Market Economy Operator Test: Timisoara Airport & Wizz Air

Public funding of activities that fall within the remit of the state does not constitute state aid.

Although the presence of a credible ex ante business plan based on realistic assumptions is a strong indicator that the MEOT is satisfied, its absence does not necessarily prove that the MEOT is failed.

Introduction

Following a complaint by Carpatair, the European Commission investigated alleged unlawful state aid granted by Timisoara Airport in Romania to Wizz Air of Hungary. Carpatair is a low-cost airline operating out of Timisoara.

Although this is a case that has been running for more than a decade and raises interesting questions on procedure, this article focuses on the analysis of the Commission on the existence of advantage. In its decision 2021/1428, the Commission concluded that the agreements between the airport manager and Wizz Air satisfied the Market Economy Operator Test and, therefore, were free of state aid.[1]

The manager of the airport is 80% owned by the Romanian state. The manager owns the airport infrastructure, except for the runway which remains in state ownership and which is made available to the manager through a concession.

Table 1 summarises the financial results of the manager for the contested period, as indicated in paragraph 35 of the Commission decision.

Table 1: The financial situation of the airport [RON, thousand]

2007 2008 2009
Revenues 23,473 30,545 41,067
Sales growth n. a. +30.1% +34.4%
EBITDA 7,318 10,646 12,212
EBITDA margin 31.2% 34.9% 29.7%
EBIT 3,249 5,809 5,655
Net Profit 2,417 4,874 3,508
Net Profit margin 10.3% 16.0% 8.5%

The alleged aid measures

The Commission investigated public funding over the period 2007-2009 for the following purposes or projects:

  • Construction of access road and car park.
  • Terminal development.
  • Improvement and extension of the runway.
  • Security infrastructure and equipment.
  • Rebates and discounts on airport charges.
  • Agreements between Wizz Air and the airport manager.

During the investigation, Wizz Air submitted to the Commission a report by Oxera, while the airport manager submitted a report by RBB Economics. The Oxera report showed, among other things, that Wizz Air paid fees that were similar or higher than those at other comparable airports. The RBB report showed that the manager made a profit from the agreements with Wizz Air. In other words, both reports claimed that the airport manager acted according to the market economy investor principle [MEIP] or the market economy operator test [MEOT]. Naturally, both reports were contested by the complainant Carpatair.

For the purposes of assessing the public funding in its decision, the Commission categorised the various advantages as follows.

Measure 1: Public funding of the airport manager

The question was whether the public funds that covered investment costs had been provided in conformity with the MEIP.

The Commission, first, considered whether those funds covered the costs of activities that fell within the remit of the state and, therefore, were not economic in nature. “(183) At an airport, activities such as air traffic control, police, customs, firefighting, activities necessary to safeguard civil aviation against acts of unlawful interference and the investments relating to the infrastructure and equipment necessary to perform these activities are generally considered to be of a non-economic nature.”

“(184) However, public financing of non-economic activities must not lead to undue discrimination between airlines and airport managers. Indeed, it is established case-law that an advantage is present when public authorities relieve undertakings of the costs inherent to their economic activities. Therefore, if, in a given legal system, it is normal that airlines or airport managers bear the costs of certain services, whereas some airlines or airport managers providing the same services on behalf of the same public authorities do not have to bear those costs, the latter may enjoy an advantage, even if those services are considered in themselves non-economic.”

Romania argued that investments in the improvement and extension of the runway, in security equipment, and in the development of the terminal fell within the public remit.

The Commission disagreed. It considered that, with the exception of security equipment, the investments were undertaken mostly for commercial purposes. With regard to security equipment, the Commission acknowledged that “(189) activities necessary to safeguard civil aviation against acts of unlawful interference and the investments relating to the infrastructure and equipment necessary to perform those activities are considered in general to be of a non-economic nature. The Commission considers the control of hold baggage, passengers, cabin luggage and the control of access of members of the public to the security area of an airport to be measures falling within the scope of safeguarding civil aviation against acts of unlawful interference.” In addition, Romania confirmed that the state funded security equipment at all airports. Therefore, there was no discrimination between Romanian airports.

Next, the only issue in doubt was whether the airport manager had obtained an advantage not available under normal market conditions [all the other criteria of Article 107(1) TFEU were easily satisfied].

In order to detect any undue advantage, the Commission applied the MEOT to the financing of the runway improvement, the terminal development, the access roads, the car park, and the lighting equipment. This test examined whether, according to the information that was available at the time, there were credible ex ante profitability prospects in proportion to the government’s shareholding of 80%. The Commission stressed that “(207) any traffic forecasts used for that purpose should be realistic and subject to a reasonable sensitivity analysis. The absence of a business plan constitutes an indication that the MEOP test may not be met.” However, “(208) in the absence of a business plan, Member States can provide analysis or internal documents from the public authorities or from the airport concerned showing clearly that an ex ante analysis demonstrates that the MEOP test is satisfied”.

The Commission examined the methodology and data in feasibility studies submitted by Romania and which purported to show positive net present values [NPV]. However, the Commission rejected the studies on the following grounds:

  • The recoupment period of 25 years was too long.
  • There were no traffic projections.
  • The rate of inflation was not explained and was too low.
  • A discount rate of 5% was not explained and appeared to be too low.
  • Investments were not considered to be costs.
  • One study was conducted after the investments took place.
  • One study only analysed costs and did not include a profitability analysis.

Nonetheless, a feasibility study concerning the access road and the parking facilities was accepted for being based on sound methodology and reasonable assumptions. “(219) Regarding the feasibility study for the modernisation and the extension of the parking on the basis of which the investments related to the access road and parking lot development was undertaken, the Commission considers the study reasonable. The study assumes a 15% increase in revenues from the expected increase in the users of the parking linked to the increase in the number of passengers. The study found a positive NPV using a discount rate of 15% over the expected lifetime of the investment of eight years. The Commission finds the discount rate of 15% reasonable and the lifetime of the investment conservatively short. The study shows that the investment will be already amortised after five years. The study was drawn up in November 2005 and is therefore suitable to indicate MEOP compliance of the investment in 2007. Furthermore, the Commission notes that at the time the financing of the modernisation and the extension of the parking was decided, the Government-owned 100% of the shares in the Airport Manager. It is therefore not necessary to proportionally adjust the NPV of the project.”

The Commission also examined ex post “reconstructed” profitability studies submitted by the airport manager. It found their results not to be credible because it could not be confirmed that their calculations were based on costs that could have been taken into account at the time of the investment.

The Commission concluded that, with the exception of the funding for the access road and car park, the rest of the public funding constituted state aid. Since it was not notified it was illegal aid. Nevertheless, it proceeded to assess its compatibility with the internal market on the basis of the 2005 aviation guidelines. It found the aid to be in conformity with the provisions of those guidelines.

Measure 2: Airport charges in 2007-2010

In the period 2007-2010, the airport manager applied a system of discounts and rebates according to the number of flights and passengers, the period of the flights, the routes and the weight of the aircraft.

The Commission paid particular importance to the question of whether there was a transfer of state resources because Romania argued that the airport manager operated independently of the state.

The Commission considered that the manager was under the control of the state, given that at that time it was wholly owned by the state. With respect to the imputability to the state of the measure involving discounts and rebates, the Commission observed, in paragraphs 277-283, that the pricing policy of the airport was determined by the board of directors. The board was supervised by the shareholders who approved its activities. The members of the board were chosen by the shareholders and appointed by the Ministry of Transport. The board also had close links with the Ministry. For these reasons, the Commission concluded that the measure in question was imputed to the state.

It then proceeded to examine whether the measure was selective. It clarified at the outset that “(286) a measure by which a public undertaking lays down the conditions for the use of its goods or services is not necessarily always a selective measure for the purposes of Article 107(1) TFEU.” In other words, a system of discounts and rebates can, in theory, be applied objectively.

Next, the Commission identified the relevant benchmark or reference framework by which to determine the existence of selectivity. “(289) The relevant reference framework for examining whether the [agreements in question] had the effect of favouring certain airlines over others which were in a comparable factual and legal situation was that of the regime applicable to Timișoara International Airport alone.” Furthermore, “(290) the system of airport charges and the discounts and rebates were applicable to all airlines using, or liable to use, Timișoara International Airport”.

Then the Commission investigated whether the system of discounts and rebates was applied in a way that favoured certain airlines over others and concluded that that was not the case. [paragraph 293] Since measure 2 was not selective, it also did not constitute state aid.

Measure 3: Agreements with Wizz Air

On the basis of the analysis of the previous measures, the Commission quickly concluded that the agreements were imputed to the state and that they were selective.

The decisive element for this measure was whether it conferred an economic advantage. The MEOT [or the market economy operator principle (MEOP)] is satisfied either when an airport charges a market price or when ex ante analysis demonstrates that the airport will make an incremental profit.

With respect to the comparison between actual charges and benchmark market rates, the Commission noted that “(311) according to the 2014 Aviation Guidelines, the identification of a benchmark requires, first, that a sufficient number of comparable airports providing comparable services under normal market conditions can be selected. In this respect the Commission notes that for the moment, a large majority of Union airports benefit from public funding to cover investment and operating costs. Publicly owned airports have traditionally been considered by public authorities as infrastructures for facilitating local development and not as undertakings operating in accordance with market rules. Those airports’ prices consequently tend not to be determined with regard to market considerations and in particular sound ex ante profitability prospects, but essentially having regard to social or regional considerations. Even if some airports are privately owned or managed without social or regional considerations, the prices charged by those airports can be strongly influenced by the prices charged by the majority of publicly subsidised airports as the latter prices are taken into account by airlines during their negotiations with the privately owned or managed airports. In those circumstances, the Commission expressed its doubts in the 2014 Aviation Guidelines that at the present time, an appropriate benchmark can be identified to establish a true market price for services provided by airports.”

For the above reasons the Commission preferred to carry out an incremental profitability analysis. In fact, the Commission rejected a report prepared for Wizz Air by Oxera, which purported to show that the fees at Timisoara were comparable to fees at three other airports. The Commission was not convinced that the airports were comparable to Timisoara or that the chosen airports were representative of airports which ran on purely commercial terms.

With respect to profitability analysis, the Commission considered “(314) that arrangements concluded between airlines and an airport can be deemed to satisfy the MEOP test when they incrementally contribute, from an ex ante standpoint, to the profitability of the airport, at least in the long term. The airport should demonstrate that, when setting up an arrangement with an airline (for example, an individual contract or an overall scheme of airport charges), it is capable of covering all costs stemming from the arrangement, over the duration of the arrangement, with a reasonable profit margin on the basis of sound medium-term prospects.” “(315) In this respect, the Commission considers that price differentiation is a standard business practice, as long as it complies with all relevant competition and sectoral legislation. Nevertheless, such differentiated pricing policies should be commercially justified to satisfy the MEOP test.”

The Commission explained the profitability of the agreements had to be considered within the time frame of the agreements themselves, without the airport manager taking into account any effects from potential renewal after they expire. [paragraphs 334-339]

The Commission held that the profitability analysis submitted by the airport manager provided a credible picture of expected revenue and a break-down of the various costs, but in the end, it rejected it for three reasons. “(355) (a) The security charge is entirely included as aeronautical revenue of the airport. This charge should have been either excluded considering it finances non-economic activities or should have been included in the aeronautical revenues with the corresponding security costs accounted for on the costs side (therefore the inclusion of security charge and costs would have not affected the profitability).

(b) The analysis does not provide any incremental operating costs calculation whereas it recognised that the Airport Manager will incur some additional operating costs (albeit small) associated with the presence of Wizz Air at Timișoara International Airport.

(c) The analysis does not provide a net present value and a discount rate.”

Then it turned its attention to a profitability report submitted by Wizz Air and which had been prepared by Oxera [reconstructed ex post on data that had been available at the time the agreements were signed]. Oxera concluded that the NPV of the agreements was positive. The Commission recalculated the data on which the report was based and it confirmed that indeed the NPV was positive. The recalculated data are shown in table 2 below.

Table 2: Oxera report: Incremental revenues, incremental costs and incremental profits

(RON ‘000s) 2008 2009 2010 2011
Number of Wizz Air departing passengers [A] 5 586,9 100 000 150 000 164 931,5
Aeronautical revenues [B] 255 4 564,7 6 824,4 7 507,3
Non-aeronautical revenues [C] 112,4 2 084,7 3 241,1 3 693,8
Total incremental revenues [D] = [B] + [C] 367,4 6 649,4 10 065,5 11 201,1
Operating costs [E] 47,4 879,1 1 366,8 1 557,7
Marketing costs [F] 29,6 2 955,7 4 410,9 4 853,6
Total incremental costs [G] = [E] + [F] 76,9 3 834,8 5 777,7 6 411,2
Incremental profits [H] = [D] – [G] 290,4 2 814,6 4 287,8 4 789,9
Discount factor 1 0,8 0,7 0,6
NPV 8 786,8

Note: The estimated profits were discounted using the Commission’s reference rate, plus a margin of 100 basis points which resulted in a discount rate of 16.9%.

The Commission concluded that a prudent market economy operator would have entered into those agreements and that they did not confer an economic advantage on Wizz Air that could not have been obtained under normal market conditions. Therefore, the agreements were free of state aid.

Conclusions

The Commission decided that the public funding for the development of the terminal, the improvement and extension of the runway and the lighting equipment constituted compatible state aid.

The public funding for the construction of the access road and the car park and the security equipment did not constitute state aid.

The airport charges and the agreements with Wizz Air were also free of state aid.


[1] The full text of the Commission decision is published in OJ L 308, 1 September 2021. It can be accessed at:

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2021.308.01.0001.01.ENG&toc=OJ%3AL%3A2021%3A308%3ATOC


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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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