irrelevant. As stated by the General Court in the Charleroi judgment: ‘[…] whether the conduct of an authority granting aid complies with national law is not a factor which should be taken into account in order to decide whether that authority acted in accordance with the private investor principle or granted an economic advantage in contravention of Article 87(1) EC.’”

The Commission then explained the precise formula it used to determine the existence of advantage for airlines. “(197) In order to assess whether any of the agreements at issue confers an economic advantage, it is necessary to analyse whether, at the date when the agreement was concluded, a prudent market economy operator would have expected this agreement to lead to a higher profit than would have been achieved otherwise. This higher profit is to be measured by the difference between the incremental revenues expected to be generated by the contract (that is, the difference between the revenues that would be achieved if the contract were concluded and the revenues that would be achieved absent the contract) and the incremental costs expected to be incurred as a result of the contract (that is, the difference between the costs that would be incurred if the contract were concluded and the costs that would be incurred absent the contract), the resulting cash flows being discounted with an appropriate discount rate.”

“(198) Furthermore, in this analysis, all the relevant incremental revenues and costs associated with the transaction must be taken into account. The various elements (discounts to airport charges, marketing grants, other financial incentives) must not be assessed separately. Indeed, as stated in the Charleroi judgment: ‘It is (…) necessary, when applying the private investor test, to envisage the commercial transaction as a whole in order to determine whether the public entity and the entity which is controlled by it, taken together, have acted as rational operators in a market economy. The Commission must, when assessing the measures at issue, examine all the relevant features of the measures and their context […].’”

“(199) The expected incremental revenues must include in particular the revenues from airport charges, taking into account the discounts as well as the traffic expected to be generated by the agreement and the non-aeronautical revenues expected to be generated by the additional traffic. The expected incremental costs must include in particular all the incremental operating and investment costs that would not be incurred absent the agreement as well as the costs of the marketing grants and other financial incentives.”

The Commission applied these formulas to obtain the net present value [NPV] of the agreements and used the cost of capital of the airport as the rate of discount. The results indicated that the discounts led to positive NPV which was consistent with the behaviour of a private operator.

Lastly, with respect to the agreement with EasyJet concerning exclusive use of a terminal, the Commission stated that the exclusivity itself was a normal commercial practice, given the size of operations of EasyJet. Moreover, the Commission examined the rental charges that applied to EasyJet and found that they were similar to those that applied to other users of airport buildings.

On the basis of the above findings, the overall conclusion of the Commission was that none of the measures it investigated contained State aid.

Concluding comments

This is a complex case and the decision is long and detailed. The principles expounded in this decision are important and can offer valuable guidance to public authorities. It is clear that a market operator can discriminate between users, clients or customers by charging different prices or fees as long as it can be shown that the lower prices or fees increase net revenue.

Nonetheless, a question remains as to whether a market operator would have to extend the same treatment to all similar users, clients or customers. The Commission did not consider this issue. In my view it should have taken it into account because this was in essence the gist of the complaints and, more importantly, because a private operator would not forgo potential profit by not offering similar discounts to anyone who could bring it more revenue.

———————————————————————————————

[1] The full text of the decision is published in OJ L89, 1/4/2015. It can be accessed at:

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2015.089.01.0001.01.ENG.

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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 presently holds positions at the College of Europe and the University of Maastricht. 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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