Briefings
Come fly with me: recent developments in EU airport regulation
The air transport sector is key to the European economy: the industry was worth $118 billion in 2010 and four of 2010’s top 15 busiest airports (by scheduled commercial departure) were located in the EU.
Over the last 40 years, there have been immense structural changes in the air transport sector. Airport ownership has transferred from the public to private sector. Traffic rights and market access for airlines have become increasingly liberalised leading to the emergence of low-cost carriers and major alliances. And of course, the current European financial climate has provided the industry with a raft of new challenges.
These changes have led to the increasing need for competition/antitrust law to regulate the undertakings that control airports and operate airlines to prevent abuses related to market dominance. In addition, the status of airports as former or quasi-public bodies has led to the European courts assessing a range of airport and airline funding issues linked to the granting of EU State aid.
The commercialisation of airports has created a range of new issues, not foreseen by previous legislation. As the market imperative becomes more prevalent, airport operators seek innovative methods for revenue generation. As airports seek to exploit these new commercial opportunities, it is likely that tendering issues will also increase in relevance.
However, as airports and airlines continue to explore new commercial initiatives, the laws regulating the sector must remain relevant whilst ensuring that there are no infringements of the principles enshrined in the Treaty on the Functioning of the European Union (TFEU). This briefing examines some of the most prevalent legal issues impacting the sector in the areas of competition/antitrust law, State aid and airport services tendering.
Competition/antitrust law issues
Market definition provides the analytical framework for the European Commission’s (the Commission) assessment of whether there has been an infringement of competition law under Article 101 and Article 102 TFEU.
Defining the market is a complex economic exercise, and involves assessment of both the relevant product market and the relevant geographic market.
Market definition
1. Air transport services
The starting point is the consideration of an origin and destination (O&D) pair, usually a city pair and the focus is on demand substitution.
The consideration of the O&D is based on the fact that passengers will generally only fly from a specific origin to a specific destination, and would be unlikely to change their preference in relation to destination or origin when faced with a small but significant increase in price. Each possible origin and destination pair is treated as a separate market from the customer’s perspective.
In terms of the product dimension, the alternative possibilities include different airline types or different modes of transport.
In terms of geographic area, alternative possibilities include; indirect connecting flights, direct flights from other airports where there are significant catchment area overlaps, and alternative modes of transport.
Using the O&D city pair as a starting point, the demand substitutability of different passenger possibilities should be assessed. Substitutability is assessed on a case-by-case basis. Supply side substitutability is only normally considered when it has an immediate and effective impact on the relevant product market.
The Commission has found that passengers travelling on unrestricted tickets (time-sensitive passengers with a need for flexibility) may be in a different market from passengers with restricted tickets (non-time sensitive). Passengers with restricted tickets will be more interested in the price of tickets than flight flexibility. Business passengers tend to be time sensitive and prefer the ability to change their tickets and return quickly to their starting point. They will choose to use airlines and airports offering more flights in a given O&D pair and the flexibility to use unrestricted tickets. Therefore there are distinct time sensitive and price sensitive markets when assessing the impact of competition on particular routes, and this distinction can influence the size of airport catchment areas.
Airport substitutability has to be examined from both the demand and supply side. From the demand perspective, passengers who start and finish their journey in a catchment area of two or more airports have the freedom to choose their O&D pair. This increases competition if airport choice also implies a wider airline choice, to the extent that they can be said to be independent. The share of customers on a certain route who actually live in an overlapping catchment area will have to be established. Catchment areas tend to be smaller for internal European flights and larger for long-haul flights. On the supply side, the substitutability will depend on the passenger’s needs but also on the kind of service that airports wish to provide.
2. Airports
The starting point is the range of airport services provided by airport operators. These services will include the provision and maintenance of airport infrastructure, the provision of essential staff and the provision of relevant security services. An operator will allocate resources between airlines and may contract-out the provision of certain services.
Both passenger and airline demand for these services is taken into account when considering the relevant product market.
Passenger demand depends on the range of destinations offered by a particular airport, frequency of services, the competitiveness of prices for flights from that airport and seat availability. Each of these factors depends in turn upon airlines deciding to operate from a particular airport. The convenience of location of a particular airport is also a critical factor in assessing passenger demand, as is the quality and price of services at the airport.
Airline demand will depend on the expected profitability of operations, which in turn is dependent on local passenger demand, the number of other airlines operating at a particular airport, the current and anticipated airport charges and operational costs and the quality of airport service.
Airlines tend to make longer term decisions on their operation patterns across a number of airports. It is therefore relatively rare that airlines switch services from one airport to another and airlines tend to concentrate on growing their business at one specific airport.
In considering the relevant geographic market for airports, the analysis begins at regional level and this is widened or narrowed based on substitution patterns by air passengers and airlines.
Article 101 TFEU
Article 101(1) TFEU prohibits all agreements between undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition.
An agreement will not infringe Article 101 TFEU if the following four cumulative criteria contained in Article 101(3) TFEU are met:
- The agreement contributes to an improvement in the production or distribution of goods or the promotion of technical or economic progress.
- Consumers receive a fair share of the benefits.
- The restrictions imposed by the agreement are necessary to achieve the objectives.
- The agreement must not allow the parties to eliminate substantial competition in respect of the products or services offered.
- Is open to commercial traffic.
- Has annual traffic of over 5 million passengers and to the airport with the highest passenger movement in each Member State.
Article 102 TFEU
Article 102 TFEU prevents abuse of a dominant position within the internal market or a substantial part of it. Abusive behaviour can be either exclusionary or exploitative.
An economic entity is considered dominant in a market when it can act independently of the market, i.e. without the need to consider customers, consumers or other competitors. A high market share is indicative of dominance but it is possible for a market operator with a relatively small market share to occupy a dominant position. It is also possible for a market operator with a high market share not to be dominant (for example because there are no barriers to market entry or an insufficient number of competitors).
A dominant organisation will infringe Article 102 TFEU if it engages in abusive practices, including, for example, excessive/predatory pricing, a refusal to supply, margin squeeze, tying practices or discrimination between customers.
Mergers
The EU Merger Regulation grants the Commission the ability to assess mergers and acquisitions (namely a change in control) concerning companies with a turnover above certain thresholds. These transactions should be notified to the Commission by the parties involved. The Commission’s duty is to prevent the substantial reduction of competition.
The Commission assesses a number of factors in merger cases, including whether the notified transaction would lead to a significant impediment to competition and have a detrimental effect on consumers.
In 2007, the Commission blocked the proposed acquisition of Aer Lingus by Ryanair. The proposed transaction involved a merger of two airlines based at the same “home” airport in the national capital. Aer Lingus was the former Irish flag carrier, but has adapted its business model to offer low-cost short-haul flights. Ryanair offers low-cost flights between numerous destinations in the EU. It was found that other airlines were unlikely to enter into direct competition against the merged entity and the remedies offered by the parties were not sufficient to prevent the merger being blocked. The General Court upheld the Commission’s prohibition in 2010. The case is currently closed.
In 2011, the Commission similarly blocked a proposed merger between Aegean Airlines and Olympic Air. The market investigation found that the merger would have led to a quasi-monopoly between Athens and eight other Greek airports. The Commission held that there was no prospect that a new entrant would compete on the Greek market after the merger and that the remedies offered by the parties did not prevent Greek customers from losing out. An appeal is currently pending before the European Courts.
It seems, therefore, that the Commission does not welcome mergers between two airlines based at the same “home” airport in a national capital. At the time of the Aegean Airlines decision, the Commission had examined 11 mergers and many alliances in the sector and yet has only prohibited the merger in the two cases discussed above.
Airport alliances
In 2009, Aeroports de Paris (AdP) and the Schiphol group entered into an airport alliance, combining two of Europe’s largest airports, Charles de Gaulle, Paris and Schiphol, Amsterdam. The combined catchment areas will generate a passenger market with 59 million inhabitants. The alliance was established with the objective of increased process harmonisation between the two partners, ultimately for the benefit of customers.
The concept of a dual-hub airport alliance mirrors the development of airline alliances. Three major global airline alliances have been established based on the perceived economic benefits of cooperation, including pooling of knowledge and resources, increasing efficiencies and driving down cost. However, it remains to be seen if airport alliances become as prevalent as airline alliances and the competition law aspects of these alliances should be carefully considered, particularly the operation of Article 101 TFEU.
Airport Charges Directive (the ACD)
For an efficient overall aviation system, all airlines must have equal access to airport facilities at a fair price. The ACD, which came into force on 15 March 2011, represents legislative intervention to achieve this.
An airport charge is defined in the ACD as:
“a levy collected for the benefit of the airport managing body and paid by the airport users for the use of facilities and services, which are exclusively provided by the airport managing body and which are related to landing, take-off, lighting and parking of aircraft, and processing of passengers and freight.”
To ensure efficient operation of the aviation market, these charges should be non-discriminatory, fair and transparent.
The ACD applies to any airport located in a territory subject to the Treaty, that:
The ACD requires that fees charged by airports to air carriers for the use of their services and facilities are calculated in a more transparent manner and on the basis of actual costs. It seeks to avoid unnecessary price differentials where possible. Airport managing bodies must regularly consult with airport users about the level of charges, and if appropriate, the level of service provided. Consultation with airport users should also occur before new infrastructure projects are finalised.
The ACD also provides that an independent supervisory body must be appointed to arbitrate and settle disputes. In the UK, the Airport Charges Regulations 2011 have implemented the ACD and appointed the Civil Aviation Authority as the supervisory body.
The Commission has already begun scrutinising the national measures taken by Member States and is due to report to the Commission and European Parliament in 2013 and, if necessary, take future actions against Member States for non and/or improper implementation of the ACD.
State aid issues
The Commission has published two sets of guidelines relating to airport and airline State aid. The first set of guidelines, published in 1994 (the 1994 Guidelines), relate to the conditions for granting State aid to airlines. The second set of guidelines, published in 2005 (the 2005 Guidelines), complement the 1994 Guidelines and contain provisions relating to start-up aid and guidance and control concerning the public financing of airports.
Infrastructure
Public financial assistance to airports can include assistance with improvements to the quality of airport infrastructure, and state guarantees to underpin the privately arranged construction of entirely new infrastructure.
The 1994 Guidelines state that the construction or enlargement of infrastructure projects represents a general measure of economic policy which is not governed by State aid principles. However, if a publically financed project grants some infrastructure users preferential treatment, State aid provisions will apply. Traditionally, public financial assistance to airport infrastructure was not considered State aid.
However, recent judgments from the European Courts based in Luxembourg have confirmed that the construction and operation of an airport may constitute an economic activity, subject to the Treaty rules on State aid. Certain exceptions apply to infrastructure where the public interest is concerned, for example, air traffic control, customs, police and security. Therefore, the rules applicable to airport infrastructure have evolved, extending beyond the 1994 Guidelines and consequently require updating to reflect current European case law.
In a recent landmark decision, the General Court of the EU in Luxembourg annulled the Commission’s decision in relation to the Brussels South Charleroi Airport (Case T-196/04 Ryanair Limited v Commission of the European Communities, Court of First Instance, 17 December 2008 (“Ryanair”)). The General Court held that the Commission had incorrectly applied the Market Economy Investment Principle (MEIP). According to the MEIP, the relevant commercial transactions should be assessed as a whole to determine whether public entities and their controlling stakeholders act similarly to a private rational operator in the market economy. In Ryanair, the relevant entities were both the Walloon Region and the Charleroi airport. The judgment also confirmed that the fixing of landing charges constituted activities directly related to the management of the airport infrastructure and therefore constituted an economic activity. (Airport charges may be a consideration for the services rendered at the airport.) The mere fact, however, that an activity is carried out in the public sector, does not imply that it relates to the exercise of public authority power and control and the MEIP should be assessed in its actual context.
Public financial assistance is likely to constitute State aid and the Commission will assess whether the aid is compatible with TFEU principles, taking into account the 1994 and 2005 Guidelines. Any public financial assistance granted must be on terms that a private investor would accept, i.e. must comply with the MEIP to not constitute aid. Whilst public financial assistance may constitute State aid, it may still be permissible if it is assessed as being compatible with the common market in the EU. However, public financial measures than involve an aid element require prior notification and approval before the Commission, before being put into effect.
State aid to airlines
Airport operators want to attract new airlines to open up new routes and consequently offer a range of incentives, including a reduction in landing charges and other subsidies. These start-up incentives could amount to State aid. The 2005 Guidelines contain specific provisions relating to start-up aid, albeit these rules have been conceived as quite complex in their practical application.
For the last seven years, airlines have relied on the 2005 Guidelines to raise complaints concerning the perceived preferences granted to other carriers. Indeed, low-cost carriers will often raise State aid complaints against legacy carriers and as the airline market has developed, low-cost carriers are bringing complaints against other low-cost carriers who they allege to be gaining an unfair economic advantage. The Commission, in particular Directorate General for Competition (DG Competition) in Brussels is currently overloaded with such complaints.
The practical application of the Guidelines is complex and the Commission is likely to revisit this in its impending modification of both the 1994 and 2005 Guidelines.
Retail operations
Airport retail operations are becoming as sophisticated as high street operations. Following Ryanair, any activity involving the offering of goods and services in a given market is deemed an economic activity. As such, airport operators must ensure compliance with both procurement and State aid rules, if, for example, they offer preferential rents to attract certain luxury retailers to establish stores in airport terminals.
Airport services tendering
As airports increasingly respond to commercial pressures, airport operators have become more concerned with developing as many revenue streams as possible. For example, Heathrow Airport has developed a reputation for having the most productive retail space of all the major European airports. There are over 120 concessionaires and 500 retail outlets including premium retail names. Any concessions awarded may have to comply with the requirements of public procurement law.
Concessions
Tenders for concessions may fall within the ambit of public procurement law. In December 2011, the Commission published proposals for a new directive on concessions, which might affect the way in which tenders for advertising space are published. Innovative joint venture agreements could attract scrutiny under EU merger regulations.
Advertising space
The sale of advertising space in airports is a lucrative business. In 2009, Clear Channel Danmark A/S was awarded the concession for the operation and development of the indoor and outdoor advertising media at Copenhagen Airport. The concession was awarded following an international call for tenders.
In 2011, AdP and JCDecaux Airport France SAS notified the Commission of a proposed concentration in the form of a joint-venture company responsible for the operation and marketing of all advertising installations managed by AdP in Ile-de-France.
State subsidies impacting on international commerce?
State financial support of airlines can transcend EU law and become an issue for the World Trade Organisation. A recent six year dispute between the USA and the European Community (including Germany, France, Spain and the United Kingdom) concerned alleged EU Member State subsidies to Airbus SAS to assist in the company’s development of large civil aircraft. On appeal, the WTO found that although certain categories of aid did amount to unfair subsidies, the aid was not targeted at boosting exports. In another WTO case, Boeing was found to have received over $5 billion in unlawful subsidies from the US government. The litigation could continue until 2018, with Boeing believing that EU subsidies have given Airbus unfair economic advantage in the global market.
The future?
Since the publication of the 2005 Guidelines, a large number of in-depth investigations have been opened, involving airports and airlines. Most recently in 2012, the Commission opened State aid investigations into airports and airlines in Germany, Austria, Sweden and France. Traditional national carriers have been subject to various restructuring aid measures in recent years, in turn triggering a number of in-depth State aid investigations by the Commission, e.g. Olympic Airways and Alitalia.
The increasing number of matters under investigation may be an indication that the current guidelines on State aid do not provide sufficient clarity and/or do not accurately reflect the market change that has occurred over the last ten years.
In 2011, the Commission launched a consultation, inviting Member States to provide feedback on a number of issues related to State aid to airports and airlines. In January 2012, the Commission indicated that the State aid guidelines were under review however, new Guidelines to replace/update the 1994 and 2005 Guidelines are not expected before summer 2012. The new Guidelines will reflect the recent market realities, take into account recent jurisprudence by the European Courts in Luxembourg, clarify ambiguities, reduce complexities of the current version of the Guidelines and, it is hoped they will provide some guidance regarding the compatibility assessment of public financial measures in the air transport sector.
Conclusion
Aviation is one of the most highly regulated industry sectors and over the last 20 years regulation has tended to be at a European, rather than national, level. State aid is currently attracting the focus of the European law makers and, after the publication of new Guidelines later in the year, it is expected that the Commission will try to adopt those revised rules as soon as possible, with a view to the more effective and efficient handling of the stream of State aid and other issues affecting the sector. As soon as the new rules are adopted, the Commission will be in a position to dispose faster of the less problematic cases and focus its resources on those cases that ultimately lead to distortions of competition in the EU. It remains to be seen what the next big issue affecting this exciting and ever evolving sector will be.
