iata submission - state aid rules for the aviation sector...

IATA submission – EC Consultation on State aid rules for the aviation sector of 22

IATA Submission to the European Commission Consultation on State Aid Rules for the Aviation Sector

06 June 2011


Questionnaire Name Magali Collot

Organization represented International Air Transport Association (IATA)

Register ID number 1805107590-28

Location (Country) Geneva (Switzerland)

Address (Headquarter) 800 Place Victoria P.O. Box 113 Montreal H4Z 1M1 Canada

Address (Geneva) Route de l’Aéroport 33, P.O. Box 416 1215 Geneva 15 Airport Switzerland

E-mail address [email protected] This submission presents the response of the International Air Transport Association (IATA). IATA’s mission is to represent, lead and serve the airline industry and brings together over 230 member airlines whose flights account for 93% of all international scheduled air traffic. IATA welcomes this opportunity to submit its comments in response to the EC public consultation on state aid rules for the aviation sector. Please note that although several member airlines have also submitted their own individual comments that could diverge in part from the IATA submission, IATA’s comments are from an international perspective, are based on the requirements of, and practice in, international civil aviation and focus mainly on airport charges aspects. For the sake of transparency, the Commission intends to make accessible the replies to this questionnaire on its website. In the absence of reply to the following questions, the Commission will assume that the response contains no confidential elements and can be divulged in its entirety. For rules on data protection on the EUROPA website, please see:

http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata

A.1 - Do you object to the disclosure of your identity? IATA does not object to the disclosure of its identity. A.2 - Does any of the exceptions foreseen in Article 4 of Regulation 1049/2001 of the European Parliament and of the Council of 30 May 2001 regarding public access to European Parliament, Council and Commission documents1 apply to your response? If so, please indicate clearly which parts should not be divulged, justify the need for such confidential treatment and provide also a non-confidential version of your response for publication on our website. The IATA response does not contain any confidential information.

1 OJ L 145, 31 May 2001, p. 43.


General

B.1 - Assessment of market developments & necessity to modify the 1994 & 2005 Aviation Guidelines B.1.1: What are, in your view, the main developments, in particular with regard to economic and social matters, environment and climate change issues, regulatory changes, such as passenger rights, security standards, airport charges, transport and competition with other modes of transport, tourism, tax policies, successive EU enlargements in 2004 and 2007 and extension of the Schengen zone, and 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 of the study. Economic and social matters

The international airline industry showed consistent average growth for passenger and freight traffic of 6-7% over the period 1970 to 2000. Since then, the resilience of the global aviation industry has been tested by disease, war, terrorism, spiking oil prices, an unprecedented economic recession and more recently, earthquakes, tsunamis and also volcanic eruptions. The industry responded with enormous change. Over the last decade, airlines radically restructured to cut non-fuel costs 9%, increase fuel efficiency 24%, and deliver a 67% improvement in labor productivity. Consumers and the wider economy have reaped the benefits of a substantial increase in the choice of travel options by destinations, frequencies, and business models available at lower cost, higher safety, and a smaller environmental footprint per passenger mile traveled than ever before. Airline owners have, however, not even been able to recover their cost of capital. But despite the great record on safety and the tremendous gains in efficiency, the industry is very precarious with 2.9% profit margin in 2010 that will shrink further in 2011. Some regions are financially stronger than others. Europe’s airlines are the weakest with expected profits of just $500 million in 2011, an EBIT margin of just 1.1%. Parts of Europe are mired in recession, as a result of the on-going banking and government debt crisis. European airlines will suffer from the resulting weak home markets, though long-haul business travel and outbound freight look more robust.

System-wide global commercial airlines 2007 2008 2009 2010E 2011F Global Regions Europe North America Asia-Pacific Middle East Latin America Africa

Traffic (TPK), % change over year 6.0 0.7 -4.3 10.3 5.7 2.1 0.9 -7.7 5.0 3.9 3.5 -2.4 -6.3 9.9 4.0 7.8 -0.2 -2.2 12.6 6.4 16.4 3.6 9.5 20.0 14.6 9.9 3.3 0.0 14.5 6.0 4.5 5.1 -5.4 15.0 6.5

Source: ICAO data to 2008. IATA 2009-2010 estimates, 2011 forecasts. Dom. and int. traffic. Includes pax and cargo by weight.

Environmental and climate change

The entire value chain - airlines, airports, air navigation service providers and aircraft manufacturers - is committed to improving fuel efficiency by 1.5% annually to 2020, cap net emissions from 2020 with carbon-neutral growth, and cut net emissions in half by 2050 compared to 2005. Moreover, aviation is the only sector where governments have managed to agree on a way forward which was achieved through the United Nation’s International Civil Aviation Organization (ICAO).


Aviation is on the right track with its climate change strategy and targets but some challenges remain. The first is to commercialize the availability of biofuels. With the notable exception of PetroChina which will supply a transpacific test flight later this year, most of the biofuels tests have been with small entrepreneurial firms. Big oil companies need to be on board to generate commercial volumes that will drive the costs to economical levels. Governments have also a role to encourage biofuels production by setting the right legal and fiscal frameworks. The second challenge is to stop governments from imposing unreasonable taxes on the aviation industry. Positive economic measures are a part of the climate change strategy but these must be globally coordinated through ICAO. This will ensure that they are fair, effective and do not distort competition. That is why IATA is completely opposed to regional schemes like the European Union Emissions Trading Scheme (EU ETS). IATA contends that the EU ETS is illegal under the Chicago convention and will do nothing to reduce emissions. There is not even a guarantee in the ETS legislation that the money collected will be invested in green technologies. Regulatory changes

Several regulations related to aviation have recently been put in place within the EU aviation sector. Some of these regulations are adding a cost burden to the airlines operating in Europe such as:

- Regulations on the common basic standards on civil aviation security (e.g. EU restrictions on liquids, aerosols and gels – last amended by Regulation 297/2010).

- Regulation 261/2004 on compensation and assistance to passengers in the event of denied boarding, cancellation or delay, some aspects of which applied even during the volcano crisis and the snow issues that affected several European airports.

- Regulation 1107/2006 on the rights of disabled persons and persons with reduced mobility which imposes a number of additional operational burdens on the airlines.

- New taxation such as European Union Emissions Trading Scheme, UK APD, German passenger tax and Austrian passenger tax.

Both the additional cost burden and the weak European economies will lead to weak medium-term travel growth originating from Europe. Competition and state aid

Europe is a mature air transport market. Competition has, therefore, become fierce due especially to challenging conditions during the financial crisis. Regarding state aid, the EC guidelines were published in 2005 with the aim of encouraging the development of regional airports and personal mobility. The guidelines wanted to address specifically the need to create new routes as part of the general European transport policy, develop regional airports and combat air traffic congestion at the major European hubs. Since 2005, new routes have been developed but are not necessarily linked to real traffic demand. Regional airports are not all financially sustainable and the traffic congestion at major European hubs remains a major issue. B.1.2: How have airport / airline business models evolved since the adoption of the 2005 Aviation Guidelines? Please describe the main differences between the business models of airports providing examples (e. g. regional v. national, large v. small, passenger v. cargo, etc.)? Airline business models have evolved over the years. The Low Cost Carriers (LCCs) or no frills point-to-point model works well on short- to medium-haul high density city-pairs, but many city-pair markets do not have sufficient origin-destination traffic. Some LCCs have modified their business model to take on connecting passengers. Some network carriers have also started to specialize (e.g. offering all business class service, benefiting from the open skies agreement with the possibility to change routes).


B.1.3: Do you consider that the 1994 and 2005 Aviation Guidelines laid down the basis for a satisfactory State aid policy in the aviation sector today? Please justify your answer. The 1994 and 2005 guidelines cover different aspects:

- The 1994 guidelines specifically authorize operating subsidies in only two cases: public service obligation compensation and social aid granted to specific categories of passengers.

- The 2005 guidelines lay down the conditions under which start-up aid can be granted to airlines to operate new routes from regional airports. The guidelines also give guidance on the public financing of airports.

While state aid is generally forbidden under article 107(1) of the EC Treaty2, it is authorized in very specific cases. For the aviation sector, the 2 guidelines cover specific cases where state aid is allowed. The 1994 guidelines remain appropriate, bearing in mind that conditions for Member States to impose public service obligation compensations have been revisited by the adoption of regulation 1008/2008 on “Common rules for the operation of air services in the Community”. However, the 2005 guidelines are complex. They have not prevented uncontrolled subsidy practices nor did they ensure a level playing field for airlines operating from a private or State owned airport or with varying business models. Additionally, the guidelines are in place but have not been fully implemented or monitored, and Member States do not always notify the EC on all state aid cases. B.1.4: How would you describe the current competitive situation of the various stakeholders in the aviation sector? Where available, please provide the relevant data on, for instance, leading players, market shares, market share evolution in relevant markets, etc. To what extent did the 1994 and 2005 Aviation Guidelines contribute to / hamper this evolution? The 2 graphs below show global trends especially amongst network airlines versus low cost carriers.

Share of global ASKs by airline type

0%

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% o

f tot

al A

SK

s

LCCs Non-aligned airlines Alliances

Source: IATA SRS Analyser LCCs account for 25% of globally available seats and 15% of average seat kilometers (ASKs), a reflection of their focus on short and medium haul markets. Their position is particularly strong in Europe (both domestic and cross-border within Europe).

2 The Treaty on the functioning of the European Union – C83/49 dated 30.3.2010


LCCs now supply a quarter of scheduled seats worldwide.

LCC Share of Available Seats

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Worldwide Within US Within Europe Within Asia Within Middle East

May-00May-02May-04May-06May-08May-10

PC8

Source: IATA SRS Analyser More detailed analysis would be required in order to assess whether the 1994 and 2005 guidelines have contributed to the market share evolution in Europe. B.1.5: Which are, in your view, the likely developments, past or future, and where do you see the major challenges for the aviation sector in the short (during the next year) and medium term (in the next 3 years) future (airlines and airports)? Europe is a mature air transport market.

- Competition has become fierce. - There is a need to ensure that competition between airlines is not distorted as a result of state aid

to airports. Europe has clearly been the main sufferer from the recent economic downturn.

- Western governments are in bad shape after the massive fiscal stimulus to bail out the banks and turn economies around from recession.

- Some have put in place austerity budgets because of unsustainable government debt position. - Certain European governments are looking for additional tax revenues. - The shift in traffic flow growth to the East and South parts of the globe is accelerated by the

economic situation in Europe. The airline industry sees a deterioration of profitability which is driven by 3 factors: the price of oil, the gross domestic product (GDP) and over-capacity.

- The rising oil price is the major threat in 2011. Each dollar increase adds USD 1.6 billion additional costs for airlines globally

- GDP growth is predicted to slow to 1% in Europe. - Airline capacity will grow more than demand. Thus, capacity will grow by 4.8% but demand will

only grow by 3.9% in Europe.

Traffic congestion at major European hubs remains a major issue - Unless urgent action is taken, more than 60 airports will become congested by 2025 and the top

20 European airports will be saturated for 8-10 hours each day.


B.1.6: Do you consider that the 1994 and 2005 Aviation Guidelines should be revised in light of these developments? Alternatively, do you consider that these developments do not justify the adoption of a new text? Which other actions do you consider appropriate? Please explain what changes should be introduced and why? It is IATA’s view that the 2005 guidelines should be reviewed independently of the developments in the aviation sector. However, the aim of the revised guidelines should address issues facing the aviation industry today. Additionally, IATA believes that the 2005 guidelines are too complex and that this may defeat their very purpose. Guidelines should help to interpret existing laws or regulations. 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 main substantive points unchanged? When reviewing the 2005 guidelines, it would be important to focus on both the content of the guidelines and also the procedures to follow before state aid can be granted. This might, therefore, require a substantial revision. In terms of content, any revision of the guidelines must be supported by additional safeguards through a standardized EU legal framework which prevent uncontrolled subsidy practices and ensure a level playing field for airlines regardless of whether they operate from a private or State owned airport. Greater emphasis should be put on the following elements:

- Any state aid within the EU aviation sector should facilitate longer term sustainable traffic growth for airports and their airline customers.

- State aid should be limited in time, scope and amount. - Fair competition must be maintained for all airlines, independent of their business models. - Airport traffic should not be the determining criterion to establish how the guidelines are to be

applied and how to characterize a regional airport. In terms of procedure, the revised guidelines should include key elements to follow before state aid is considered such as:

- Member States to notify all state aid cases being considered. - All airline users to be consulted throughout the decision-making process when state aid is

considered at a given airport as customers and stakeholders. - The EC to examine, in a timely manner, the considered state aid before it is accepted.

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 as being necessary in view of these characteristics? If so, please clarify why horizontal State aid rules are, in your view, not sufficient or appropriate for the sector. Please be as specific as possible in your reply indicating also the expected economic, social and environmental impact of the sectoral rules and of a potential application of the horizontal rules.


B.2 - Information on business models by airport operators and airlines B.2.1: In what market segments (in particular passenger air carriers v. air cargo carriers, network air carriers v. point-to-point air carriers, long haul vs. short haul air carriers, airport operators, air traffic control, air ground handling, etc.) of the aviation sector are you active? Is there in your opinion an overcapacity in these market segments? Please provide details justifying your answer. IATA brings together over 230 member airlines whose flights account for 93% of all international scheduled air traffic. 80 of its members are registered in Europe and service 26.8% of IATA’s total scheduled traffic. B.2.2: What is your market share in the market segment(s) you are active in? Please provide also historic data (per market segment for the last ten years) in order to show the development of the market share. Please clarify extraordinary circumstances, which lead to an increase or decrease of your market share (e. g. mergers). Not applicable B.2.3: Please provide information on the market leaders in the market segment(s) you are active in. If possible, please provide reasons why these companies have the market leadership. Not applicable B.2.4: Please describe whether you consider all market segment(s) you are active in, as competitive market(s) or not. Please justify your answer with examples and data as far as available. Not applicable B.2.5: Considering your market position, which are, in your view, the likely developments of the market segment(s) you are active in? Not applicable B.2.6: Do you consider that State aid has played a (positive or negative) role in the market development so far in the market segment(s) in which you are active? If so, please specify how and why this was the case. Please provide data and narrative explanations in order to support your answer. Not applicable B.2.7: Please describe how you perceive the role of State aid in the aviation sector in general and in particular concerning infrastructure investment incentives, regional development, safeguarding fair competition, financing in the sector. Please justify your answer with data, if possible. Europe is one region of the global aviation marketplace. From an airport charges aspect, when state aid is considered specifically for new infrastructure, new routes or new schedules within the EU, it should comply with the following global charges principles: - All airlines should be engaged in a meaningful consultation as the decision could have an impact on

any airline user.

- The level of state aid should be published and transparent (e.g. publication in the Official Journal of the European Union of all conditions under which start-up aid is available at a particular airport).

- The form of state aid should be non-discriminatory and should meet ICAO Policies3.

- The result of state aid should not distort competition among airlines irrespective of their individual business models.

3 ICAO Doc 9082/8 Paragraph 31 v)


- The costs associated with state aid should not be recovered from charges levied to airport users who do not qualify for that state aid.

- State aid should be limited in time, scope and amount.

B.2.8: Where do you see the major challenges for your company and the aviation sector in general and in particular the market segment(s) you are active in the short term (during the next year), medium term (in the next 3 years) and long term (after the next 3 years)? Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible. Not applicable B.2.9: Have you as Member State or public body granted State aid in application of the1994 or/and 2005 Aviation Guidelines? Please specify whether the aid was approved or not, providing details on the procedure and the aid amount granted. Not applicable B.2.10: Have you as market participant applied to a Member State / a regional or local authority / a public undertaking for State aid under the 1994 or/and 2005 Aviation Guidelines? Please specify whether the aid was approved or not, providing details on the procedure and the aid amount granted. Not applicable B.2.11: Do you consider that the existing Guidelines for the aviation sector impose an adequate level of regulation or would you favour a higher or lower degree of regulation? Please be as specific as possible in your reply indicating also the expected economic, social and environmental impact connected to your view. The existing guidelines are lacking effective control on the aids granted by regional airports or local communities to airlines. There is a need to implement clear, time-limited and mandatory procedures that would guarantee that no state aid could be granted prior to assessment by the Member State concerned and the EC. All airlines impacted by the proposed state aid should also be consulted throughout the decision-making process. The EC might want to review if such procedures could be successfully implemented and monitored within the current level of regulation or whether a higher level is required. A penalty mechanism might also be considered for cases where the guidelines are not followed. 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 1.2.1. of the 2005 Aviation Guidelines are appropriate in view of the evolution of the sector? Otherwise, what changes would you consider appropriate to this categorization? In your view is it sufficient to take into account for the categorization of airports only passenger numbers? Which other indicators (for example tonnes of air cargo, number of aircraft 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. Airport traffic should not be the sole criterion to establish how the guidelines are to be applied and how to characterize a regional airport. When state aid is considered, the proposal should assess the potential distortion of competition among airlines with factors such as location, economic catchment area, traffic mix and accessibility.


In any case, state aid should only be granted under very specific conditions and subject to an effective and efficient prior control by both Member State and the EC. 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 exemption4 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. The commission should examine aid granted to all airports irrespective of its size. Additionally, no block exemption should be considered for any category of airports. 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 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 guidelines should recognize the difference between a truly regional airport situated in the outermost regions of Europe and a secondary airport. For example, a flight between Charleroi (CRL) and Stansted (STN) is clearly part of the Brussels to London market whereas a flight between the Azores and Lisbon is a regional link. If a carrier advertises, for example, a service between Beauvais and Gerona as being Paris – Barcelona, then it should not be able claim this to be a new route eligible for start-up aid. Start-up aid should not be given to a carrier at one airport where there is a carrier operating a parallel route at another. The cost of transferring to another “regional” airport may be too prohibitive to allow the ‘competing’ carrier to take advantage of the reduced rates. IATA proposes that airports within a given catchment area should be excluded from start-up aid on the grounds that such aid distorts competition. We suggest that airports less than 100 kilometres apart or less than one hour away from each other by high-speed train should be considered as being located in the same catchment area. B.3.4: What are in your view the minimal legal and economic conditions under which an airport can be operated on a profitable basis and without financial assistance from the public authorities? In this respect, do you consider that the results of the study carried out by Cranfield University for the Commission in preparation of the 2005 Aviation Guidelines, which concludes that this figure varies according to the country and the business model, but is generally between 500,000 and 1,000,000 passengers, are still valid today?

4 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.


Factual information on the regulatory and economic environment C.1 – Airport’s economic activity and activities falling within the public policy remit C.1.1: Which activities of an airport in your view in your country fall within public policy remit and do not constitute an economic activity keeping in mind the notion of undertaking under EU State aid law? How are these activities defined and regulated in your country? Is the distinction made by the 2005 Aviation Guidelines appropriate? Please justify your view on this issue. Not applicable C.1.2: The 2005 Aviation Guidelines provide examples for the activities falling within the public policy remit, such as safety, air traffic control, police, customs. How are these activities and the equipment necessary for these activities (e. g. scanners etc.) financed in your country? How are fire fighting services at the airport organized and financed in your country? Not applicable C.1.3: Do you consider that the framework established in the 2005 Aviation Guidelines for differentiating between economic activities and activities falling within the public policy remit is sufficiently clear and unambiguous? What additional guidance or clarification should be introduced in possible revised guidelines? C.1.4: Is a distinction between economic and non-economic activities still relevant for an airport? Please justify your view. For the purpose of state aid, the distinction between economic and non-economic activities is not pertinent for airport activities. The 2 categories of activities are so interrelated that the financing of “non-economic” activities would indirectly have an effect on economic activities. A more “holistic” approach that takes into consideration all effects of financing airport activities would be more pertinent. C.2 – Services of general economic interest 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 service obligation entrusted on the airport operators / air carriers? If not, why is the decision not used in the aviation sector? On what basis is the compensation for discharging these public service obligations determined? Please be as detailed as possible, providing data and narrative explanations. Not applicable 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 given to airports is sufficiently clear? Otherwise, what additional guidance or clarifications should be introduced in possible revised guidelines? C.2.3: Do you see any practical obstacles to the use of this possibility offered by the 2005 Aviation Guidelines and the 2005 Commission Decision on services of general economic interest? If so, how do you think that such obstacles might be removed? C.2.4: Do you consider that additional or alternative conditions/criteria should be used in order to avoid undue distortion of competition? If so, what are these criteria?


C.3 – Factual elements to be taken into account for the application of the market economy investor principle C.3.1 – Public funding of airport operators (e.g. financing of infrastructure investments, capital injections, etc) C.3.1.a: Do you consider that the factual elements considered in the 2005 Aviation Guidelines with regard to the application of the so-called "market economy investor principle" to public funding of airports are sufficient, or do you think that additional elements should be taken into account? Please justify your reply. C.3.1.b: In case you consider that further elements should be taken into account, which ones? C.3.1.c: In your opinion, what type of costs (e. g. parking fees; rents for shops; rents for advertisement spaces; etc.) would a market economy investor take into account when setting airport charges and defining the cost structure of commercial services offered by the airport (e.g. only variable/marginal costs, variable costs and infrastructure costs, only part of infrastructure costs, etc.)? In this context, on which basis would a market economy investor evaluates infrastructure costs (e.g. historical cost, market value, accounting value, etc.)? Please justify your views on this issue providing data and concrete business plans, if possible, and also describe the impact of the different types of the cost on the setting of airport charges and the cost structure of commercial services offered by the airport (parking fees; rents for shops; rents for advertisement spaces; etc.). IATA supports the principles in ICAO Document 9082/85 – paragraph 30.i):

“i) The cost to be shared is the full cost of providing the airport and its essential ancillary services, including appropriate amounts for cost of capital and depreciation of assets, as well as the costs of maintenance, operation, management and administration, but allowing for all aeronautical revenues plus contributions from non-aeronautical revenues accruing from the operation of the airport to its operators.”

C.3.1.d: In your opinion, what type of revenues would a market economy investor base its business decisions on (e.g. only direct revenues such as airport charges, direct revenues and other indirect revenues such as parking and shop/sales revenues, etc.)? Please justify your views on this issue providing data and concrete business plans, if possible. Business decisions should be based on total revenues (aeronautical and non-aeronautical). As customers and stakeholders, airlines are directly affected by policy decisions, investments and charges. Effective consultation with users should ensure that airlines are consulted in major policy decisions and investments plans. Investments should only be made when there is a clear business case supported by a thorough and positive cost benefit analysis on the impact on stakeholders.

5 ICAO’s Policies on Charges for Airports and Air Navigation Services – 8th edition - 2009


C.3.1.e: What time frame does a market economy investor base its investment decisions on (e.g. based on the useful economic, technical or accounting depreciation period of airport infrastructure or based on a shorter timeframe)? Please justify your views on this issue providing data and concrete business plans, if possible, and also describe the impact. IATA supports the principles in ICAO Doc 9562/6 – Airports Economics Manual6: “4.11 The original value of an asset should be depreciated over its estimated useful life and such depreciation included in the annual costs of the service concerned. Depreciation should not commence until a facility is placed in service.” “4.12 …The most common method used by national administrations, and also the simplest, is the straight-line method whereby depreciation is charged as a constant amount year after year during the book life of the asset concerned, the amount being determined by dividing the historical cost of the asset (less its anticipated residual value, if any) by the expected number of years of its book life.” Examples of range of depreciation periods provided in the ICAO Doc 9562/6 are: Buildings (freehold) 20-40 years Buildings (built on leased land) Over the period of the lease Runways and taxiways 15-30 years Aircraft parking areas 15-30 years Furniture and fittings 10-15 years Motor vehicles 4-10 years Electronic equipment (incl. telecom) 7-15 years General equipment 7-10 years Computer equipment 5-10 years Computer software 3-8 years C.3.1.f: Please explain whether or not you are of the opinion that aid is necessary for ensuring that the market provides for sufficient airport infrastructure? If so, please specify for which types of airport infrastructure this may be the case and why. Did you invest in airport infrastructure without receiving aid? Please specify your answer providing data and concrete business plans, if possible. C.3.2– Support by airport operators and/or public authorities to air carriers (e.g. marketing support, rebates schemes and start-up support etc.) C.3.2.a: Do you consider that the factual elements considered in the 2005 Aviation Guidelines with regard to the application of the market economy investor principle to public funding of air carriers (e.g. in the form of marketing support, quantity rebates, start-up support, etc.) are sufficient or do you think that additional elements should be taken into account? As state aid should only be granted under very specific conditions and subject to an effective and efficient prior control by both Member State and the EC, factual elements eligible for receiving state aid should be restricted to the minimum possible instead of being extended. C.3.2.b: In case you consider that additional elements should be taken into account, which ones? Not applicable

6 Airport Economics Manual – 2nd edition - 2006


C.3.2.c: In your opinion, what type of costs would a market economy investor take into account when negotiating an agreement with an air carrier (e.g. only variable/marginal costs, variable costs and infrastructure costs, only part of infrastructure costs, etc.)? In this context, on which basis would he evaluate infrastructure costs (e.g. historical cost, market value, accounting value, etc.)? On which basis (e. g. passenger numbers, maximum take-off weight, aircraft movements at the airport etc.) would he attribute the costs to the specific agreement with an air carrier? Please justify your views on this issue providing data and concrete contracts, if possible, and also describe the impact of the different options. Not applicable C.3.2.d: In your opinion, what type of revenues (e.g. only direct revenues, such as airport charges, direct revenues and other indirect revenues, such as parking and shop/sales revenues, etc.) would a market economy investor take into account when negotiating an agreement with an air carrier? Please justify your views on this issue providing data and concrete business plans, if possible, and also describe the impact. Not applicable C.3.2.e: What time frame would a private investor use for his agreement with an air carrier on (e.g. based on the duration of the specific contract or based on a longer or shorter timeframe or the balance of risk assumptions of the parties under a specific contract)? Not applicable C.3.2.f: Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible. Not applicable


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? IATA is not opposed to the public financing of airports where appropriate regardless of whether the airport is privately or publicly owned. However, state aid should only be authorized on the basis of a case-by-case review and subject to an effective and efficient prior control by both the Member State and the EC. The list of 5 criteria is adequate and transparent but has not necessarily been applied in the past. The following elements should be considered:

- Member States to notify the EC about the proposed state aid case - The EC to examine, in a timely manner, the considered state aid before it is accepted. - Proposals should be supported by a business case demonstrating why state aid is of interest. - Proposals should demonstrate that the investment plan is suitable and cost-effective and driven by

airport user requirements. - Proposals should demonstrate that competition between airlines will not be distorted.

D.1.2: Which are in your view the distortions of competition resulting from investment aid to airports depending in particular on their size and their geographical location (in particular proximity to other airports)? Do you consider that this is a valid and only criterion that should be taken into account in this respect? More factors apart from size must be considered in order to assess the potential distortion of competition (e.g. location, catchment area, traffic mix, accessibility etc). Every single case must be analysed regarding the airport’s specific competition situation. Additionally, the primary focus when analysing the impact of state aid on competition should be the competition between airlines and not between airports. D.1.3: Which annual traffic (passenger and cargo) do you consider necessary in order to cover all investments and maintenance costs? Please justify your view also in light of the Cranfield University study referred to above in point C.3.4. D.1.4: Which annual traffic (passenger and cargo) do you consider necessary in order to cover all operating costs? Please justify your view also in light of the Cranfield University study referred to above in point C.3.4.


D.1.5: Do the compatibility criteria set out in point 61 of the 2005 Aviation Guideline provide enough legal certainty and contribute to the predictability of the Commission's decisions in individual cases? Otherwise, please explain in which way these criteria could be further developed? Should there be, for example, further guidance on the maximum aid intensity that the Commission would allow for each type of infrastructure investment or for each type of airport, further indications about the eligible and non-eligible costs, and further indications on the definition of the catchment area of an airport and its degree of competition with other airports and high speed rail? As state aid should only be granted under very specific conditions and subject to an effective and efficient prior control by both Member State and the EC, compatibility criteria eligible for receiving state aid should be restricted instead of being extended. D.1.6: Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible. Not applicable D.1.7: Do you consider that public financing of airport infrastructure provides for crowding-out of private investors? Please justify your opinion on this issue. Not applicable D.1.8: Do you consider that public financing of regional airports provides positive and negative externalities, for instance in terms of local development, accessibility, employment, air and noise pollution, climate change? If yes, please provide examples, indicating the economic, social and environmental impact. The aim of the 2005 guidelines was to encourage the development of regional airports and personal mobility. Since 2005, new routes have been developed but are not necessarily linked to real traffic demand, regional airports are not all financially sustainable and the traffic congestion at major European hubs remains a major issue. Public financing of regional airports can provide both positive and negative externalities. The expansion of infrastructure should, however, be demand driven instead of distributing traffic rerouting towards low demand regions. D.1.9: Do you consider that specific conditions should be attached to the financing of regional airports, for instance to limit distortion of competition of or to avoid duplication on non-profitable airports? Which conditions (i. e. non-discrimination with regard to airport charges; certain minimum level of airport charges; necessity of aid; catchment area; avoid creation of overcapacity etc.)? How should the catchment area of an airport be defined (i. e. distance in kilometres, travelling time using public transport or car, etc.)? D.1.10: Please describe how important the access to finance is for you as airport operator and the cost of it. Not applicable D.1.11: Please describe whether or not you deem State support necessary for having access to finance, supporting your answer with data, if possible. Not applicable


D.2 – Aid for operation of airport infrastructure D.2.1: The 2005 Aviation Guidelines consider that normally this type of aid is incompatible with the Treaty, except under certain conditions in disadvantaged regions on the basis of Article 107 (3)(a) or (c) TFEU (ex Article 87(3)(a) or (c) of the EC Treaty) or if it is necessary for the operation of a service of general economic interest in the sense of Article 106 (2) TFEU (ex Article 86(2) of the EC Treaty; see points 62-63 of the 2005 Aviation Guidelines). Do you consider that this approach remains valid? If not, what changes do you consider appropriate? This approach remains valid and is even a necessary basic principle. Due to many exceptions in practice, this basic principle has been ignored. It might be useful to determine stricter targets and implement and monitor them rigorously. Public funding of airport operations should not be used to systematically cover net losses. D.2.2: Do you consider that this Section of the 2005 Aviation Guidelines provides enough guidance on the conditions that must be met in order for the public financing of the operation of airport infrastructure as compensation for the operation of a service of general economic interest in the sense of Article 106 (2) TFEU (ex Article 86 (2) of the EC Treaty) to be compatible with the Treaty? If not, what additional guidance or clarifications should be introduced in possible revised guidelines? D.2.3: As mentioned above (see section C.2), the 2005 Commission Decision on services of general economic interest applies to airport operators. However, the Community framework for State aid in the form of public service compensation7, which lays down the compatibility conditions for compensation paid to undertakings for the performance of services of general economic interest, does not apply to airport operators. This Framework as well as the Decision are currently being revised. In your view, would it be appropriate to continue to address compensation for services of general economic interest in airport operation in the 2005 Aviation Guidelines, as is currently the case, or would it be preferable to simply refer to the general rules laid down in the above-mentioned Framework and Decision? Are special rules for services of general economic interest compensation for airport operations needed (as opposed to most other economic sectors) and if so, why? D.2.4: Do you consider that all airport operators should meet the normal costs of running and maintaining the airport infrastructure from its own resources? If not, please justify your view on this issue and indicate which 'critical mass' (e. g. number of passengers, number of tonnes air cargo, number of aircraft movements) is necessary for an airport in order to achieve financial viability (being able to meet the cost of running the airport including the cost for running and maintaining the infrastructure)? Please justify your view on this issue with data and in view of the Cranfield University study referred to above in point C.3.4. D.2.5: In your opinion, is it necessary to provide criteria for assessment of compatibility of public financing of certain operating costs outside the scope of services of general economic interest? If so, please identify these operating costs and provide a detailed justification why and on what basis, in your view, they should be considered compatible with the State aid rules. D.2.6: Please explain whether you regard aid for the operation of airport infrastructure as necessary in the current business environment and in which conditions? Did you operate airport infrastructure without receiving aid? Please specify your answer by providing data, if possible.

7 OJ C 297, 29 November.2005, p. 4.


D.2.7: Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible. D.3 – Aid for airport services D.3.1: Do you consider that, in general terms, the Commission approach to the compatibility of public financing of airport services is adequate? Otherwise, what should in your view be the approach to this type of aid? D.3.2: Do you consider that this Section of the 2005 Aviation Guidelines provides enough guidance on the conditions that must be met in order for the public financing of airport services to be compatible with the Treaty? If not, what additional guidance or clarifications should be introduced in possible revised guidelines? D.3.3: Please explain whether you regard aid for airport services as necessary in the current business environment? Did you operate airport services without receiving aid? Please specify in your answer providing data, if possible. D.3.4: Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible.


Start-up aid E.1.1: Do you consider that, in general terms, the Commission approach to the compatibility of start-up aid is adequate? Otherwise, what should in your view be the approach to this type of aid? State aid should only be authorized under very specific conditions and subject to an effective and efficient prior control by both the Member State and the EC. The compatibility of start-up aid is adequate but has not necessarily been applied in the past. The following elements should be considered:

- Member States to notify the EC about the proposed state aid case. - The EC to examine, in a timely manner, the considered state aid before it is accepted. - All airline users to be consulted throughout the decision-making process when state aid is

considered at a given airport as customers and stakeholders. - Proposals should be supported by a business case demonstrating why state aid is of interest. - Proposals should assess the potential distortion of competition among airlines with factors such as

location, catchment area, traffic mix and accessibility. - Proposals should demonstrate how the airport and its airline customers will benefit from longer

term sustainable growth. Any revision to the 2005 guidelines should also be supported by additional safeguards, through a standardized EU legal framework, which prevent uncontrolled subsidy practices and ensure a level playing field for airlines regardless if they operate from a private or State owned airport. Europe is one region of the global aviation market place. When state aid is considered, specifically for new routes or new schedules within the EU, it should comply with global charges principles: - All airlines should be engaged in a meaningful consultation as the decision could have a direct impact

on any airline user.

- The level of state aid should be transparent and made public (e.g. publication in the Official Journal of the European Union of all conditions under which start-up aid is available at a particular airport).

- The form of state aid should be non-discriminatory and should meet ICAO Policies8.

- The result of state aid should not distort competition among airlines irrespective of their individual business models.

- The costs associated with state aid should not be recovered from charges levied to airport users which do not qualify for that state aid.

- State aid should be limited in time, scope and amount.

E.1.2: Do you consider that the compatibility conditions laid down in point 79 of the 2005 Aviation Guidelines are appropriate, taking into account the risk of distortion of competition of this type of aid? If no, why? Nothing to add – see answer to question E.1.1

8 ICAO Doc 9082/8 Paragraph 31 iv): “The charges must be non-discriminatory both between foreign users and those having the nationality of the State in which the airport is located and engaged in similar international operations, and between two or more foreign users.”


E.1.3: Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic / regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible. Since 2005, new routes have been developed but are not necessarily linked to real traffic demand, regional airports are not all financially sustainable and the traffic congestion at major European hubs remains a major issue. E.1.4: Do you consider that the current limitation of start-up aid to routes linking a regional airport in category C or D to another EU airport (point 79 (b)) is warranted? If not, should start-up aid be more or less restrictive in terms of airport size? Which criteria should be required? Airport size in terms of passenger traffic should not be the determining criterion to establish the current limitation of start-up aid. Before any state aid is considered, there should be a proper review:

- Proposals should be supported by a business case demonstrating why state aid is of interest. - Proposals should assess the potential distortion of competition among airlines with factors such as

location, catchment area, traffic mix, accessibility. Additionally, the primary focus when analyzing the impact of state aid on competition should be the competition between airlines and not between airports. E.1.5: Do you consider that the definition of new routes is adequate? If, not which changes would you propose? Are in your view the criteria to define abuses clear, relevant and effective? The guidelines should ensure that no market distortion occur where markets compete with each other or where they may be substituted for each other. Location and economic catchment area are relevant in this regard. Airports within a given catchment area should be excluded from start-up aid on the grounds that such aid distorts competition. Airports less than 100 kilometers apart or less than 1 hour away from each other by high-speed train should be considered as being located in the same catchment area for these purposes. E.1.6: Is the eligible cost base set out in point 79 (e) appropriate in your view? Should it be adapted in some way? Does this criterion offer sufficient guidance on what type of costs are eligible for start-up aid or is additional clarification needed? Aid should be proportional to the additional start-up costs (e.g. marketing and advertising costs) and should only be granted for the opening of new routes or new schedules provided that a similar route is not offered by a carrier departing/arriving from an airport located in the same catchment area or that a similar routing is not offered by another carrier via its hub. Additionally, no aid regarding standard operating costs should be granted (e.g. leasing, depreciation of aircraft, use of airport facilities etc). E.1.7: In your view are the limits of start-up aid in terms of duration and intensity adequate? Otherwise, please explain what changes should be introduced and why? Please provide economic justifications. Duration State aid should be limited in time. Defining a certain time period is designed to support the establishment of new traffic and as such should be no longer than 2 years. A 12-month period allows for a full year cycle within which different traffic types can be generated such as business, leisure and seasonal. Normal practice at many airports for start-up routes is 2 years. This should fully cover the payback period of the start up operation for the carrier. A period longer than this may allow for operational aid, which may distort competitive market forces and should not be allowed.


Intensity The service benefiting from the aid must ultimately prove profitable. This is why the amount of the aid must gradually be decreasing over the limited time period. E.1.8: In your view, which other compatibility criteria should be revised, abolished or added. Please explain. As mentioned earlier, state aid should only be granted under very specific conditions and subject to an effective and efficient prior control by both Member State and the EC. Certain compatibility criteria such as long-term viability and degressiveness (79d), intensity and duration (79f), non-discriminatory allocation (79h) and cumulation (80) could become more prominent. Competition (from a catchment area perspective) could also be added instead of using the sole criterion of airport size. E.1.9: Please explain whether you regard start up aid as necessary in the current business environment? Did you set up new flight routes despite not receiving Start up aid? Please specify in your answer providing data, if possible. Not applicable E.1.10: Did you apply and/or receive Start up aid? Please describe whether the aid was approved or not and on what grounds providing also details on the procedure. Not applicable E.1.11: Please describe the economic / social / environmental impacts that start up aid had for you as airline / airport, if possible, with data and narrative explanations. Not applicable E.1.12: Do you consider that the scope of the eligible costs for start-up aid is accurate? If not please justify your answer.

It is difficult to assess whether or not the scope of the eligible costs for start-up aid are accurate since state aid cases are not all notified by Member states and are not examined, in a timely manner, by the EC before being accepted. E.1.13: Do you consider that the aid intensity and duration serves its purpose as investment incentive or not? Please justify your reply with data also mentioned the economic / social / environmental impact. E.1.14: From a transport perspective, please describe whether you regard it as justified that the 2005 Aviation Guidelines should keep the prohibition of start up aid for a connection where a high speed train link exists. Please mention also potential economic / environmental / social impacts in your answer, if possible. When subsidies apply, they should ensure that competition is not distorted and that there is a level playing field between modes of transport. Highway and any other kind of efficient connections should then also be referred to.


1994 Aviation Guidelines F.1.1: Do you as airline / public authority consider that the rules established in the 1994 Aviation Guidelines will remain appropriate in the light of the developments of the market or do you believe that abolition or adaptations will be necessary? Please explain what changes should be introduced and why? Not applicable F.1.2: Please explain what is in your view the relevance of the 1994 Aviation Guidelines after the publication of the 2005 Aviation Guidelines? Please explain which rules set out in the 1994 Aviation Guidelines should be retained? Before the publication of the 2005 guidelines, the legal framework regarding state aid was clear. The EU Treaty forbade state aid as a matter of principle. In the aviation sector, the 1994 guidelines authorized state aid in only two cases: public service obligation compensation and social aid granted to specific categories of passengers. The 1994 guidelines remain appropriate, bearing in mind that conditions for Member States to impose public service obligation compensation have been revisited by the adoption of regulation 1008/2008 on “Common rules for the operation of air services in the Community”. F.1.3: Is the scope of operating aid to airlines still appropriate, i.e. as regards/for public service obligation and social aid to the benefit of consumers? F.1.4: Do you consider that aid of a social character to cover specific categories of passengers and underprivileged regions, mainly islands, is still justified by the market conditions? Please justify your opinion on this issue. F.1.5: Are the assessment assumptions for market economy investor principle investments still valid in view of the market development, in particular concerning capital injections, loan financing, etc. F.1.6: In the context of the market development do you believe that there is a need for special conditions for the assessment of restructuring aid in the aviation industry? Please provide detailed economic justifications. F.1.7: In your view, which other compatibility criteria should be revised, abolished or added? Please explain. Further information G.1.1: In case you have carried out or are aware of any studies concerning the impacts of public financing of airports or air carriers, or related aspects which maybe relevant, we would be grateful if you could provide us with these studies. You should clearly identify any confidential data in these studies. Where protected by copyright or contractual restrictions, please provide the references of the study. IATA is not aware of any studies concerning the impacts of public financing of airports and air carriers.

iata submission - state aid rules for the aviation sector...

Documents