1 C*· A U) I I Study on Competition between Airports and the I Appiication of State Aid Rules I I I Final Report I Volume 1 I September 2002 I European Commission I Directorate-General Energy and Transport Directorate F - Air Transport I I I I Air Transport Group School of Engineering Cranfield University I Cranfield Beds MK43 OAL United Kingdom I With: I Alan Stratford and Associates (SKM Europe) INECO I Gruppo CLAS enton Wilde Sąpte Study on Competition between Airports and the Application of State Aid Rules Final Report Volume 1 September 2002 European Commission Directorate-General Energy and Transport Directorate F-Air Transport ι ΙΛ^^"^ \ Air Transport Group Schooi of Engineering C*^^ η . ^ζ&ν „'^Γ Ν -^ Cranfield University Vt> V l CnrraannfífcikeIHld Beds MK43 OAL cP^''" United Kingdom With: Alan Stratford and Associates (SKM Europe) INECO Gruppo CLAS Denton Wilde Sapŕe Contents - Final Report Chapter Page Executive Summary 0-1 1 Introduction 1-1 2 Legal Overview (Summary) 2-1 3 Airport Ownership 3-1 4 Airport Competition 4-1 5 Airport Finance 5-1 6 Discussion 6-1 7 Conclusions 7-1 Annex A Legal Overview Al I Air Transport Group, School of Engineering, Cranffe/d Universrty I Competition between A/rporís and (Ле Application of State Aid Rules Executive Summary Executive Summary In general terms, the principal objective of this Study is to provide the Commission with information and analysis necessary to update the approach towards the application of State Aid Rules to the public financing of airport infrastructure. The Final Report, which should be read in conjunction with the Interim Reporl, is split into two volumes. Volume 1, of which this is part, has concentrated on four main areas. The first of these (Chapter 2, supplemented by Annex A) is a legal overview of current legal legislation in the European Union including an introduction to EC law on State aids and the application of EC law on State aids to airports. Denton Wilde Sapte has prepared this overview as their contribution to the Study. Chapter 3 concentrates on airport ownership and includes an analysis of the different types of airport ownership in Europe including national government, regional / local government chambers of commerce and privatised entities. This is followed by Chapter 4 that examines airport competition including definitions of different types of competition and individual airport views on airport competition including catchment areas and competing airports. Chapter 5 deals with airport finance and includes discussion on aeronautical charges, the economic viability of airports, the financing airport capital expenditure, subvention (subsidies) and Accession countries. Volume 2 of the Final Report supplements this Volume and includes data, for each of the countries examined, collected during the course of the Study including a brief discussion on government policy, airport traffic data for the country, an overview of the airline market and detailed information about each of the airports that were interviewed. The overall conclusions of the Study are set out in Chapter 7 but the salient points are reproduced below. Airports are happy to be part of a competitive market. The only proviso is that competition is on a level playing field as general concerns have been expressed about the relative level of airport charges, taxation loop-holes and elements of state-funding that are sometimes inconsistent (new security measures, for example). There are many airport ownership models in Europe ranging from 100% privatisation to an airport network still under the control of the national Civil Aviation Authority. Most models publish financial performance data, details of accounting practices and tax regimes for Air Transport Group, School of Engineering, Cranfield University 0-1 I I Competition between Airports and the Application of State Aid Rules Executive Summary I individual airports. The exceptions to this are those airport networks controlled by the national C AAs. I Airport charges are published in the public domain. In general uie charges follow the overall recommendations of ICAO. The services for which charges are mcurred are generally I consistent from one airport to another. Environmental (emissions) charges are still uncommon. The relative level of charges can vary from one airport to another. In some cases this is because of economic regulation on a national airport network basis. In other cases, I individual airports are regulated in recognition of their natural monopoly. Concerns have been expressed about the application of discounted airport charges and route support grants. I Differential charges between airports have little impact on airport competition with the exception of the low-cost market. I Funding for airport infrastructure can come from several sources including cash flow, retained profits, government grants and loans and other sources such as the European Union TEN-T programme of the European Investment Bank. Current Commission policy is that in general I the funding of airport infrastructure does not constitute State aid due to congestion at existing airports. Similarly, the current development of the Community Trans European Transport I Network would allow the construction of transport related surface infrastructure to an airport without being classified as State aid. I Depreciation periods used were fairly consistent and in line with normal industry practice. For example, the depreciation period for runway was up to 50 years, terminal buildings 30 to 50 years, and mobile equipment 5 to 10 years and the shortest depreciation periods are normally I for information technology systems. Most airports are currently paying corporation tax, the rates varying between 28 and 40% of the taxable profits. I The transition point for an airport to become profitable appears to be in the ader of about 500,000 WLUs per annum (without cargo, this would be equivalent to about 500,000 I passengers per annum. I Many airports have limited or no natural competitors, for example, remote airports will compete only with their nearest neighbour (if at all) and international hubs will tend to compete only with other international hubs. The main area of airport competition is between I the regional airports. For example, large regional airports will compete with each other and the nearest hub airport and smaller regional airports will compete with each other. Airports will compete with each other according to the common market that both airports wish to I serve. I Competition between two airports can be judged by comparing attributes. These can include congestion, surface access and airport charges. It is suggested that a first step towards airport classification in terms of competition would be to develop a matrix system. I Air Transport Group, School of Engineering, Cranfíeld University 0-2 I I Competition between Airports and the Application of State Aid Rules Executive Summary In general, it appears that, while there may be some concems by individual airports on unfair competition due to differential airport charges and taxation, in general the airports feel that they are operating in a reasonably competitive environment and that the main threats to fair competition are those of congestion and environmental constraints both of which impact on airport operations in different ways that can vary from one countrv to another and even one neighbouring airport to another. Air Transport Group, School of Engineering, Cranfield University 0-3 Competition between Airports and the Application of State Aid Rules Introduction 1 Introduction 1.1 Background Changes in the airport industry over the last decade are such that airports are no longer just infrastructure providers but, in many cases, are now also operating in a competitive environment. The degree of competition between or at airports, or perception thereof, can take many forms. Some of these have been idertified by ACI Europe1 and may include competition: To attract new passenger and freight services Between airports with overlapping catchments Between hub airports and medium / long-haul transfer traffic Between airports within the same urban conurbation The provision of services at individual airports Between different terminals at an individual airport In addition, competition can also include the attraction of funds, subsidies (including tax alleviation), grants or other monies from central or regional government under the overall umbrella of what might be considered to be State aid. This is particularly important as a number oftest cases have been brought to the attention of the European Commission in which it has been claimed that State aid in one form or another to a particular airport has in fact resulted in unfair competition or an unwarranted level of subsidisation. At the same time, the Commission's policy on state aid for airport infrastructure has been set out in the guidelines on State aid in the aviation sector2, according to which the construction and enlargement of airport infrastructure represent general measures of economic policy that cannot be controlled by the Commission under the Treaty Rules on State aids. This traditional view is increasingly challenged by the commercial evolution and the appearance of competition. Indeed, this approach is based on the implicit assumption that competition between airports is not an issue. In the present situation, as long as the provision of airport facilities is a European-wide commercial activity open to competition, the application of State European Airports: A Competitive Industry, October 22nd, 1999 The Commission's Guidelines for State Aid in the aviation sector set out that the constmction or enlargement of aviation infrastructure projects financed by the public sector represents a general measure of economic policy that cannot be controlled by the Commission under the Treaty Rules on State Aid, insofar as it is aimed at meeting planning needs or implementing national transport policies. Nevertheless, since possible aid elements may result from preferential treatment of specific companies when using the infrastructure, the väidity of the is general principle is subiect to the condition that the infrastructure concerned is accessible to all users on the basis of obiective and non-discriminatorv I criteria. Air Transport Group, School of Engineering, Cranfield University ^T" I I Competition between A/Vports and the Application of State Aid Rules Introduction aid rules targeting certain practices can no longer be ruled out and the current approach may require updating. The whole aspect of competition is indeed now becoming very complex with different models of airport ownership, different charging policies, different roles and vastly differing ranges of passenger and freight traffic. Taking also into account requirements to minimise costs to the users and accounting transparency then it is not surprising that the Commission has found it necessary to examine the current state of the airport industry. 1.2 Study Objectives In general terms, the principal objective of this Study is to provide the Commission with information and analysis necessary to update the approach towards the application of State Aid Rules to the public financing of airport infrastructure . The instrument for this will be the Final Study Report that will: Analyse the evolution of the airport industry in recent years, focusing in particular on the development of competition between airports Examine the different forms of state resources granted to airports, with a view to assessing whether and to what extent they come within the scope of Article 87 of the Treaty. Provide an in-depth understanding of: How public financing is provided to airports across the EU The economics of airport competition Whether, to what extent and under which circumstances different forms of public financing can be considered as being necessary for the achievement of public service objectives What type of parameters and criteria (e.g. size thresholds, geographical location) could be used to classify airports on the basis of the contestability of their markets? Such a classification should make it possible to identify airports The reference documents setting out the current Community policy are the Guidelines for the application of Articles 87 and 88 of the EC Treaty and 61 of the EEA Agreement to state aids in the aviation sector (OJEC no. C350 of 10.12.1994). Further background material has been provided by the decisions on Manchester Airport and Aerelba. Air Transport Group, School of Engineering, Cranfield University 7-2" I Competition between Airports and the Application of State Aid Rules Introduction for which it can be assumed that competition is an issue of limited or no relevance (e.g. small, regional and peripheral airporís) 1.3 Final Report Structure The Final Report has been split into Volumes 1 and 2. The main text of the Report has been mcluded in Volume 1, this having five main chapters. The Final report should also be read in conjunction with the Interim Report Denton Wilde Sapte (One Fleet Place, London) is responsible for Chapter 2, and Annex A; this Chapter provides a legal overview of current legal legislation in the European Union including: An introduction to EC law on State aids The application of EC law on State aids to airports Chapter 3 discusses airport ownership including: Historical development of airport ownership in the European Union Types of airport ownership National government ownership Regional / local government ownership Chambers of commerce Privatised airports This leads into Chapter 4 that examines airport competition including: Definitions of different types of competition Views on airport competition from airport interviews including catchment areas and competing airports Chapter 5 examines airport finance covering: Aeronautical charges Economic viability of airports Financing airport capital expenditure Subvention (subsidies) Accession countries Chapter 6 seeks to draw together the findings of Chapters 2 to 5 with the intention of analysing of the inteiplay between public financing and inter-airport competition including: Air Transport Group, School of Engineering, Cranfield University 7-3" Competition between Airports and the Application of State Aid Rules Introduction The economics of the European airport industry, especially on competition between airports Ownership structure patterns Different types of public financing and impact on airport charges Airport charging practices and impact on competition Fiscal practices, and the legal implications of 'harmful tax competition' Financing the provision of services of general economic interest The development of criteria to classify airports on the basis of competition to which they are exposed Implications for the Accession countries Legal implications drawn from the analysis in Chapter 2 From the analysis undertaken in Chapter 6, supported by data from the Interim Report and Volume 2 of the Final Report, it is hoped that the Commission will be provided with an understanding of: How public financing is provided to airports across the EU The economics of inter-airport competition Whether and to what extent and under which circumstances different forms of public financing may be negatively affect competition between airports and the market for corporate property and control of airport infrastructure Whether, to what extent and under which circumstances different forms of public financing can be considered as being necessary for the achievement of public service objectives What type of parameters and criteria (e.g. size, location) could be used to classify airports on the basis of the contestability of their market. Volume 2 of the Final Report includes data collected during the course of the Study and set out on a country-by-country basis. For example, for each of the EU countries and a selection of Accession countries, there is a brief discussion on government policy, airport traffic data for the country, an overview of the airline market and detailed information about each of the airports that were interviewed including: Traffic data including a split into domestic and international traffic Accounting policies including tax and depreciation policies Airport charges including policies on discounts and environmental charges Airport competition, for example, primary competitors for different types of traffic Ownership structure, balance sheets Past and future capital investment including funding sources Air Transport Group, School of Engineering, Cranfield University 1-4 I I