PAVIA e ANSALDO S t u d i o L e g a l e

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1 Avenue Des Arts Bruxelles-Belgium- Tel Fax / info.bruxelles@pavia-ansaldo.be Brussels, 7 June 2011 European Commission Dg Comp F2 Unit B-1049 Brussels Reference: HT-2635 Revision of Aviation Guidelines Via Stateaidgreffe@ec.europa.eu OBSERVATIONS TO THE PUBLIC CONSULTATION REVIEW OF THE COMMUNITY GUIDELINES ON FINANCING AIRPORTS AND START- UP AID TO AIRLINES DEPARTING FROM REGIONAL AIRPORTS SUBMITTED BY PAVIA E ANSALDO STUDIO LEGALE, BRUXELLES Dear Sirs, We welcome the opportunity to contribute to the debate over the European Commission s Public Consultation on the Review of the Community Guidelines on financing airports and start-up aid to airlines departing from regional airports. Please find herein below the comments of the Antitrust and EU law Departments of Pavia e Ansaldo Studio Legale; for this purpose, reference is made to the order and questions used in the text of the Consultation. As you will see, we have dealt with a selected number of questions and key issues addressed in the Consultation paper. In particular, we have considered the Aviation market s development of the recent years; the question of the Market definition for airports and airlines and the profiles related to Public Service Obligations in air transport. We acknowledge that air transport is fundamental for European mobility, prosperity and political cohesion. It plays a vital role in facilitating European economic and social growth, providing revenues to otherwise isolated regions. This sector also plays a crucial role in the integration of an enlarged Europe, supplying essential links between Europe s regions and between the EU and third countries. Via del Lauro, 7 - I Milan. Tel Fax info.milano@pavia-ansaldo.it Via Bocca di Leone, 78 - I Rome. Tél Fax /7. info.roma@pavia-ansaldo.it Nikolskaya Street, 10 - RU Moscow. Tel Fax info.moscow@pavia-ansaldo.com Kropotkina Street, 1 - RU St. Petersburg. Tel Fax info.saintpetersburg@pavia-ansaldo.com

2 B.1.: ASSESSMENT OF THE MARKET DEVELOPMENTS AND THE NECESSITY TO MODIFY THE 1994 AND 2005 AVIATION GUIDELINES B.1.1. What are, in your view, the main developments, in particular with regard to a) economic and social matters; b) environmental and climate change issues c) regulatory changes, such as passenger rights, security standards, airport charges, transport competition with other models of transport, tourism, tax policies, successive EU enlargements in 2004 and 2007 and the extension of the Schengen zone; and d) competition and State aid issues that have recently taken place in the aviation sector and what are their impacts on the sector? Where available, please provide data or studies showing such evolutions. Where protected by copyright or contractual restrictions, please provide the references for the study. The European aviation sector has undergone multiple changes in recent years. The context created by the liberalisation and deregulation has given new opportunities to develop new routes and carriers, and has contributed to the growth of air transport in the EU. The main and most evident economic development is the strong growth of the lowcost carriers phenomenon. The business model based on low-cost routes to secondary airports and the maximum use of available places through a tight marketing campaign has proofed effective and revolutionary, so that low-cost carriers have reinforced their position and now represent more than 30 % of the total intra EU-traffic 1. To date, the phenomenon is in a phase of consolidation, characterized by a stable number of players with major carrier leaders who operate high-volume traffic and small carriers specialized in particular segments. Market share projections show that the low-cost market segment is expected to continue growing substantially faster than other airlines in the next years, reaching from 45 to 53 per cent of market share in The low-cost airlines market is clearly dominated by two airlines, Ryanair and EasyJet, each of which is four or more times the size of the other competitors. This low-cost phenomenon has deeply influenced the aviation sector as a whole, especially the competition between airlines and airports. Traditional air carriers, which have lost certain privileges with the liberalisation and had to deal with much more efficient competitors, have responded in different ways. One response has been the diversification of their structure: for example, some carriers have re-introduced a point to point system for certain routes, or have 1 See the recent study by KPMG Evoluzione del traffico low cost a livello europeo e nazionale, 18 May 2011, available at According to a Study by ELFAA, low-cost carriers market share in the European market amounts to 38%: see ELFAA, Market share of low fares airlines in Europe, Final Report, February 2011, available at 2 ELFAA, Market share of low fares airlines in Europe, Final Report, op. cit., pp

3 reduced significantly their offer; they have introduced promotions and price differentiations; they have cut the costs of catering and have started using the internet for the sale of tickets. Personnel and wages have been subject to cut as well. Furthermore, traditional airlines have responded by finding alliances on the market: indeed, a significant consolidation between airlines has taken place in the last years, both on a national and EU level 3. European traffic has not yet reached the levels of concentration in the U.S. market: such a difference would indicate a tendency to further strengthen the process of consolidation between European carriers in the future 4. Also the competition between airports has changed in light of the recent developments. Indeed, low-cost carriers are able to flexibly deploy their aircrafts and crews at the most profitable locations; and airports tend to expand their business in order to attract new traffic in their area. Low cost business involves an increased managerial complexity for the airports, which need to have a higher ability to manage negotiations with multiple carriers in order to find commercial agreements; they need to optimize operational processes and staff; they should be able to develop commercial revenues in the different business areas and to find a balance between operational effectiveness and cost containment. As studies have shown, airports that cannot handle this complexity can incur in significant economic losses 5. Airports have diversified their structure in order to respond to the new market challenges: in many medium and large scale airports in Europe, terminals dedicated to special categories of flights are becoming more and more common. In particular, terminals dedicated exclusively to low-cost carriers have been built, characterized by lower quality services and a less costly infrastructure, according to low cost carriers' pricing policies and the lower needs of passengers who benefit from such flights 6. As for State aid developments, in the last few years the European jurisdictions have had various occasions to decide upon the validity of Commission s decision on State aid to air transport. In the Ryanair case 7, the General Court has annulled Commission decision n. 2004/93/EC, as the private market investor test had not been applied in respect to airport fees. 3 Since 2005, several mergers between airlines have been notified to the Commission: see M.3770 Lufthansa/Swiss; M.3940 Lufthansa/Eurowings; M.4439 Ryanair/Aer Lingus; M.5141 KLM/Martinair; M.5181 Delta Airlines/Northwest Airlines; M.5335 Lufthansa/SN Airholding (Brussels airlines); M5364 Iberia/Vueling/Clickair; M.5403 Lufthansa/BMI; M.5435 Ryanair/Aer Lingus II; M.5440 Lufthansa/Austrian airlines; M.5747 Iberia / British Airways; M.5830 Olympic/Aegan Airlines; M.5889 United Airlines /Continental Airlines. 4 See the Report of the International Center for Competitiveness Studies in the Aviation Industry (ICCSAI), ICCSAI Factbook 2008, p. 23, available at the website 5 KPMG, Evoluzione del traffico low cost a livello europeo e nazionale, op. cit. 6 For further insights, see our contribution: A. Franchi, L. Picciano, La Direttiva 2009/12/CE sui diritti aeroportuali: verso l armonizzazione delle politiche di finanziamento dell industria aeroportuale europea, in Contratto e Impresa/Europa, n. 1, 2010, p Case T-196/04 Ryanair v Commission [2008] ECR II

4 Indeed, airport fees are not considered as a tax but rather a compensation for a range of services that the region offers to airline companies in the Charleroi site, and therefore they can be object of an economic evaluation. The General Court has found that these services can be implemented by a private company, since taxes are actually payments for services, not an exercise of public power: it is therefore necessary to apply, in such cases, the private investor test. In the recent Leipzig-Halle decision 8, the General Court has confirmed the Commission s evaluation according to which the construction of airport infrastructure is subject to State aid scrutiny. Indeed, it does not fall under the public policy prerogatives of a public authority, but it is part of the economic activity of operating an airport, for which remuneration will be provided (through landing fees). From a social point of view, the developments of the sector changes have also influenced employment, wages and working conditions. It is plausible, indeed, that the increase in employment in the aviation sector in the past ten years is strongly related to the increase in air traffic in the EU. The increased competition (and lower fares) on the short haul market has stimulated a productivity increase of airlines operating in this market and now a larger part of airline staff is working at point-to-point carriers 9. Also from an environmental point of view, during the last years relevant changes for the aviation sector have occurred. At the global level, the International Civil Aviation Organization (ICAO) has adopted in 2010 a resolution requesting States to develop policy actions to accelerate the development, deployment and use of sustainable aviation fuels. At the European level, the European Commission s 2011 White Paper on transport has set a target of 40% of use of low-carbon fuels in aviation by Moreover, the Renewable Energies Directive 10 requires the share of energy from renewable sources in all forms of transport in 2020 to be at least 10% of the final consumption of energy in the sector. In 2012 the EU Emissions Trading Scheme (EU ETS) 11 will start applying to air transport as well. In the next few years, as a consequence, the aviation industry will have to strongly augment its capacity to invest in greener technologies and the use of bio-fuels. Therefore, it is possible that, in order to contribute 8 Joined cases T-443/08 and T-455/08, Freistaat Sachsen and Other v Commission, Judgment of the General Court (Eighth Chamber) of 24 March 2011, nyr. 9 See the European Commission s study: Effects of EU liberalisation on Air Transport Employment and Working Conditions, available at: t_employment_and_working_conditions.pdf. 10 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L 140 of 5 June 2009, Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community, OJ L 8 of 13 January 2009,

5 significantly to the EU ETS by fostering the sustainability of European air transport, some support to the industry s efforts to reduce its environmental impact (e.g. subsidies to the greener air companies) could take place in the next years. B.1.7.: In case you consider that the 2005 Aviation Guidelines should be revised, do you think that a substantial revision is necessary or, alternatively, that only minor points should be amended, leaving the structure and the main substantive points unchanged? We believe that a revision of the current Aviation Guidelines 12 is necessary in light of the developments of the sector, but that a substantial revision is not required. The current structure should be left unaltered and only minor points of the text should be amended. Indeed, the current Guidelines have a clear and comprehensive structure, dealing both with airports and airlines. As regards airports, they clearly distinguish the financing of airport infrastructure, which can be considered compatible with the internal market at certain conditions; from the financing of the ground handling services, which are subject to stricter compatibility conditions; and from the operating aid to airports, which are in principle incompatible unless they constitute compensation for a Service of general economic interest. B.1.8.: Do you consider that sectoral State aid rules for the aviation sector are still necessary? What characteristics are making the aviation sector unique from the perspective of State aid control? What sectoral rules do you consider necessary in view of these characteristics? If so, please clarify which horizontal State aid rules are in your view not sufficient or appropriate for the sector. Please be as specific as possible in your reply, including also the expected economic, social and environmental impact of the sectoral rules and of a potential application of the horizontal rules. We believe that, from a State aid point of view, sector specific compatibility rules for the air transport are still necessary. Indeed, aviation is a sector that, despite the liberalization, remains a very sensitive one. The sector is characterized by several phenomena known as market failures : externalities, natural monopolies, information asymmetries. Indeed, it is generally admitted that, in presence of market failures, such as externalities, a certain degree of public intervention is justified by the need to correct them 13. Positive externalities occur when an economic agent generates additional 12 Communication from the Commission Community Guidelines on financing of airports and start-up aid to airlines departing from regional airports, OJ C 312 of 9 December 2005, See Géradin, Quel Contrôle pour les Aides d'etat? in Les Aides d'etat en Droit Communautaire et National, Bruxelles, 1999, pp

6 benefits to a third party outside the market for which no appropriate compensation is paid. Typically, aviation presents those kinds of externalities: it helps businesses to transport their goods quickly and reasonably cheaply; furthermore, aviation has undeniable external benefits in terms of development of the interested area and of the tourist-related activities. On the other hand, aviation presents also relevant negative externalities, namely in terms of pollution. The airport infrastructure is traditionally considered as an "essential facility". Airport consists of assets and infrastructure equipment for air operations (runways, landing ramps, parking areas, etc...); infrastructures which are essential to the operations of passenger and aircraft handling (loading bridges, fuel storage and distribution systems, BHS, etc...); additional spaces dedicated to commercial activities. Overall, the airport infrastructure presents elements that could be configured as a natural monopoly. Very high investment costs and the presence of significant economies of scale contribute to this qualification. It is on this basis that, for instance, in Italy airport infrastructure is typically assigned to a single subject, through an exclusive right of concession ( concessione in esclusiva ). Airport infrastructure assets are in fact unavailable to the operator, airport surface is considered to be unavailable government property ( demanio indisponibile ); and every process of privatization does not involve the ownership of assets, but rather the acquisition of shares in operating companies. For all these peculiarities, we believe that it is important to have a vertical, sectorspecific instrument for air transport. Aviation would not fit well in the existing horizontal Guidelines on State aid compatibility, which are generally designed and do not take into account the specificities of the sector. Under the current horizontal Guidelines, for example, structural aid to the airport infrastructure would not be covered, unless it falls under the more restrictive scope of application of the regional Guidelines 14 or the rescue and restructuring Guidelines 15. B.3. DEFINITION OF RELEVANT MARKETS FOR AIRPORTS AND AIRLINES B.3.1.: Do you consider that the categories of airports and passenger thresholds referred to in Section of the 2005 Aviation Guidelines are appropriate in view of the evolution of the sector? Otherwise, what changes would you consider appropriate to this categorisation? In your view is it sufficient to take into account for the categorisation of airports only passenger numbers? Which other indicators (for example tonnes of air cargo, number of aircraft 14 Guidelines on national regional aid for , OJ C 54 of 4 March 2006, Communication from the Commission Community Guidelines on State aid for rescuing and restructuring firms in difficulty, OJ C 244 of 1 October 2004,

7 movements or other indicators) should replace or also be taken into account in order to address sufficiently the impact of the different business models on the competition and trade between Member States? Please be as detailed as possible, providing data and narrative explanations. Under the current Guidelines, airports are classified taking exclusively into account the annual number of passengers. Accordingly, the Commission has defined four different airport categories: - category A ( large Community airports ), with more than 10 million passengers a year, - category B ( national airports ), with an annual passenger volume of between 5 and 10 million, - category C ( large regional airports ), with an annual passenger volume of between 1 and 5 million, - category D ( small regional airports ), with an annual passenger volume of less than 1 million passengers per year. In general, under the Guidelines, airports in categories C and D enjoy various advantages in respect to State aid compatibility. The existing classification has the advantage of being clear and simple; however, it does not reflect the real market structure of the sector and should be revised. Indeed, these thresholds based on passenger traffic volumes have been set theoretically; and the way in which airports are classified does not allow any definite conclusions to be drawn as to the extent of the competition existing between them. Passenger figures are an important indicator of competition, but they certainly cannot be seen as the sole criterion. Additional criteria should be taken into consideration as well. Accordingly, we believe that it is of primary importance to consider the catchment area concerned by an airport, which should be identified with the relevant geographic market. In this way, the status of regional airport (category C or D) should be limited to the airport facilities which do not belong to the same catchment area of other structures. When the catchment area of two or more airports overlaps, State aid to one of these airports could distort competition and should therefore not be automatically be deemed compatible with the internal market. In those cases, it cannot be excluded a priori that a public intervention could divert air traffic from the already existing structures. We propose, as a possible solution, that the revised Guidelines could introduce a distinction between regional airports those with a reduced passenger traffic volume and not insisting in the catchment area of other airports - and secondary airports - the ones with a small passenger volume, belonging to a geographic area already affected by another airport. State aid for truly regional airports could be declared compatible; whereas in case of secondary airports it - 7 -

8 seems necessary to make a deeper analysis concerning the effects of the aid on competition and on intra-eu trade, before declaring aid compatibility. The proposed solution, we believe, would be in line with the Commission s policy to introduce a more refined economic approach when assessing State aid compatibility with the internal market, and to allow State aid only when they do not hinder significantly the functioning of the Single Market. B.3.2.: Are you of the opinion that the Commission should examine aid granted to all airports irrespectively of its size or do you consider that a Block exemption for small airports would be appropriate? If you are of the opinion that a Block exemption 16 rule is appropriate, for which size of the airports should it be established? Or, do you consider that other criteria than size should be taken into account? If so, what are in your opinion these criteria? Please provide justification of your opinion and possible criteria for a Block exemption. Please be as specific as possible, providing data and narrative explanations. In principle, we believe that the Commission should examine aid granted to all airports, irrespective of their size. However, we acknowledge that a Block exemption could significantly contribute to simplification for market operators and could help reducing the Commission s workload. Should a Block exemption be introduced, we consider that it is necessary to avoid that only small airports as such are dispensed from notification. As we have indicated in Question B.3.1., a modest airport size does not automatically imply that competition is not distorted: rather, State aid to small airports can distort competition when the airports involved are located in the same catchment area of other competitors. A preferable solution would then be to introduce a Block exemption for regional airports based on a specific threshold of passengers traffic volume to be established according to an economic approach. The aid should be given for a limited period or number of times and it should be finalized to support development policies, such as the start-up of a new airport, or the modernization of existing infrastructure, thus avoiding any cumulative operating aid. B.3.3. How do you consider should the relevant geographic and product markets be defined for airports and airlines? In particular, under which condition do you consider that a connection to 16 Such Block exemption could, for instance, provide for exemption from notification of State aids to certain categories of airports and set up conditions under which such aids can be considered compatible with the internal market. Alternatively, it could exempt from notification certain types or amounts of State aid, independently of the category of airports

9 one airport is part of the same geographic and product market as a connection to another airport located in vicinity respectively to a high-speed train linking the same urban areas? You are invited to answer to these questions for passenger and for freight transport. The aviation market is a very complex one. There is not a single market for aviation, but rather different market segments as regards airports, airlines, passenger transport and cargo. Airports can range in size from the major international hubs to small airports serving local, isolated communities. Airlines, at the same time, can range in size from the international flag carriers to small commuter services, and from low-cost carriers to cargo operators. Major hubs generally compete among themselves and in certain occasions also with smaller airports located in the same catchment area. Minor and isolated airports, situated in remote locations, face little competition from the nearest airport, and the greatest competition comes from alternative means of transports, like ferry services or other available forms of land transport. On the contrary, in other areas, regional airports compete with each other in order to attract low cost airlines services and gain new market. That is why a market definition can only be made on a case-by-case analysis, having regard to the catchment area of the airport or the airlines concerned. The definition of the relevant geographic and product market should focus on the concept of substitutability, in line with the antitrust law approach. In the aviation sector, the market definition should be made on the basis of a route-by-route analysis, that is by identifying the relevant market among the pairs of cities point of origin / destination point " (O&D) of a single route, including all airports in the respective replaceable points of origin and destination 17. To establish whether an O&D pair forms a relevant market, it is necessary to assess if, following a small but significant and non-transitory increase of price on a route, passengers would switch on another one. In this respect, it is necessary to consider the different possibilities offered to consumers to travel between these two points. Since many cities are connected to two or more airports, not only direct flights between the two airports concerned should be considered, but also alternative airports to the extent that they are regarded sufficiently substitutable to these direct flights. It is therefore necessary to determine which bundle of routes between different airports belonging to two cities are substitutable and which are not (that is to say, which airports can be considered to belong to the same catchment area from the consumers' point of view). The definition of the relevant market is always and necessarily an ad hoc, case by case analysis, that cannot be merely the result of the application by analogy of past decisions, but 17 This is a well-established approach, adopted by the Commission in the field of mergers. See for instance the Commission decisions in cases COMP/M.4439 Ryanair / Aer Lingus; COMP/M.5440 Lufthansa/ Austrian Airlines; COMP/M Lufthansa/SN Airholding; COMP/M Iberia/Vueling/Clickair; COMP/M.5747 Iberia/British Airways

10 requires a renewed testing, market by market, time to time, of the elements and checks outlined above. Various criteria could help to assess substitutability: travel times and frequencies, distances, types of land transport, costs of travel, the proximity of the airport to the point of destination and the existing connections to the city center or to the nearby city. In this respect, alternative means of transports connecting the same points of origin and destination should also be taken into account: the alternative services offered play a role in the level of substitutability of flights. For instance, the presence of a high-speed train connecting the same cities can be included in the relevant market, provided that the rail serves the envisaged route with a difference in travel time of less than three hours and with sufficient frequencies, connections and suitable timings. In those cases, we believe, the different modes of transports are substitutable from the passenger s point of view. For example, as regards the Italian situation, the presence of a high-speed railway connection between Milan and Rome can be seen as belonging to the same relevant market of the corresponding air route. Cargo traffic deserves a separate mention. In Europe, 84 % of freight traffic is concentrated in the major airports in Northern Europe: Amsterdam, Brussels, Frankfurt, London, Paris and Luxembourg. The countries of Central and South Europe share the remaining 16 % of the market 18. The geographical distribution of freight traffic with respect to airlines reflects the same distribution of airports market shares: the first five airlines (Lufthansa, Air France, Cargolux, British Airways, KLM) belong to Central and Northern European countries, and account for about 80 % of the total market share. In the European air cargo market, however, important changes are happening, mainly dictated by the need of airlines to reduce their costs and by the emerging of a degree of competition between airports for this market segment. In recent years, in fact, the traditional European hub and spoke model dominant in the cargo transport market - is giving way to a different system, based on direct links between regional airports. The reasons for this change are especially related to two phenomena linked together: first, a very rapid growth in the demand and the inability of the supply to keep step, including - but not limited to - the resistance from local residents to the enlargement of the existing hub airports. Secondly, the increased congestion at major airports, in consideration of the high use of airport infrastructure during the day, and the growing opposition to the use of night flights. Hence the growing importance of regional airports, where major international couriers have started to install. In general, among the main users of second-level airports there are European airlines with a particular vocation in the cargo; airlines related to 18 See the Study by Uniontrasporti, Scenari e prospettive del cargo aereo e ruolo degli aeroporti regionali in Italia, available at:

11 postal companies and courier express; international freight operators, logistics companies, real estate developers 19. As regards the market definition, for freight transport it is based on different parameters, given the structural difference with the passenger segment. Here, the demand is represented by airlines only, which can decide where to locate their logistic base according to different parameters: the reduced congestion of an airport both "air side" and "land side"; a faster turn-around time; shorter bureaucratic times (for example for customs and sanitary controls); inferior airport fees; lower costs of storage of goods in the surrounding areas; greater spaces and inferior costs for stocks. C.2. SERVICES OF GENERAL ECONOMIC INTEREST Section of the 2005 Aviation Guidelines sets out the possibility for certain economic activities carried out by airports to be considered by the public authority as constituting services of general economic interest. It also describes the conditions under which compensation for public service obligations imposed on an airport operator does not amount to State aid. The 1994 Aviation Guidelines provide rules for the assessment of the compatibility of compensation for Public Service Obligations imposed on airlines. The possibility for airport's activities to be considered as constituting services of general economic interest is specified further in the Commission Decision of 28 November 2005 on the application of Article 86 (2) of the EC Treaty (now Article 106 (2) TFEU) to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (hereinafter the 2005 decision on SGEIs ) 20. It applies to airports whose average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned does not exceed 1 million passengers and complying with the conditions set up in the decision, and to airports whose turnover is below 100 million EUR and which receive less than 30 million EUR compensation per year. 19 There are many examples of major airports that have experienced reductions in recent years traffic and have been abandoned by airline companies moving into more efficient and small realities. For example, Brussels airport has suffered from severe limitations imposed by the Belgian Government against the use of night flights, and this has influenced DHL s decision to shift its logistic base to Leipzig-Halle airport. A similar situation has arisen in the case of Zurich airport, which in recent years has reported negative results. Also in Germany, international couriers have preferred to place their headquarters in less congested airports. 20 OJ L 312 of 29 November 2005,

12 On the other hand, the transport sector as a whole is excluded from the scope of application of the Community Framework for State aid in the form of public service compensation (hereinafter The 2005 framework on SGEIs ) 21. C.2.1.: Are public service obligations for airports / air carriers already legally defined in your country? What is their form (law or contract)? Please indicate the relevant legal provisions. If so, how are these public services obligations entrusted on the airports / air carriers? If not, why is the decision not used in the aviation sector? On what basis is the compensation for discharging these PSO determined? Please be as detailed as possible, providing data and narrative explanations. Regulation n. 2408/92 (now repealed and replaced by Regulation n. 1008/2008 of 24 September 2008 establishing common rules for the operation of air services in the Community) has opened European Union s carriers licensed by one of the Member States of the European Union. While this market opening has undoubtful advantages, on the other hand it has threatened the unprofitable routes, to the detriment of local populations and territories. Indeed, without airport infrastructure these regions would be neglected. In remote regions, airports and air transport fulfils an essential social function, often connecting communities to key services, such as hospitals and higher education. Air carriers, however, (traditional, low-cost and charters) hardly set up at regional airports without incentives for the opening of new routes at less developed airports. According to Art. 16 of Regulation 1008/2008, it is therefore possible for the Member States to ensure transport services in geographically disadvantaged regions, by granting financial compensation in favor of the air companies who agree to provide that transport service, at the conditions identified by the States themselves. These services should serve in particular underserved airports located in remote areas, or be related to routes with a low traffic density to a regional airport, if this essential to the economic and social development of the region. The possibility to introduce Public Service Obligations for airlines has been used in Italy, due to the peculiar configuration of the territory and the presence of remote regions. In our country, there are currently various operating routes under Public Service Obligations. PSOs are conferred to airlines rather than airports, but the financial compensation they receive has an indirect benefit on the interested airports and regions as well. In Italy, Public Service Obligations are entailed following the procedure laid down in Regulation 1008/2008. First, if the other forms of transport are unable to ensure uninterrupted service with at least two daily frequencies, the State identifies the services for which Public 21 OJ C 297 of 29 November 2005,

13 Service Obligations may be imposed. This happens through an Ordinary Law ( Legge ordinaria ), which indicates the Regions concerned and delegates to the Ministry of Transports in accordance with the President of the interested Regions - the definition of the air routes concerned by the PSO. Subsequently, the Ministry convenes and presides over a Conference ( Conferenza di servizi ) with the Presidents of the Regions and the local administrations concerned. The Conferenza di servizi has the task of specifying the contents of the PSO, no cost to the State budget, stating: - the types and levels of the fares; - the persons who are entitled to have special discounts; - the number of flights to be granted each day and each week; - flight times; - types of aircraft; - the requirements concerning the airlines ability to offer the service. All this requirements are then included in a Ministerial decree ( Decreto del Ministero delle Infrastrutture e dei Trasporti ), which declares the Public Service Obligation and indicates the maximum tariff for passengers and the minimum number of scheduled flights to be granted, both on a daily and a weekly basis. When these conditions are established, the process of assigning routes can develop through two phases. In the first phase, one or more carriers may accept to operate the service under the conditions imposed in the Ministerial decree. If no carrier accepts the obligation, there is a second phase which entails a call for tenders for the award of the route on an exclusive basis, for a maximum period of four - five years and with the provision of a financial compensation for the undertaking. Such compensation is quantified in relation to the expected deficit of the line, as stipulated in the tender, and cannot exceed the total costs incurred for the exercise of the service charged with PSO plus a reasonable margin of profit. It is therefore in the tender proceedings that the precise amount of compensation for each route is established, even if in most cases the Ordinary Law sets the maximum amount of compensation for all the PSOs routes of a certain region. In Italy, PSO are generally assigned in the second phase. The tender procedure starts with the publication of the notice in the Official Journal of the European Union. The entity responsible for the tender proceedings, from the opening of envelops and the examination of the requirements of the participating airlines requirements is ENAC (Ente Nazionale Aviazione Civile) On the ENAC website ( _territoriale-oneri_di_servizio_pubblico/index.html), it is possible to find all the relevant information about the pending tendering procedures; the text of the call for tenders is only available on demand of the interested parties

14 There are currently various routes in Italy whose operators are entitled with a Public Service Obligation. Regarding Sicily and Sardinia, Law n. 144 of 17 May 1999 (Art. 36) 23 assigned to the Ministry of Transport competence to issue a Decree with the imposition of Public Service Obligations on scheduled air services between the airports of Sicily and Sardinia and the main national airports. The Law also indicates the maximum amount of compensation awardable, in case that no other company accepts the conditions imposed by the Decree and it is necessary to tender the PSO routes. Accordingly, with Ministerial Decree n of 5 August , the Ministry of Transports has imposed PSOs on the following routes in Sardinia: Alghero - Rome Fiumicino, Alghero - Milan Linate, Cagliari Rome Fiumicino, Cagliari Milan Linate, Olbia Rome Fiumicino, Olbia Milan Linate; and viceversa. As of March 2011, these Public Service Obligations have ceased for the routes to Olbia and for the routes Alghero Milan Linate and Cagliari Rome Fiumicino 25. As for Sicily, Ministerial Decree n. 2 of 2 January has imposed Public Services Obligations on the following routes: Pantelleria Trapani, Pantelleria Palermo, Lampedusa Palermo, Lampedusa Catania; and viceversa. The duration of PSOs on these routes has been further extended by Ministerial Decree n. 987 of 15 December and Ministerial Decree n. 23 March Public Service Obligations have also been awarded for certain routes in Calabria Region. Art. 36 of Law 17 May 1999, n. 144 gave the Minister for Transport the power to issue a Decree with the imposition of Public Service Obligations in accordance with EC Regulation n. 2408/92, now repealed and replaced by EC Regulation n. 1008/2008. The provisions of Art. 36, initially designed for Sicily and Sardinia, were extended to the airports of Calabria Region through another Ordinary Law, n. 289 of 27 December 2002 (Art. 82) 29. Through Ministerial Decree n. 180 of 23 March , the Italian authorities have imposed Public Service Obligations on the routes Reggio Calabria - Milano Malpensa, Reggio Calabria - Pisa San Giusto, Reggio Calabria 23 Published in Italian Official Journal (general series) 22 May 1999, n Published in Italian Official Journal (general series), 26 August 2008, n Ministerial Decree n. 12 of 14 January 2011, published in Italian Official Journal (general series) 27 January 2011, n In Italian Official Journal (general series), 28 January 2008, n In Italian Official Journal (general series), 18 January 2011, n Published in the Italian Official Journal (general series) 24 March 2011, n Published in the Italian Official Journal (general series) 31 December 2002, n Published in the Italian Official Journal (general series) 20 April 2011, n

15 Turin; and vice versa. These routes have been tendered and, in May 2011, three notices have been published in the EU official Journal (C 141, of 12 May 2011), which indicate the periods of validity of contracts, the deadline for submission of tenders and the address at which it is possible to obtain the texts of the call for tenders, any information and relevant documentation related to the tendering procedure and the PSOs 31. As for Tuscany, with Ministerial Decree n. 280 of 10 May , partially amended by Decree N. 988 of 15 December , the Italian authorities have imposed Public Service Obligations on routes Elba Marina di Campo - Florence and vice versa, and Elba Marina di Campo - Pisa, and vice versa. The pertinent invitation to tender has been published in the EU Official Journal (series C 34, 3 February 2011) with an indication of the validity period of the contract, the deadline for submission and the address at which it is possible to obtain the text of the notice and any information or relevant documentation related to the tender and the Public Service Obligation. C.2.2.: Do you consider that the framework established in the 2005 Aviation Guidelines and the 2005 Commission decision on Services of general economic interest for assessing compensation to airports is sufficiently clear? Otherwise, what additional guidance or clarifications should be introduced in possible revised Guidelines? The examination of the compatibility of compensation in the transport sector requires special attention because of multiple sectoral regulations governing the financing of these types of activities. As we have mentioned above 34, the transport sector as a whole is excluded from the scope of the 2005 Framework on SGEIs; whereas air transport is subject to the 2005 Decision on SGEIs and to Regulation 1008/2008 of 24 September 2008 establishing common rules for the operation of air services in the Community. In the first place, a lack of coordination between regulation 1008/2008 and the 2005 Decision on SGEIs must be mentioned. The link between the Altmark conditions and the 2005 Decision on SGEIs is problematic, especially as regards the public service compensation paid to the airlines. 31 This procedure is still opened, and the deadline is 12 July Published in the Italian Official Journal (general series), 1st June 2010, n Published in the Italian Official Journal (general series) 18 January 2011, n Supra, p

16 Indeed, the granting of such compensation is strictly regulated by Regulation n. 1008/2008 and in particular its Artt. 16 and 17. These articles impose conditions that ultimately lead to respect the four Altmark criteria: PSOs are formally imposed, they are subject to a notice published in the European Official Journal (Art. 16.4); the operator is selected through a tender procedure (section 17); the tender and the resulting contract must contain objective and transparent parameters underlying the calculation of compensation for the performance of the PSO (Article 17.3.e); and the compensation "may not exceed the amount required to cover the net costs incurred in discharging each public service obligation, taking account of revenue relating thereto kept by the air carrier and a reasonable profit" (section 17.8). Although this is not explicitly specified in Regulation 1008/2008, public service compensation granted in accordance with its provisions complies with the Altmark criteria, and as a consequence, it does not constitute State aid. The Commission could clarify, in the revised Aviation Guidelines, which is the relation between the sectoral Regulation 1008/2008 and the 2005 Decision on SGEIs (or the future instrument that will amend or replace it). Secondly, with respect to the framework established by the 2005 Aviation Guidelines and the 2005 Commission s Decision on SGEIs, we believe that the mechanism for assessing compensation could be further clarified. In particular, it could be made clear what is the admissible amount of the reasonable margin of profit which can be added to the public service compensation. Indeed, the concept of reasonable profit presents some difficulties, as the boundaries between what is overcompensation and what is reasonable profit is often difficult to assess. D. FINANCING OF AIRPORTS D.1. FINANCING OF AIRPORT INFRASTRUCTURE D.1.1 Do you think that the compatibility criteria (point 61 of the 2005 Aviation Guidelines) set out in Section 4.1 for the public funding of airport infrastructure are adequate, transparent and well applicable? Otherwise, please explain which criteria should be reviewed and how? We believe that the overall structure of the Guidelines should remain unaltered, distinguishing the aspects of the financing of airport infrastructure, the financing of the ground handling services, the operating aid to airports and start-up aid to airlines, whose assessing criteria have demonstrated to work well. In recent years, the European Commission has revised its position on public funding of airport infrastructure. There was a time when such facilities could be financed entirely by public funds without any regulatory constraint

17 However, since the adoption of the Guidelines on the financing of airports in 2005, Member States must respect the private investor principle. In general, whether the public funding benefits airports or is granted directly or indirectly by the public authorities to airlines, the airport manager will assess whether it constitutes aid by considering whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regionalpolicy and sectoral considerations, would have subscribed to the capital in question 35. The Court of Justice has ruled that the principle of equality, to which the governments refer in connection with the relationship between public and private undertakings, in general, presupposes that the two are in comparable situations. [ ] private undertakings determine their industrial and commercial strategy by taking into account in particular requirements of profitability. Decisions of public undertakings, on the other hand, may be affected by factors of a different kind within the framework of the pursuit of objectives of public interest by public authorities which may exercise an influence over those decisions 36. Thus the concept of foreseeable profitability for the operator who effectively provides the funds as a market player is of central importance. The Community Courts have also judge that the conduct of a public investor must be compared with that of a private investor pursuing a structural policy whether general or sectoral and guided by prospects of profitability in the longer term 37. These considerations are particularly pertinent to investment in infrastructure. One notable exception to this principle is represented by the costs related to areas dedicated to public service missions. Otherwise, any support provided to the manager must be approved beforehand by the European Commission. The 2005 Aviation Guidelines defined the five following criteria for assessing infrastructure aid: - construction and operation of the infrastructure meets a clearly defined objective of general interest (regional development, accessibility, etc.); - the infrastructure is necessary and proportional to the objective which has been set; - the infrastructure has satisfactory medium-term prospects for use, in particular as regards the use of existing infrastructure; 35 Case 40/85 Kingdom of Belgium v Commission [1986] ECR I Joined Cases 188/80 to 190/80 French Republic, Italian Republic and United Kingdom of Great Britain and Northern Ireland v Commission of the European Communities [1982] ECR 2571, point Case C-305/89 Italy v Commission [1991] ECR I-1603, point 20. Case T-228/99 Westdeutsche Landesbank Girozentrale v Commission [2003] ECR II-435, point(s)

18 - all potential users of the infrastructure have access to it in an equal and non-discriminatory manner; - the development of trade is not affected to an extent contrary to the functioning of the EEA Agreement. Those criteria initially appeared rather broad and imprecise. In fact, on the basis of the sole criteria it was impossible for the member States and airport operators to apprehend the legality of the aids which might be granted for the financing of the airport infrastructure. However, the Commission practice has been positively helpful with regard to the clarification of the application of this category of compatible aids. The Commission adopted a flexible approach in recent years and approved all submitted notifications of state aid. This included both smaller airports and larger airports, giving rise to additional questions on the scope of the Guidelines (which in principle excluded larger airports from state aid). Furthermore, on March 23, 2011 the EU s General Court ruled on the action brought against the 2008 Commission s decision on the financing of the southern runway at Leipzig-Halle airport 38, thereby establishing that the construction of airport infrastructure is an economic activity 39. Therefore, public funding of infrastructure necessary for the operation of an airport alleviates the costs that the airport operator would normally have to bear and constitutes State aid. State aid which is paid and which would not have been provided by an investor operating under normal market conditions or which cannot otherwise be exempted under one of the special provisions in the Treaty on the Functioning of the European Union, must be repaid with interest by the beneficiary. The EC welcomed this decision, stating that the ruling of the General Court is important... for [all EU] Member States and... European airports. The ruling is consistent with the EC s approach as 38 See IP/08/ Cases T-443/08 and T-455/08, Freistaat Sachsen and Other v Commission, Judgment of the General Court (Eighth Chamber) of 24 March 2011, nyr. On 23 July 2008, the Commission declared the capital injection of 350 million for the purpose of the construction of a new southern runway at Leipzig-Halle airport to be compatible with the internal market. Even though the Commission declared the aid to be compatible, the airport and the German Länder Sachsen and Sachsen-Anhalt contested the Commission's finding that the measure constituted State aid at all. In their view, the construction of infrastructure was not economically viable and cannot therefore be regarded as an economic activity in the meaning of EU State aid rules. The applicants claimed that the Commission incorrectly quantified the aid to amount to 350 million, given that the challenged decision had acknowledged that certain parts of the aid were intended to fund activities of a non-economic nature (security, air traffic control, police and customs). The only plea upheld by the Court concerns the quantification of the aid at 350 million without deducting the costs which are of a non-economic nature (security, air traffic control, police, and customs). Therefore, the General Court partially annulled Article 1 of the decision to the extent it determined the amount of State aid. In case T-443/08, the action was dismissed as inadmissible