National subsidy and support measures in favour of companies are subject to EU state aid law. If such activities may distort competition and affect interstate trade, they are in principle prohibited. The extent to which an aid measure fulfils the conditions of an exception must in principle be determined by the European Commission, which can approve certain aid.
Unlawfully granted aid must be effectively recovered by the affected Member State from the aid recipient.
In the aviation sector, in addition to direct state subsidies to airports or airlines, cases are also relevant in which public funds are available to an airport and these benefit an airline in a special form – for example, through arrangements on discounts on airport charges.
The legal framework for such subsidies is examined in more detail below:
Legal framework – aid from airports to airlines
State aid must generally (with a few exceptions) be approved. The European Commission, as the responsible supervisory authority, has drawn up guidelines for the assessment of state aid from airports to airlines.
First, of course, it must be examined whether there is any state aid at all – an economic advantage – in favour of an airline. Only if such an advantage exists, can approval be required. The prerequisite is first that the measures granted by a public company are attributable to the state - this is the case with public airports.
Whether a company (the airline) has subsequently received an economic advantage is examined on the basis of the so-called “market economy operator principle”.
a) The market economy operator principle
The Commission considers that agreements concluded between airlines and an airport may be considered to be in conformity with the market economy operator
principle if, from an ex ante point of view, they contribute incrementally (i.e. build up gradually) to the profitability of the airport. The airport should demonstrate, when setting up an arrangement with an airline (e.g. individual contract or general airport charging scheme), that 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.
This should also consider the non-aeronautical revenues expected to be generated by the airline's activities. Similarly, any incremental costs likely to be incurred by the airport in relation to the airline’s activities at the airport should also be taken into account. For example, if the airport needs to build or expand a terminal or other facilities, in particular due to the needs of a specific airline, the corresponding costs should be taken into account in the calculation of the incremental costs.
b) Start-up aid
However, if the above test does not lead to cost recovery, and therefore state aid to an airline is present, it may still be permissible and approved as so-called “start-up aid”.
Start-up aid is state aid to airlines for launching a new route with the aim of increasing the connectivity of a region. For it to be permissible, the following conditions must be met cumulatively:
Contribution to a well-defined objective of common interest: E.g. aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment.
Need for state intervention: State aid may only be granted if it can bring about substantial improvements which the market cannot bring about itself.
Appropriateness of State aid as policy instrument: The aid measure must be an appropriate instrument to achieve the objective of common interest (business plan).
Existence of incentive effect: The aid must lead the undertakings concerned to change their behaviour and to engage in additional activities which, without the aid, they would not undertake or would undertake only to a lesser extent or in a different way or in a different location.
Proportionality of the aid amount: Limitation of the aid to the minimum necessary.
Avoidance of undue negative effects on competition and trade between Member States: The negative effects of the aid must be limited to a sufficient extent so that the overall balance of the measure is positive.
Transparency of aid: Member States, the Commission, economic operators and the interested public must have easy access to all relevant rules and to relevant information on aid granted under them.
Conclusions
If concrete evidence is found that a public airport is granting aid to airlines, this could be considered admissible as “start-up aid” for the launch of new routes. However, this requires a prior notification to and examination by the Commission.
Aid that is not approved would have to be repaid by the recipient of the aid!
Whether the criteria of state aid are fulfilled at all is determined by the standard of the “market economy operator”:
According to this, state aid would be present, for example, if a public airport were not in a position, during the term of the arrangement with the respective airline, to cover the costs from the arrangement with a reasonable profit margin on the basis of sound medium-term medium-term prospects.
This calculation would have to take into account, in addition to the airport charges (net of any discounts, marketing support or incentive schemes), the non-aeronautical revenues expected to be generated by the airline’s activities and any incremental costs.
Characteristics that speak in favour of compliance with the market economy operator standard would include risk reduction through diversification (expansion of the airport’s customer base), better allocation of resources, reduction of overcapacities and (free) advertising measures for the benefit of the airport.
However, if the bottom line were not an economically reasonable plus, state aid would have to be assumed.
Attorney aviation law & competition law
Dr. Simon Harald Baier LL.M. advises on all questions of aviation law and competition law.