The Selectivity and Profitability of Agreements between Airports and Airlines

The Selectivity and Profitability of Agreements between Airports and Airlines - State Aid Uncovered SM posts 27

Introduction

Selectivity is a tricky issue. Even a measure that appears not to favour or exclude any undertaking may in practice prove to be selective if its effects favour certain undertakings over others that are in a comparable situation. In order to determine whether they are comparable it necessary to examine the objective of the measure.

This is what the General Court ruled on 8 February 2023 in case T522/20, Carpatair v European Commission. Carpatair, a budget airline based in Romania, sought the annulment of Commission decision 2021/1428 on State aid granted by Romania to Timișoara International Airport and Wizz Air, a Hungarian budget airline.

In its decision, the Commission found the following:

  • Public financing for improvement of the airport was compatible State aid.
  • Public financing of an access road, a parking area and security equipment did not constitute State aid.
  • Airport charges and discounts and rebates were not selective. Therefore, they were not State aid.
  • An agreement between the airport and Wizz Aid was incrementally profitable. Therefore, it also did not constitute State aid.

After examining the various arguments on the legal standing of the applicants, the Court concluded that the action was admissible and proceeded to consider the substance of the pleas put forth by Carpatair.

Were the discounts and rebates selective?

Carptair argued that the discounts and rebates to landing charges were, contrary to the Commission’s decision, selective.

First, the General Court recalled that “(126) only measures which confer an advantage selectively on certain undertakings or categories of undertakings or on certain economic sectors fall within the concept of ‘aid’.”

“(127) Nevertheless, the case-law has made it clear that even interventions which, prima facie, apply to undertakings in general may be to a certain extent selective and, accordingly, be regarded as measures designed to favour certain undertakings or the production of certain goods”.

“(128) De facto selectivity can be established in cases where, although the formal criteria for the application of the measure are formulated in general and objective terms, the structure of the measure is such that its effects significantly favour a particular group of undertakings”.

Perhaps it should be noted at this point that even measures which are considered to be genuinely general do not affect undertakings equally. The case law has never specified the meaning of “significantly favour”. The structure of the measure must be such as to exclude or favour ex ante certain undertakings.

The Court went on to infer from the case law that “(129) the assessment of the condition relating to the selectivity of the advantage requires a determination as to whether, under a particular legal regime, a national measure is such as to favour ‘certain undertakings or the production of certain goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation. The concept of ‘State aid’ does not refer to State measures which differentiate between undertakings and which are, therefore, prima facie selective where that differentiation arises from the nature or the overall structure of the system of which they form part”.

“(130) It is also settled case-law that Article 107(1) TFEU does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects”.

Then, the Court made this important statement. “(131) Accordingly, whilst it cannot be ruled out that a measure by which a public undertaking lays down the conditions for the use of its goods or services is selective despite applying to all the undertakings using those goods or services, it is necessary, in order to determine whether that is the case, to have regard not to the nature of that measure but to its effects, by examining whether the advantage which it is supposed to procure in fact benefits only some of those undertakings as opposed to others, although, in the light of the objective pursued by the regime concerned, all of the undertakings are in a comparable factual and legal situation”.

“(132) The determination of the set of undertakings which are in a comparable factual and legal situation depends on the prior definition of the legal regime in the light of whose objective it must, as the case may be, be examined whether the factual and legal situation of the undertakings favoured by the measure in question is comparable with that of those which are not”.

The Court applied the above principles to the measures in question which were summarised as follows:

First, rebates of 10% to 70% depending on the number of landings performed in the previous year with respect to international flights;

Second, a discount of 50% for a period of 12 months for new air carriers performing at least three flights per week with an aircraft having a capacity of at least 70 seats.

Third, discounts of 72% to 85% for aircraft above 70 tonnes with more than 10,000 embarked passengers per month.

The Court rejected Commission arguments that the rebates and discounts were general on the following grounds. “(140) The nature of the […] measure, which took the form of the application of a ‘general’ regime, based on criteria that were, in themselves, also of a general nature, does not preclude a finding that that measure is selective. The condition relating to selectivity has a broader scope, extending to measures which, by their effects, favour certain undertakings on account of the specific features characteristic of those undertakings. Similarly, it is apparent from the case-law that the fact that the aid is not aimed at one or more specific recipients defined in advance, but is subject to a series of objective criteria pursuant to which it may be granted to an indefinite number of beneficiaries who are not initially individually identified, cannot suffice to call into question the selective nature of the measure and, accordingly, its classification as State aid within the meaning of Article 107(1) TFEU. Such a fact does not preclude that public intervention from having to be regarded as constituting a selective measure if, owing to the criteria governing its application, it procures an advantage for certain undertakings, to the exclusion of others […] Thus, the general nature of the AIP did not, as such, preclude any de facto discrimination between the airlines using the airport.”

“(143) The Commission did not take a position on the question whether, […], airlines other than Wizz Air had in their fleet aircraft of the relevant sizes and sufficient frequencies which actually enabled them to benefit from it.”

“(145) In practice, the type of reduction […] benefited Wizz Air alone, and that no other airline, including Tarom, reached the minimum number of embarked passengers per month”.

A comment is in order at this point. The purpose of rebates and discounts is to attract new airlines. The fact that airlines currently operating in Timisoara or neighbouring airports could not benefit from the measure in question seems to support rather than weaken the case for incentives to attract airlines other than the ones that were already in the region.

Admittedly, the levels and ranges of the rebates and discounts varied significantly. This is suspicious. But the Commission has acknowledged in other cases that an airport operator may vary its charges depending on the revenue it can generate from each airline. In this respect, the economic rationality of the rebates and discounts [i.e. whether they maximised the revenue of the airport operator] was hardly discussed in the case. The Court rejected as irrelevant the claim of Wizz Air and the airport operator that the revenue of the latter increased.

Was the agreement between the airport and Wizz Air profitable for the airport?

The agreement between Wizz Air and the airport operator consisted of a memorandum of understanding, a marketing agreement, an operation agreement, and a ground handling agreement.

The operator committed to extend the passenger terminal, to upgrade the runway and to make slots available to Wizz Air. Wizz Air agreed to conduct marketing activities for the airport. In addition, the agreement set the airport charges to be paid by Wizz Air, as well as discounts and exemptions from those charges.

As mentioned earlier, the Commission found the agreement and its various parts to be incrementally profitable. It is important to note that the Commission examined the ex ante profitability analysis which was reconstructed ex post on the basis of the data available before the conclusion of the agreement. Two reports were submitted to the Commission for this purpose: one by Romania and another by Wizz Air that was prepared Oxera. The Commission rejected the Romanian report but accepted most of the Oxera report.

“(169) Thus, the Commission concluded, on the basis of the 2015 Oxera report as recalculated by it, and supported by the ex post studies by Oxera and RBB, that the third measure was expected to be incrementally profitable for AITTV. […] Consequently, the Commission found that a prudent private operator in a market economy would have entered into such arrangements.”

The General Court, first, recalled that “(171) in order to examine whether or not the Member State or the public body concerned has adopted the conduct of a prudent private operator in a market economy, it is necessary to place oneself in the context of the period during which the measures at issue were taken in order to assess the economic rationality of the conduct of the Member State or of the public body, and thus to refrain from any assessment based on a later situation”.

“(173) Therefore, in particular for the purposes of applying the private operator test, the only relevant evidence is the information which was available, and the developments which were foreseeable, at the time when the decision to conduct the operation in question was taken”.

“(176) Where the public undertaking provides the Commission with evidence of the required nature, the Commission must, however, conduct an overall assessment, taking into account, in addition to the information provided by that undertaking, all other relevant evidence enabling it to determine whether the measure in question is compliant with the private operator test. The public undertaking concerned thus has the opportunity in the administrative procedure to produce additional evidence which is generated after the adoption of the measure but is based on the information which was available and the developments which were foreseeable at the time of adoption”.

“(177) The inability to make detailed, full projections cannot relieve a public investor of its task of carrying out an appropriate prior evaluation of the profitability of its investment, comparable to that which a private operator would have had carried out in a similar situation, having regard to the available and foreseeable information”.

On the basis of the above reasoning, the Court held that “(181) contrary to what is required in accordance with the case-law […], it is in no way apparent from the contested decision that AITTV’s decision to conclude the 2008 agreements with Wizz Air was based on prior economic evaluations which a private operator in a similar situation would have carried out, having regard to the available and foreseeable information.”

The “(183) ‘business plan’ had not been prepared in 2008, but had been reconstructed ex post during the administrative procedure, on the basis of information which would have been available to AITTV in 2008.”

“(184) It follows that the Commission did not have in its possession any written document prepared prior to the conclusion of the 2008 agreements when it analysed whether AITTV had acted like a private operator in a similar situation, having regard to the available and foreseeable information.”

“(188) Contrary to what the Commission asserts, the view cannot be taken, merely because that report is based on the information which was available and the developments which were foreseeable at the time when the third measure was adopted in 2008, that it amounts to an ex ante analysis capable of demonstrating compliance with the private operator in a market economy test.”

The Court stressed that the airport operator which is a public undertaking is under “(191) obligation to carry out an appropriate prior economic evaluation, based on an analysis of the available information and foreseeable developments which is appropriate having regard to the nature, complexity, size and context of the operation”.

“(192) However, in the present case, the 2015 Oxera report, although based on data available before the conclusion of the 2008 agreements, is nonetheless a retrospective finding that those agreements were actually profitable. For that reason, […], it is irrelevant for the purpose of assessing compliance with the private operator in a market economy test.”

Consequently, the General Court annulled the relevant parts of Commission decision 2021/1428.

Lingering questions

The judgment recalled extensive case law both on the concept of selectivity and the market economy operator principle. In this sense the judgment is instructive. However, its treatment of the purpose of the rebates and discounts was cursory. The question whether an operator can target specific clients has been left unanswered. An operator may want to attract a new class of customers. This is a typical if not legitimate business practice. Would rebates and discounts that target specific clients selective if implemented by a publicly-owned operator?

With respect to the application of the market economy operator principle, the General Court seems to argue against itself. At several points in the judgment it stressed that the concept of State aid concerns effects, not aims or intentions. Why then did it reject the retrospective proof that according to information that was available at the time the agreement with Wizz Air was signed, Wizz Aid did not obtain any undue advantage? It is true that if there is no credible ex ante business plan, any transaction between a public entity and an undertaking is suspect. But by pure lack it may not contain State aid. Even though not expressed in terms of luck, the Court of Justice has ruled in multiple cases that what matters is whether an advantage is conferred, by design or accident, and that the Commission must examine the presence of advantage using only contemporaneous information. The General Court in fact has ruled out the use of ex post assessment. If no ex ante plan exists, no ex post assessment is acceptable in its eyes.


The full text of the judgment can be accessed at:

https://curia.europa.eu/juris/document/document.jsf?text=&docid=270306&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=490040

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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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