REVIEW OF THE

COMMUNITY GUIDELINES ON FINANCING OF AIRPORTS AND START-UP AID TO AIRLINES DEPARTING FROM REGIONAL

AIRPORTS1

QUESTIONNAIRE

NOTE: The following questionnaire follows the structure of the Community guidelines on financing of airports and start-up aid to airlines departing from regional airports. You are requested to follow the order of the questions, even though you are not required to reply to all questions. You can also submit additional information that you consider relevant and which does not fit the questions in this questionnaire.

A. About You

Please describe the main activities of your company/organisation/association. Please provide your contact details below.

Name Juliusz Komorek

Organisation represented Ryanair

Location (Country) Ireland

E-mail address komorekj@ryanair.com

Ryanair operates more than 1,500 flights per day from 44 bases and 1300+ low fare routes across 27 countries, connecting 160 destinations. Ryanair operates a fleet of 272 new Boeing 737-800 aircraft with orders for a further 40 new aircraft (before taking account of planned disposals), which will be delivered over the next year. Ryanair currently has a team of more than 8,500 people and carried 73 million passengers in the last fiscal year.

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

1 OJ C 312, 9 December 2005, p. 1.

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A.1. Do you object to the disclosure of your identity?

No.

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 documents2 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.

Not applicable.

B. General

B.1. Assessment of the market developments and the necessity to modify the 1994 and 2005 Aviation Guidelines

B.1.1 What are, in your view, the main developments, in particular with regard to

(a) Economic and social matters;

(b) Environmental and climate change issues;

(c) Regulatory changes, such as passenger rights, security standards, airport charges, transport and competition with other modes of transport, tourism, tax policies, successive EU enlargements in 2004 and 2007 and extension of the Schengen zone; and

(d) Competition and State aid issues

that have recently taken place in the aviation sector and what are their impacts on the sector? Where available, please provide data or studies showing such evolutions. Where protected by copyright or contractual restrictions, please provide the references of the study.

In 2005, when the Guidelines were published, low fares airlines had a market share of around 25% of total European seat capacity3. Recent work for the European Low Fares Airline Association (ELFAA) shows that by 2010, low fares airlines had achieved a market share of 38% of all intra-European passengers4. When only point to point traffic is included, this share rises to 43%. By 2020, based on current trends and airline fleet replacement plans, the share of low fares airlines is expected to rise to between 45% and 53% of intra-European air passenger journeys. For point to point journeys, the low fares market share is projected to rise to between 50% and 60%.

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

3 SRS Low Cost Monitor 2006.

4 York Aviation, Market Share of Low Fares Airlines in Europe, March 2011.

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Hence, for intra-European air passenger travel, the low fares model is no longer a special case but the normal business model by which such routes are served, other than for hub connecting purposes. This means that any new Guidelines would need to reflect this change in the market dynamic and take as a baseline the commercial relationships between airports and airlines in this segment, which reflects the consequences of the liberalised and competitive aviation market in Europe.

Furthermore, increasing consolidation amongst network carriers with an emphasis on feeding their hubs has resulted in fewer alternatives for regions and their airports seeking to develop an increased range of direct point to point connections. In many cases, low fare carriers like Ryanair represent the only prospect of growth for regional airports in the European market. Increasingly, this applies to larger as well as smaller regional airports as the network carriers’ consolidation and focus on hubs increases.

Air travel faces increasing competition from high speed rail in many intra-European markets. It is essential that a platform for fair competition with rail exists. To that extent, whatever principles apply to the MEIP in respect of the aviation sector must apply on a consistent basis to the rail sector, including in relation to the provision of core infrastructure, such as rail tracks or runways, and access to such infrastructure.

Enlargement has opened up new market opportunities and many of these markets rely heavily on the low fares business model to develop and sustain traffic flows. These routes are socially and economically valuable in the context of the European cohesion and regional development.

In December 2008 the EU Court of First Instance quashed the Commission’s February 2004 Charleroi decision, dismissing as fully inadequate the Commission’s reasoning. Since the 2005 Guidelines and many of the Commission’s subsequent decisions to investigate arrangements between low fares airlines and regional airports were based on the principles established initially in the Charleroi decision, the CFI’s judgment calls for a substantial revision of the Guidelines and for a careful analysis of the airline / airport relationships in the pending State aid investigations.

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.)?

From our perspective, the evolution of airport/airline business models since the adoption of the 2005 Aviation Guidelines has been strongly impacted by the success of low cost airlines like ourselves and the resulting growth of regional airports. In general terms, low cost airlines have continued to grow at a faster rate than traditional airlines that use high-cost airports, and this has had repercussions to regional vs national airport business models.

Contrary to national airports, regional airports rely almost entirely on low-cost airlines for their continuing (often impressive) growth. Moreover, their location, away from congested and more expensive areas, makes it easier for them to

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expand their capacity organically, in order to meet realistic demand expectations rather than fanciful political pet projects. By contrast, the expansion of national airports’ capacity is more expensive, politicised and constrained by environmental or urban planning rules, and less driven by actual demand. It is therefore more likely to result in controversial, State aid-financed projects that distort competition, and increase prices for consumers.

Unlocking the potential of regional airports is crucial to continuing the process of territorial cohesion and regional development in the EU, as well as removing congestion from the “hub” airports of the high-cost airlines. Developing regional airports means more employment, greater opportunities for business in peripheral areas of the EU, less emissions through direct region-to-region connections instead of indirect flights through hubs, and less ground transportation emissions through the use by passengers of their local airports.

The growth of regional airports must be encouraged by flexible State aid Guidelines which focus on the Market Economy Investor Principle (MEIP) rather than rigid rules which prevent growth where there is demand for growth. Use of secondary and regional airports must be encouraged in order to remedy any capacity issues at saturated hubs and reduce the number of inefficient indirect flights through hubs.

As airports become increasingly commercial in their approach as a result of growing private sector participation in the ownership and management of airports, long term commercial contracts between airports and airlines are becoming the norm. These contracts are set to reflect:

a. the commitment which the airline makes to the airport, in terms of:

i. passenger volumes,

ii. number and range of destinations,

iii. frequencies of service,

iv. based aircraft,

v. duration of the contract;

b. the value to the airport of the incremental passenger volume, including:

i. opportunities for enhanced non-aeronautical revenue generation,

ii. the availability of spare capacity and the opportunity cost of capacity used,

iii. the need for any additional facilities,

iv. the increase in the airport’s value,

v. the increased potential to attract other airlines.

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It is increasingly the case that published charges are only applied to ad hoc irregular operations by charter or other airlines and at the large monopoly hub airports which are usually able to extract excessive charges from airlines due to their market power.

Indeed, the UK Civil Aviation Authority has recognised that a willingness of an airport to enter into long term contracts with airlines may be a sign of an airport acting both commercially and competitively:

“4.46 In competitive markets – on the other hand – it is open to companies to innovate. In doing so, companies bear significant risks, but – on the flip side – can expect to make substantial returns. Not all companies’ will succeed, but those that consumers favour will do so, and can expect to be rewarded accordingly.

4.47 There are several examples of innovation in the regional UK airports

market. First, airports are entering into longer term contracts with airlines, with commitments on both sides including in respect of service provision, charges, and sometimes marketing. Second, some airports are seeking to meet the demands of no-frills airlines through dedicated no-frills terminals. Third, some airports are changing staff terms and conditions to match resources more closely to peaks and troughs in demand.

4.48 These examples show that competitive pressure can lead to new, and more

effective, ways of meeting consumer requirements.”5

There is clearly a recognition that long term contracts between airports and airlines, including ongoing marketing arrangements, are an expected outcome of an innovative and competitive airport market. As such, such arrangements clearly are consistent with the MEIP and, indeed, are more representative of the application of this principle than the application of standard published charges.

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.

For the reasons discussed in various sections of these submissions, Ryanair believes that the Aviation Guidelines have totally failed to provide an adequate basis for a satisfactory State aid policy in the aviation sector. On the contrary, they have led to regulatory uncertainty, the proliferation of litigation, unnecessary obstacles to the growth of regional airports and low fares airlines, and multiple distortive tranches of State aid to traditional high cost airlines.

5 De-designation of Manchester and Stansted airports for price control regulation: The CAA’s Advice to the Secretary of State, July 2007.

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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 evolution of the aviation sector in terms of the growth of low fares airlines (as set out above in B.1.1) has occurred due to strong consumer demand for low fares air travel, and despite the failure of the 2005 Guidelines to recognise the need to facilitate the development of a competitive airport market in the EU.

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)?

The current weak consumer demand arising from the prolonged recession remains a challenge for airlines (and consequently for airports), and will remain so in the short- to medium-term. Fluctuating oil prices are a particular challenge for Ryanair, and presumably other low fares airlines, due to the price sensitivity of our passengers, and generally high oil prices have a particularly pernicious effect on low fares airlines as opposed to high fares airlines which are able to pass on the cost to a much larger extent.

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?

For the reasons mentioned above and explained in more detail in the rest of these submissions, Ryanair welcomes the Commission’s review of the Aviation Guidelines; indeed we consider it long overdue given the fact that the 2005 Guidelines are based on the now discredited Charleroi Decision. We hope that the experience of the past number of years has given the Commission a more thorough understanding of the relationships between both public and private regional airports and airlines, and will thus allow it to make the necessary changes to the Guidelines.

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?

As explained under the appropriate sections of these submissions, it is clear to us that the revisions to the 2005 Aviation Guidelines need to be substantial.

To sum up the main points elaborated in other sections of these submissions:

- Consistent with the General Court’s decision in Charleroi, it is incumbent on the Commission to assess a measure of a public airport in the widest

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context, and this should also include using a realistic private comparator. The Guidelines should make it clear that the Commission will always take into account the economic position of the public airport and the realistic options available to it at the time of the measure being considered, as well as considering the counterfactual, i.e., what would have happened if the transaction had not taken place.

- There should be a fundamental shift of the Guidelines from their current emphasis on start-up aid – which assumes that there is State aid to begin with in all relationships between public airports and airlines – to a more detailed and realistic discussion of the way the MEIP applies to the sector, particularly in connection with regional airport’s arrangements with low fares airlines. The Guidelines’ current text draws from the Commission’s flawed decision in Charleroi (subsequently overturned by the General Court). The clear inconsistencies and errors in the Charleroi decision created a state of confusion and flux, and the 2005 Guidelines followed these, now recognised as mistaken, principles. With the experience gained in the meantime, both on the market and the litigation front, there is no excuse for such a confusing and flawed regulatory approach.

- Accordingly, any amended Guidelines should deal with:

a) measures that do not come within the definition of State aid at all due to satisfaction of the MEIP, lack of selectivity or imputability, etc., and

b) measures that are State aid and the conditions under which they are compatible with the common market.

The distinction between the two should be clear enough to avoid unnecessary notifications and litigation.

However, it may be impossible to avoid borderline cases. In such a situation, many of the arguments included in these submissions on situations that meet the MEIP and do not, therefore, constitute State aid, should be also taken into account if, for any reason, the arrangements under consideration do qualify as State aid. In such a borderline situation, it may be necessary to notify the arrangement in question, but also relatively easier to obtain its exemption.

The important thing is that the Commission should not lose sight of the specificities of regional airports’ growth-driven and volume-driven arrangements with low fares airlines and resort to a mechanical application of the existing rigid and flawed rules. Matters discussed in the Guidelines require a dose of flexibility much greater than that currently foreseen.

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

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expected economic, social and environmental impact of the sectoral rules and of a potential application of the horizontal rules.

Historically, the supposedly “special” characteristics of the aviation sector have been relied upon to support a more lenient and politicized State aid policy that has tended to favour flag carrier airlines (the main beneficiaries of State aid), and thus restrict genuine competition and effectively discriminate against new market entrants.

Proper reliance on the MEIP and regulatory clarity would help simplify, or render redundant, the existing sectoral State aid rules. The success of the low cost / low fares model and the growth of regional airports show that genuine competition within the aviation industry can develop without any need for distortive State aid, with resulting benefits for consumers and tax payers alike.

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.

Ryanair operates short- and medium-haul, point-to-point routes mostly within the EU. Consumer demand for low fares air travel continues to be strong, although demand for air travel generally is negatively affected by the ongoing recession.

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).

According to recent ELFAA statistics6, Ryanair has a share of 29.66% of the low fares airline market segment (represented by all ELFAA members) in the EU.

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.

Ryanair and easyJet are the two low fares airlines with the highest market share in the EU, followed by flybe, Jet2, Norwegian, Transavia, Vueling and Wizzair.

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.

6 Available on the ELFAA website, www.elfaa.com.

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The liberalisation of the European aviation market allowed airlines like Ryanair to enter and exit routes with ease. The only real entry barriers are excessive airport charges and in some cases slot constraints at major airports, but low fares airlines have largely been able to avoid these barriers by focusing their growth on regional and secondary airports. As a result, the European low fares air travel market is characterized by dynamic entry and exit and the market is highly competitive.

B.2.5 Considering your market position, which are, in your view, the likely developments of the market segment(s) you are active in?

Ryanair and other low fares airlines will continue to grow and increase market share, as borne out by the forecasts set out at B.1.1 above, provided that crippling re-regulation and State aid to flag carrier airlines do not overly distort the market.

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.

State aid to high fares flag carrier airlines continues to distort competition in the EU aviation market. Due to their legacy high cost operations these airlines continue to struggle when competing with low cost / low fares airlines. Faced with the new competitive environment they often incur substantial losses and request government bailouts, while seeking to justify their inability to adapt to the new competitive reality by making false allegations of State aid to low fares airlines. Amendments to the Guidelines must recognise the distortive effect of State aid to the high-cost, high-fare airlines and not allow it to continue. Examples of this State aid are set out below:

a) State aid to Lufthansa in the form of the conditions offered by the Austrian Government to take over Austrian Airlines.

b) State aid to Air France in the form of reduced airport charges on French domestic routes. (See, regarding State aid to Air France for decades through lower airport charges for domestic flights : Commission Decision in Case E4/2007 Différenciation des «redevances par passager» sur certains aéroports français [2009] C83, available here: http://ec.europa.eu/eu_law/state_aids/transports-2007/e004-07.pdf).

c) State aid granted to Olympic Airlines and Olympic Airways Services in the form of supposed arbitral awards against the Greek State in favour of OA/OAS (currently under investigation).

d) State aid to Alitalia in the form of a Government loan and the restructuring programme designed to artificially maintain its presence on the market (Commission’s decision of 12 November 2008 in State aid case C26/2008 - Loan of 300 millions euros to Alitalia, decision of 12 November 2008 in State aid case N510/2008, Sale of assets of Alitalia to CAI, currently challenged before the Tribunal).

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e) State aid to Spanair in the form of “loans” from the Spanish Government.

f) State aid to Air France-KLM through an exemption from the Dutch air travel tax for transfer passengers (currently the subject of a complaint to the Commission).

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.

See B.2.6 above. Also, State aid may have a role to play in terms of certain necessary infrastructure upgrades at regional and secondary airports, in order to level the playing field between those airports and major national hubs which have in the past benefited from State aid for infrastructure development and from State aid to main users of these airports, the flag carrier airlines.

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.

The following are likely to be the major challenges for Ryanair in the short, medium and long term:

a) High fuel costs;

b) Overregulation and misguided regulation of the aviation sector;

c) Abusive airport monopolies;

d) State aid to flag carrier airlines;

e) Air Traffic Control inefficiencies.

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.

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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.

Ryanair does not advocate “higher” or “lower” degrees of regulation – this is not the key issue. Ryanair instead calls for a consistent application of clear rules based on established judicial principles such as the MEIP. We are in favour of more regulatory clarity through concise guidelines which focus on the MEIP instead of dismissing it as is the case at present. As discussed elsewhere in these submissions, we strongly object to burdensome and inflexible rules, applied mechanically. As in other areas of State aid and competition law, the Commission should follow a more economics-based approach. This can be based on just a few basic rules, revolving around the MEIP, but its practical application will require a thorough and down-to-earth understanding of the sector’s economics and a Commission readiness to benefit from the experience it has gained over the last years.

B.3. Definition of relevant markets for airports and airlines

In the aviation industry there are currently several different levels of competition between the different types of airports and between airlines. Therefore, the definition of relevant markets for airports and airlines is a key factor when investigating State aid, and makes it necessary to examine the extent to which competition could be distorted and the internal market affected.

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 categorisation? In your view is it sufficient to take into account for the categorisation of airports only passenger numbers? Which other indicators (for example tonnes of air cargo, number of aircraft 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.

Ryanair believes that, given the developments in the sector after 2005, it is appropriate to increase the passenger volume threshold for classification of “small regional airports” (Category D) to 1.5 MPPA, and increase the volume thresholds for “large regional airports” (Category C) to between 1.5 MPPA and 7.5 MPPA.

B.3.2 Are you of the opinion that the Commission should examine aid granted to all airports irrespectively of its size or do you consider that a Block exemption for small airports would be appropriate? If you are of the opinion that a Block exemption 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.

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There are two issues which should be addressed by the revised Guidelines. Firstly, public funding of costs such as security, fire, safety, police, and customs must be allowed to continue, in line with the treatment of other transport modes. Secondly, aid given to Category C and D airports for infrastructure upgrades should be covered by the de minimis rules as very unlikely to distort competition and vital for European cohesion and regional development.

B.3.3 How do you consider should the relevant geographic and product markets be defined for airports and airlines?

Given the fact that there is limited competition between most secondary airports and primary airports, the starting point for defining the product and geographic market for air services must be the airport pair market definition.

A key consideration in defining the relevant geographic and product markets is also to consider not solely passengers’ ability to switch between airports but also airlines’ ability to switch. Passenger choices are not independent of the airlines’ decision as to which routes it can viably serve from any airport. The key is to establish the real level of substitutability for airlines and for passengers. There is no single definition which is generally applicable and each individual case needs to be considered on its merits, often distinguishing between inbound and outbound passengers.

In particular, standard arbitrary catchment area definitions defined by distance from the airport are unlikely to be valid and there needs to be consideration of where each individual airport draws its passengers from. For example, even where a number of airports surround the same city, each may serve very distinct catchment areas for short haul services with, in practice, little overlap.

The catchment areas should therefore not be defined by reference to any rigid distance or access time criteria but should take into account the principal areas from which an airport draws its passengers and may need to take into account that the catchment area for airports vary according to the service offered and whether flights to the same destinations are offered from neighbouring airports. Failure to take these factors into account can lead to a misinterpretation of the extent of competition between airports. A wide catchment area may simply mean that an airport serves a range of destinations not available at other airports and which serve ‘thin’ markets not capable of being served by more than a few airports serving the densest catchment areas.

It also needs to be remembered that the catchment areas for airports differ for inbound and outbound travellers. Whilst inbound travellers will orient towards city centres and major attractions, outbound travellers will more likely be drawn from their point of residence dispersed around the urban core. An over focus on the travel time to particular cities or between airports may lead to a distorted perception of the extent to which airports compete.

To conclude, the catchment area for each airport needs to be considered individually, not by reference to any arbitrary criteria, and we would encourage the Commission to take great care when defining the relevant market in airport related cases.

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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 effects, if any, that a high-speed train link may have for the definition of a relevant product and geographic market for one or more airports is a case-specific matter that cannot be addressed summarily, in a general rule. Suffice to say that we see no reason why the definition of the relevant market in this instance should be based on criteria other than those normally relied on under EU competition law (i.e., primarily, substitutability of demand)

However, in the context of State-aid in particular, it is worth highlighting an inherent risk of discrimination between different modes of transport. The 2005 Aviation Guidelines provide that “it will not be acceptable to grant start up aid for a new air route corresponding to a high-speed train link.” This cursory remark neglects the fact that high-speed trains have been receiving various forms of national and EU aid. While train links and airports may well be considered part of the same relevant geographic market, depending on the circumstances, it is unlikely that the distortive effects of State aid to train links vis-à-vis air transport may have been taken into account at the time this aid was approved. In such a scenario, incentives provided by airport operators to airlines should not qualify as State aid to the extent they compensate the competitive advantage already gained by subsidized (and competing) train links.

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 be 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? (A copy of the study can be found under http://ec.europa.eu/competition/sectors/transport/reports/airports_competition_1.pdf and http://ec.europa.eu/competition/sectors/transport/reports/airports_competition_2.pdf ; please provide reasons in case you disagree with that study.)

The Cranfield University Report is dated 2002 and is based largely on data for 1999/2000. It is, therefore, substantially out of date. In particular, it will not reflect the increasingly competitive nature of the airport sector. Hence, the results of this study may no longer be a reliable indicator of the economics of airport operation. It would seem desirable to commission an updated report on the financial position of airports if such information is to be relied on in formulating new Guidelines.

We believe that a properly managed, efficient airport can operate without the need to rely on State aid with even less than 0.5 MPPA.

C. FACTUAL INFORMATION ON THE REGULATORY AND ECONOMIC ENVIRONMENT

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C.1. Airport's economic activity and activities falling within the public policy remit

Section 3.2.1 of the 2005 Aviation Guidelines distinguishes between economic activities of an airport and activities which normally fall under State responsibility in the exercise of its official powers as a public authority.

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.

Ryanair believes that services such as security, safety, police, customs, immigration, fire fighting, as well as services or infrastructure provided by airports in relation to local air traffic control (which is excluded from the remit of competition law), do not constitute economic activity. These services fall within the public policy remit and should consequently be financed by the State, as is the case with other transport modes.

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 organised and financed in your country?

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?

See response to C.1.1 above. Also, it is clear from the CFI’s judgment in Charleroi that the distinction between airport-related economic activities and public policy activities must be based on objective criteria and not on how these services are described or considered by a Member State. Accordingly, the Commission should provide a list of activities that it will henceforward consider as public policy activities. Other activities could be considered as public policy activities on a case by case basis, but again on the basis of objective criteria.

C.1.4 Is a distinction between economic and non-economic activities still relevant for an airport? Please justify your view.

The distinction is still relevant.

C.2. Services of general economic interest

Section 3.2.2 of the 2005 Aviation Guidelines sets out the possibility for certain economic activities carried out by airports to be considered by the public authority as constituting services of general economic interest. It also describes the conditions under which compensation for public service obligations imposed on an airport operator does not amount to State aid. The 1994 Aviation Guidelines provide rules for

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the assessment of the compatibility of compensation for public service obligations imposed on airlines.

The possibility for airport's activities to be considered as constituting services of general economic interest is specified further in the Commission Decision of 28 November 2005 on the application of Article 86 (2) of the EC Treaty (now Article 106 (2) TFEU) to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (hereafter "2005 Commission Decision on services of general economic interest"). It exempts from notification public service compensation for airports with average annual traffic during the two financial years preceding that in which the service of general economic interest was assigned not exceeding 1 million passengers and complying with the conditions set up in the decision, as well as airports whose turn over is below 100 million EUR and which receive less than 30 million EUR compensation per year.

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.

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?

In certain cases, airport catchment areas or their potential to attract inbound passengers are too small to support a commercially viable operation of the airport. While arrangements with airlines should be profitable for such airports taking account of incremental costs on a medium- to long-term basis (taking account of compatible start-up aid, discussed in section E below), these airports may never be able to cover their fixed costs. Nevertheless, it may be necessary for regional development and social cohesion purposes that such airports continue to operate in order to allow for vital air connections to continue. In such cases, Member States should be free to regard the continued operation of an airport as a service of general economic interest and to cover the airport’s fixed costs.

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The provision of and compensation for services of general economic interest remains a national competence, subject only to light Commission oversight, consistent with Articles 14 and 106(2) TFEU. We therefore do not believe that it is possible or desirable for the Commission to seek to determine specific and rigid conditions of such compensation. Rather, each case should be assessed by the Member State on a case by case basis and the Commission should be free to request details of compensation granted in order to analyse it and satisfy itself that compensation does not extend beyond what is necessary to cover the airport’s costs for the provision of services of general economic interest.

C.3. Factual elements to be taken into account for the application of the market economy investor principle

Section 3.2.4. of the 2005 Aviation Guidelines explains how the Commission will assess whether public funding constitutes State aid, by reference to the so-called "market economy investor principle". This issue concerns, on the one hand, public funding of airport operators (e.g. for infrastructure investments or management, for the provision of airport services, etc.) and, on the other hand, support by airport operators to air carriers (e.g. marketing support, quantity rebates, start-up support, etc.).

C.3.1 With regard to the public funding of airport operators (e. g. financing of infrastructure investments, capital injections, etc.)

Public investment in airports should generally follow the MEIP requirements. Exceptions may be required for services of general economic interest (see response to C.2 above) and certain infrastructure upgrades to Category C and D airports in order to level the playing field with major airports which have in the past benefited from infrastructure aid and from aid to their major customers, the national airlines.

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.

The Guidelines expressly prohibit considerations of social or regional policy nature when assessing compliance of public funding of airports with the MEIP. This is an unnecessarily simplistic and limiting approach. Local or regional authorities may well be able to present a valid business case for investing in an airport on the basis of expected benefits in the form of, for example, increased tax intake from additional economic activity generated by incremental passengers. Under the current Guidelines such a business case would be rejected as involving considerations related to regional policy, while quite clearly it complies with the MEIP in its wider sense. We would encourage the Commission to reconsider its approach to this important issue.

At the very least, investments in airports should be regarded as compatible State aid if the public authority has objectively analysed and justified the investment

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as delivering a return against broader policy objectives, i.e., in attracting investment in other sectors and delivering tax benefits or other benefits to consumer welfare. Such considerations are allowed in respect of public investment in other industrial sectors, e.g., investment in a car manufacturing plant being justified in terms of a value being ascribed to each job being created.

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.).

When considering what level of airport charges to agree with an airline, a market economy investor would consider the value of business (passenger throughput) which the airline would bring to the airport. Commercial airports would consider the net value of the investment in a route having regard to the full range of airline and passenger related revenues and the incremental costs of handling the flight. The extent to which an airline would make more or less use of infrastructure, e.g., check-in and baggage systems, airbridges, apron parking areas dependent on turnaround times, would also be included in the calculation.

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.

(Note: our reply to the previous two questions and our comments below are also relevant to question C.3.2.b below.)

i. Non-aeronautical revenues: “Single till”: It is fundamentally flawed to assess how an airport covers its costs and generates revenues by just looking at the charges imposed on individual airlines. Income from airlines in the form of charges is just one part of their revenue stream.7

Low fares airlines like Ryanair can and do generate positive network externalities in the form of non-aeronautical activity at the airport (e.g.

7 Commission’s Decision in the Bratislava case (Case C 12/2008, ex NN 74/07, para. 103).

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retail shops in the airport, car parks, car hire, restaurants, bars). The airport can thus take an economically rational decision to reduce aeronautical charges applied to a particular airline to reflect the amount of expected non-aeronautical revenue generated by that airline. This in turn encourages more airline traffic, and increases the attraction of the airport for non-aeronautical activity due to more passenger footfall. In fact, once the number of passengers starts increasing significantly, the growth of non-aeronautical revenues can even outpace the growth of passenger numbers. For example, between 2008 and 2009, the commercial (non-aviation) revenues of the Charleroi airport increased by 41%, while its number of passengers increased by “only” 33% (source: Charleroi Airport website).

Generally, as the number of passengers using an airport grows, the ability to earn non-aeronautical revenues increases as the airport attains a critical mass enabling it to attract a wider range of retail and catering activities and ancillary services. This creates more opportunities for passenger spending on a wider range of products. For example, a very small airport may only be able to support a single shop selling a basic range or products, whilst medium sized airports over 3 million passengers a year may be able to support a wider range of specialist retailers. At larger airports, there will be scope for directly competing retail and catering outlets, all leading to increased revenue generation opportunities. A market economy investor will take this into account in seeking to grow an airport through the critical mass thresholds to secure greater potential for added value additional revenue sources.

It makes no sense to discount the “single till” approach, like the Commission did in the Charleroi decision. It makes no difference to an airport whether the money that ends up in its bank account derives from aeronautical or non-aeronautical activity, as long as it helps it meet a commercially acceptable target. If an airport is satisfied that an airline will bring enough passengers (often guaranteed under penalty) to generate a certain amount of non-aeronautical activity, then it makes economic sense for that airport to reduce the aeronautical charges applied to the airline proportionately.

The positive network externalities that low fares airlines can generate were already known in 2005 and should have been properly taken into account in the Guidelines. They are even more incontestable today, with the repeated success story of regional airport revivals across the whole of Europe, thanks to Ryanair and other low fares airlines.

ii. Use of comparators: The Commission must use broadly analogous private airports as comparators when assessing the investment decisions of public airports – this is an obligation imposed by the ECJ on the Commission.

It is clear from Chronopost that it is only in cases where a private investor comparator is unavailable that the test may change from a market-based test to cost-based.

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One should remember, in this context, that smaller regional and secondary airports compete with other airports throughout Europe for airline traffic. Therefore, these airports are more exposed to competition than large monopoly airports, and it is therefore easier to find analogous private comparators.

iii. “The lesser of two evils”: Minimisation of losses can satisfy MEIP.

A proper assessment of an alleged State aid by or through a regional airport to an air carrier cannot disregard the history of regional airports in the EU. As a rule, these airports were built and developed many years ago, not as commercial enterprises, but as “public utilities”. Their use declined significantly with the concentration of air traffic in major international hubs and there was therefore no reasonable expectation of the recovery, at any point in the future, of the fixed costs incurred for the construction of these regional airports. In fact they were underutilised to an extent that did not even allow them to cover their operating costs. Closure of the airport might be an alternative, but the real market value of the airport assets net of closure costs was usually insignificant.

Since the liberalisation of the air transport market in Europe, regional airports have adapted by aiming to attract low fares airlines as their only remaining alternative. To do this successfully, they had to treat their “legacy” costs of infrastructure and fixed operating costs as sunk, and unrecoverable from airlines. Therefore, incremental/marginal cost pricing makes logical commercial sense for these airports, in order to maximise throughput.

It makes no economic or common sense to postulate that “legacy” and fixed operating costs should be also recovered from the airlines using regional airports in order for the MEIP to apply. Regional airports, offering no network externalities or other competitive advantages would be unable to compete with national airports if such recovery was mandated by the Commission, given their limited market power.

Thus it is perfectly consistent with the MEIP for public airports to enter into arrangements with airlines which, while perhaps initially not profit-making, are better for the airport than the alternative of continuing to lose more money, or even closing completely. The commercial logic in this approach is underlined by the long-term nature of regional airport business plans (see iv. below).

Entering into arrangements with airlines which guarantee substantial increases in passenger numbers, but are not initially profitable, makes perfect sense for both public and private airports, in that the key aim is to reach a critical mass of passenger numbers necessary to sustain higher levels of non-aeronautical revenue. Reducing losses is consistent with increasing passenger numbers in order to reach the point where the airport becomes profitable. The increase in passenger numbers will occur first, then the related development of non-aeronautical sources of revenue, then the profitability of the airport will improve.

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This “least bad choice” can lead to the airport increasing the value of its assets8 and showing itself to be a viable airport for other airlines (one-sided network externalities) and for commercial outlets/transport links, leading to more passengers being attracted to the airport (two-sided network externality).

iv. The long-term nature of the business plans of regional airports

The previous considerations tie in with the long-term nature of airport business plans: it is rational, and indeed consistent with MEIP, that the “least bad choice”, at a certain point in time, may well pay off to make the airport profitable and viable. It is totally unrealistic, however, to insist that such a break-even point should be achieved within only 3-5 years. This is a luxury that regional airports cannot afford, given their history of near-extinction and their weak competitive position. Regional airports are unique pieces of infrastructure, with historical context, that do not respond to the application of a standard 5 year business plan.9

Under-utilised regional airports often do not expect to make short-term gains from deals with airlines. The business plans of these airports are often around 25 years in length, and accept short-term losses in recognition of the fact that it takes time to build a critical mass of passengers and develop the airport in terms of additional sources of aeronautical and non-aeronautical revenue.

The application by the Commission of the MEIP must take into account the fact that even a private airport would take a long-term view of the profitability of a business plan. Public airports must be allowed to take analogous commercial risks to their private counterparts. In the airport business, any operator (public or private) will be willing to incur short/medium term losses in order to build up the airport to where the operator believes it will begin to turn a profit.

The long-term nature of regional airports’ business plans also mean that incentives they may grant to airlines may well be longer than five or more years, and still be consistent with the MEIP. As long as a regional airport is dependent on one or just a few low fares airlines as its main drivers for traffic and revenue growth, it has good reasons to continue incentivising these low fares airlines to maintain and grow their operations in that airport.

8 The positive effect that arrangements with an airline can have on an airport’s value was expressly recognized by the Commission in its 2010 Decision in the Bratislava case (Case C 12/2008, ex NN 74/07, para. 115).

9 Commission’s Decision in the Bratislava case (Case C 12/2008, ex NN 74/07, para. 109).

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Ryanair therefore believes that the following principles should be expressly recognised in the revised Guidelines in order to end the confusion created by the current Guidelines:

a) It is consistent with the MEIP for airports to offer discounts in recognition of traffic volume commitments.

b) It is consistent with the MEIP for airports to offer discounts for new routes / frequencies.

c) It is consistent with the MEIP for airports to offer incentives to airlines for longer than 3 years.

d) It is consistent with the MEIP for incentives not to decrease over time.

v. Contributions to marketing costs

The Guidelines should expressly recognize the fact that underserved regional airports are often willing to contribute to the marketing costs of the airline that increase the number of incoming passengers to their destination. This has been recognised as good commercial practice by the UK Civil Aviation Authority, as outlined in Section B.1.2 above. In the present version of the Guidelines, this is mentioned only in respect of start-up aid, thus implying that such contributions will always qualify as State aid and cannot be justified under the MEIP. This should be rectified. A private investor in the same position could also accept contributing to an airline’s marketing costs (for many years) if this could help increase passenger numbers and thus the revenues and value of the airport.

vi. Implications of the airline’s business model

The assessment of whether incentives given to different airlines qualify as State aid should also take into account the business model of low fares airlines, and the unique benefits they bring to airports. This can show that the incentives to such airlines are fully consistent with the MEIP and non-discriminatory vis-à-vis any traditional airlines that do not receive similar benefits.

Briefly, low fares airlines:

- make less use of airports’ services and infrastructure, thus reducing airports’ costs and justifying heavier discounts;

- have a unique and proven ability to deliver large passenger numbers to airports.

Taking into account the particularities of Ryanair and other low fares airlines’ business models becomes even more important in cases where our use of larger airports’ services and infrastructure is attached to conditions that appear to be different from those offered to traditional airlines by the same airport. In such cases, any investigation of alleged State aid (or discrimination, for that matter) should keep in mind the very

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different costs incurred through a typical low fares airline’s use of an airport’s services and infrastructure.

For example, Ryanair usually:

- requires less check-in positions at the airport than conventional airlines:

- does not generally use buses, air bridges, lounges or other superfluous facilities at the airport;

- keeps our aircraft on the ground for a shorter period, helping the airport better utilize its capacity and resources;

- offers only point-to-point flights, i.e., we do not use transfer facilities at the airport (both for passenger handling and baggage);

- has a lower bag-to-passenger ratio (i.e., we have lower demand for baggage handling equipment, such as belts or trucks, as well as staff);

- ensures that our crews help board passengers, reducing the requirement for the airport’s handling staff;

- ensures that our crews clean the aircraft themselves during turnarounds instead of relying on the airport’s cleaning services.

vii. Adequate Rate of Return

As mentioned above, the price charged to airlines by regional airports should take into account the revenue generated from non-aeronautical activities, which are initiated as a result of the positive network externalities brought about by an airline operating from the airport in question. This “single till” approach is common in the airline industry.

Uncongested airports will use the “single till” approach to reduce the charges applied to an airline in proportion to the amount of non-aeronautical activity that is expected to be delivered by the airline, and often with regard to other network externalities such as the increase in the value of the airport. Therefore, an uncongested, under-utilised regional airport will usually charge airlines a price close to its marginal cost of doing the deal with the airline, as long as the marginal benefits of the offer exceed its marginal costs.

Assessment of an “average” rate of return for such airports is a futile exercise, as the “adequate” rates of return for different airports will vary widely depending on a series of factors, including:

- the degree of competition the airport is facing from other airports;

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- the degree of bargaining power the airport has in its negotiations with a particular airline, which is affected by the expected number of passengers the airline will bring to the airport and the economic situation of the airport, as well as the general economic environment, at the time the deal is negotiated;

- the degree of economic activity at the airport at the time of the negotiations: an “empty” airport will price at or near marginal cost, just like a pragmatic private airport would, in order to generate passengers and improve the value of the airport.

- the degree of risk assumed by an airline which is willing to be the “first mover” into an under-utilised airport, or on to a new route, which has no track record of success, as well as risk adopted by airlines which are not “first movers” but are assuming a high degree of risk by entering into an airport/route nonetheless. Growth incentives should be applied on a more sophisticated basis than the “one size fits all” approach to the intensity and duration of alleged aid displayed by the 2005 Guidelines.

- Similarly network externalities at airports must be factored into a decision by a public airport to make an investment which, on the face of it, looks like it delivers a low rate of return. The rate of return cannot be examined in isolation from the potentially more valuable, long-term, positive network externalities that come with attracting more passengers to an under-utilised airport.

- An agreement with an airline which guarantees passenger numbers for an airport (through penalties if the airline fails to meet its commitments) reduces the risk and uncertainty for that airport. Therefore a lower rate of return may be rational for the airport to accept and consistent with the MEIP.

viii. Selectivity

An issue that goes back to the definition of State aid and is closely connected with the above considerations is selectivity. In the situations described already (i.e. that of regional, underutilized, uncongested airports), airports are generally willing to offer the same terms to any airline willing to commit to the same level of growth. That is certainly Ryanair’s experience. There is, therefore, no selectivity, and the conditions for State aid are not satisfied in the first place.

Just because an airport does not publicise the terms it is willing to offer does not mean that selectivity exists: an airport will obviously not, from a commercial perspective, publicise its discounts off published charges. Again, to say otherwise would discriminate between public and private airports, and would lead to a public airport being forced to conclude bad deals (as compared to what it could obtain if it was not obliged to make its terms public) from its own perspective as its bargaining position would be undermined. This could lead to a vicious circle of adverse

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deals, lack of competitiveness with competing private airports, and eventual exit from the market.

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.

See Section iv of the answer to question C.3.1. d) above.

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.

Aid for infrastructure upgrades for Category C and D airports should be subject to de minimis rules in order to level the playing field with major airports which have in the past benefited from infrastructure aid and from aid to their main customer, the flag carrier airlines.

C.3.2 With regard to 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 ?

The 2005 Aviation Guidelines (in their Section 3.2.4) provide regrettably inadequate guidance on the application of the MEIP to the incentives offered to air carriers. Any revisions to these Guidelines should properly reflect the MEIP’s importance as a central part of the assessment of whether measures given by a public body are classified as State aid. The MEIP should be upgraded to a pivotal element of the Guidelines, and their provisions should include non-exhaustive and detailed examples of its application to regional airports in particular, drawing from the market and regulatory experience gained since the adoption of the 2005 Aviation Guidelines.

In addition to the summary fashion in which the MEIP principle is treated in the 2005 Aviation Guidelines, their paragraphs 51 and 52 impose very restrictive, and fundamentally flawed, conditions on the applicability of the MEIP in terms of start-up aid.

The last sentence of paragraph 51 implies that State aid will normally be found to exist in all cases where a private airport provides incentives to airlines, part of which comes from public resources: “if a private airport gives funding which in

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fact is no more than a redistribution of public resources given to it for this purpose by a public body, these subsidies must be considered as State aid if the decision to redistribute public resources is taken by the public authorities.” This is a dangerous presumption.

According to this false logic, any incentives granted by a public airport to an airline will qualify as State aid even if only a part of this incentive has been financed through public resources. The conclusion would presumably then be the same even if the incentives were granted by a private airport but had been approved by public authorities in any way. Thus there may be no point in trying to justify such incentives to an airline under the MEIP, as they will qualify as State aid in any event. The correct approach, in our view, would be to note that reliance on public aid granted to an airport as a means of further financing this airport’s commitments vis-à-vis an airline may require a more subtle economic analysis and complicate, but not necessarily exclude, the application of the MEIP. Instead, the current arbitrary wording is inconsistent with the Commission’s obligation, as confirmed in Charleroi, to take into account “all the relevant features of the transaction at issue” when assessing the applicability of the MEIP.

The problem is compounded in paragraph 52 of the Guidelines. This renders the applicability of the MEIP to airport cases subject to disproportionate and arbitrary conditions that can effectively exclude reliance on the MEIP in practice. According to this provision, “an airport which does not finance its investments or does not pay the corresponding fees, or whose operating costs are partly covered by public funds, over and above a task undertaken in the general interest, cannot usually be considered as a private operator in a market economy, subject to a case-by-case assessment; it is therefore extremely difficult to apply this reasoning to such an operator.”

It will be difficult to find any regional airport in Europe, whether public or private, whose investments or operating costs have not been at some point, or are not currently, at least partly financed by some public fund, directly or indirectly. But under the current text of the Guidelines it would be “extremely difficult” (and, in practice, often impossible) to apply the MEIP to such regional airport operators. This is an unacceptable rejection of an obligation imposed on the Commission by the ECJ to apply the MEIP.

The current text of paragraphs 51 and 52 wrongly conflates State aid to an undertaking (such as a regional airport) with potential State aid involved in any dealings of this undertaking with third parties (such as airlines). Instead, these two instances should be assessed separately. The current text results in a discrimination against public airports in State aid reviews and is incompatible with Article 345 TFEU (ex Article 295 EC), despite the Commission’s express reference to this Article in its Guidelines as a principle to be respected. The Commission should not handicap public airports by, e.g., permitting private airports to heavily discount from published charges, as is common, but not allowing public airports to do the same when the airline makes satisfactory traffic commitments which are expected to bring growth.

C.3.2. b) In case you consider that additional elements should be taken into account, which ones?

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These additional elements are identified and expanded upon in Section C.3.1.d above, and incorporated here by reference.

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.

When negotiating an agreement with an airline, a market economy investor would consider the value of business (passenger throughput) which the airline would bring to the airport. Commercial airports would consider the net value of the investment in a route having regard to the full range of airline and passenger related revenues and the incremental costs of handling the flight. The extent to which an airline would make more or less use of infrastructure, e.g., check-in and baggage systems, airbridges, apron parking areas dependent on turnaround times, would also be included in the calculation.

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.

With regard to questions C.3.2. c) and C.3.2. d), please see our comments under C.3.1.d) and C.3.1.d). As regards the type of revenues that a market economy investor would take into account we would refer, in particular, to our comments on the “single till” approach.

As should be clear from the above, in the case of regional airports, infrastructure costs should be considered sunk costs and should not be part of the equation, under any cost standard. Similarly, if incremental costs are to be attributed to specific agreements with individual air carriers then the same should also apply on the revenue side (both aeronautical and non-aeronautical) and should also take into account any positive externalities attributable to that specific agreement.

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)?

Please see, in particular, our comments under C.3.1.d) point (iv), above.

C.3.2. f) Please justify your views on this issue and also describe the impact. Please distinguish in your answer between competition / economic /

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regulatory / political / environmental and climate change / capacity and social challenges supporting your answers with data, if possible.

D. FINANCING OF AIRPORTS

D.1. Financing of airport infrastructure

Section 4.1. of the 2005 Aviation Guidelines sets out the Commission approach to the public funding of the construction of airport infrastructure and equipment or facilities.

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?

Ryanair believes that the present Guidelines are unnecessarily limiting and restrictive in their approach to public funding of airport infrastructure. Aid for infrastructure upgrades for Category C and D airports should be subject to de minimis rules in order to level the playing field with major airports which have in the past benefited from infrastructure aid and from aid to their main customers, the flag carrier airlines.

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?

There are very few (if any) distortions of competition arising from aid for infrastructure upgrades to airports in categories C and D as long as there are transparent conditions for the grant of such aid, with de minimis rules applicable.

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.

Please see our response to question B.3.4 above. Also, we believe that the Commission is unnecessarily trying to define a threshold of profitability while the answer to this question is case specific and driven by a combination of internal and external factors affecting the airport’s performance.

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.

Please see our response to question B.3.4 above. Also, we believe that the Commission is unnecessarily trying to define a threshold of profitability while the answer to this question is case specific and driven by a combination of internal and external factors affecting the airport’s performance.

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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 ?

We believe that it is inappropriate for the Commission to seek to define specific criteria which would be applicable in all cases. Every case requires a separate assessment and the Commission’s enforcement practice would benefit from a higher degree of flexibility rather than from more stringent rules and criteria.

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.

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.

Public funding of infrastructure at Category C and D airports, taking into account our suggestion in Section B.3.1 above to increase the passenger thresholds for these categories, should be permitted in line with the de minimis State aid rules. “Crowding-out” of private investors in this context is extremely unlikely given the limited competition between these airports for passengers.

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.

Public financing of regional airports is far more likely to attract low fares airlines than conventional airlines. Therefore, it is also bound to lead to significant policy, social and environmental benefits, given that low fares airlines like Ryanair:

- tend to use more environmentally friendly and efficient aircraft;

- maximise use of capacity, delivering more passengers for less fuel burn, and less environmental impact;

- reduce both road and air traffic congestion in major airports and neighbouring areas;

- generate social benefits by unlocking the potential of previously undeveloped regions.

See also our response to questions C.3.1.a).

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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.)?

Distortion of competition already exists because of years of public funding of major airports. It can now be addressed by allowing public funding of infrastructure upgrades in Category C and D airports, along with an increase in the passenger thresholds for these categories. Also, we do not believe that a distortion between Category C and D airports will arise if rules are the same for all of these airports within the EU. Public authorities should nevertheless be required to undertake an assessment of the necessity of aid.

With regard to the conditions identified above, Ryanair is of the view that minimum levels of airport charges or an avoidance of perceived overcapacity should not be conditions of any financing of regional airports. Also, we are concerned that the Commission seems to confuse the notion of non-discrimination with regard to airport charges with the notion of non-differentiated charges. This is fundamentally wrong. Ryanair advocates non-discriminatory airport charges, i.e., (a) charges which are the same for airlines which offer the exact same commitments to the airport and which use the airport’s infrastructure and services in the exact same manner, and (b) charges which are differentiated between airlines which offered different commitments to the airport or which use the airport’s infrastructure and services in a different manner. Ryanair is, however, fundamentally opposed to the notion of equal charges for all airlines irrespective of what commitments they offered or how they use the airport’s infrastructure and services, as this would be inherently discriminatory and anticompetitive. We would encourage the Commission to reflect on this important point.

For our views on catchment areas, please see response to questions B.3.3 above.

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

Section 4.2. of the 2005 Aviation Guidelines sets out the Commission approach to the public funding of costs of running and maintaining the airport infrastructure.

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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 do you consider that this approach remains valid? If not, what changes do you consider appropriate?

While all airports should be required to strive for efficiency and aim ultimately to become self-sustainable, if the operation of an unprofitable airport is considered vital for regional development, then operating aid may need to be allowed on a case-by-case basis. Please see our comments in section C.2 in relation to services of general economic interest.

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?

Please see our comments in section C.2 in relation to services of general economic interest.

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 compensation, 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 and 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?

We believe that there is no need for specific treatment of compensation for airports providing services of general economic interest, as long as the applicable rules are clear. Please see our comments in section C.2 in relation to services of general economic interest.

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

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issue with data and in view of the Cranfield University study referred to above in point C.3.4 .

Please see our comments on the use of the Cranfield study in section B.3.4. Please see our comments in section C.2 in relation to services of general economic interest.

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.

Please see our comments in section C.2 in relation to services of general economic interest, and in section C.1.1 in relation to services which fall within public policy remit.

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.

Please see our comments in section C.2 in relation to services of general economic interest, and in section C.1.1 in relation to services which fall within public policy remit.

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

Section 4.3. of the 2005 Aviation Guidelines sets out the Commission approach to the public funding of different airport services, such as groundhandling 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?

See answer to question D.2.1 above.

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?

See answer to question D.2.1 above.

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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.

See answer to question D.2.1 above.

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.

E. START-UP AID

Section 5 of the 2005 Aviation Guidelines sets out the criteria that must be fulfilled for start-up aid for new routes departing from regional airports to be considered compatible with the Treaty.

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?

Section 5 of the 2005 Aviation Guidelines is fundamentally flawed in that it creates a false impression that all incentives are State aid. This is plainly wrong and the fact that private airports routinely offer various incentives to airlines demonstrates that in the majority of cases incentives offered by public airports comply with the MEIP. The revised guidelines should focus on the MEIP and discontinue the current presumption of aid in relation to arrangements between airports and airlines.

Secondly, Section 5 is flawed in that it states that incentives considered State aid are only compatible with the State aid rules if they are start-up incentives. This restriction suggests a failure to understand that incentives usually reward traffic volumes and long-term traffic commitments, and only secondarily new routes. Usually, airports do not attach significant importance to whether growth comes from a new route, or an existing route – the decision to give growth incentives is taken on the same basis regardless. If the MEIP does not apply, the possible exemption of the State aid concerned should therefore not automatically exclude aid for existing routes.

Thirdly, the present Guidelines are overly prescriptive in their treatment of compatible aid . This attempt to impose a straightjacket solution on all airports throughout the EU, regardless of their competitive position, is unfair and lacks common sense. The revised Guidelines should recognise that compatibility needs to be assessed on a case by case basis, taking account of all relevant features of each individual case.

The confusion created by the current provisions of the Guidelines creates bizarre incentives to enter on to a new route with intentionally low capacity to effectively block any other airline from entering the route for 3-5 years. The route therefore does not grow, it remains untouched by competition and after 3-5

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years, it is unclear whether the public airport must artificially raise its charges to the airline at a time when airport charges are falling, based on perceived compliance with Commission Guidelines, and not on a rational commercial decision. The public airport will then lose business to the private airport, which is able to price freely according to market demand.

Handicapping public regional airports in this way has led to under-development of regional airports and the surrounding regions. Ryanair and other low fares airlines have grown despite this, but by clarifying these confusing rules airlines will be able to continue lowering fares, developing peripheral regions and expanding choice for passengers

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?

These compatibility conditions are too prescriptive and fail to recognise the specificities of each individual case. Ryanair’s view is that, if incentives are classified as State aid (i.e., the MEIP test is not satisfied, the measure is imputable to the State, there is selectivity and an impact on trade between Member States), then each case should be assessed on its merits and not be subjected to rigid conditions which may be inapplicable to a particular case.

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.

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?

We believe that the current limitation of compatible aid to Category C and D airports should be reconsidered. For example, a public airport under Category B may be under-utilised, and not fulfilling its true potential, and therefore it may be regarded as necessary for regional development purposes for public authorities to offer aid in order to support growth. In reality, such incentives at category B airports, where traffic volumes should generally support a profitable operation, will in the vast majority of cases comply with the MEIP. However, if the MEIP cannot be satisfied, public airports should not automatically be precluded from offering compatible aid in order to meet regional development objectives.

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?

See our comments in section E.1.1 above.

The restriction of compatible aid to new routes (point 79 (c) of the Guidelines) does not recognise the realities of the market. Low fares airlines stimulate

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demand, and do not divert passenger traffic from one airline/airport to another. Therefore, incentives given to low fares airlines for routes which are already operated from airports in the same city / conurbation / airport system do not necessarily result in a transfer of traffic and, if such incentives are classified as aid, they should be regarded as compatible aid.

Point 79(c) should therefore be deleted.

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?

The description of eligible costs for compatible aid (at point 79 (e)) is too rigid. At some airports, due to, for example, the high degree of risk involved, it may be necessary to maintain marketing support to promote routes for a longer period of time than at other airports. Therefore it is not accurate to say that the air operator does “not have to bear them once the route is up and running.”

Also, the costs identified as ineligible for compatible aid (e.g. airport charges, catering costs) may be justified for discounting in the case of some airlines which place less demand on these services. The airlines placing less demand on airport services are generally low cost airlines, but as long as the availability of discounting from the covering of these costs is transparently available to any airline which wishes to avail of a discount scheme, then these costs should be permitted as eligible.

The rigidity of the current approach fails to take into account the specifics of different airports and airlines, and the rules should therefore be relaxed.

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.

The “one size fits all” criterion for intensity of aid (50% of total eligible costs in one year, 30% of total eligible costs over the entire period) and duration (3 years) fails to take into account the specifics of different airports and airlines.

Operating from different regional airports presents different levels of risk to different airlines. Public airports must be allowed to price at a level which will attract airlines to operate there, according to market conditions prevailing at the time. Otherwise, a public airport with a particularly high risk factor would be forced to close rather than offer incentives which would breach the Guidelines on intensity/duration, while a private comparator could price according to demand.

The intensity and duration limits should therefore be removed.

E.1.8 In your view, which other compatibility criteria should be revised, abolished or added. Please explain.

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Ryanair believes that the following principles should be recognised in the revised Guidelines in relation to compatible aid, while affording Member States flexibility to assess each case on its merits and decide (subject to Commission ex post scrutiny) whether or not aid is compatible:

a) Compatible aid may include discounts in recognition of traffic volume commitments.

b) Compatible aid may include discounts for new routes / frequencies.

c) Compatible aid may include incentives to airlines for longer than 3 years.

d) Compatible aid may include incentives which do not decrease over time.

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.

We believe that the vast majority of routes currently operated in Europe can be operated on a commercial basis, in compliance with the MEIP. However, State aid has a role to play for regional development and social cohesion purposes.

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.

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.

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.

Please see our response to question E.1.6.

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.

Please see our responses to questions E.1.6 and E.1.7.

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.

Please see our comment under section B.3.3.

F. 1994 AVIATION GUIDELINES

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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?

State aid to flag carriers, such as the examples outlined in section B.2.6 above, has been subject to a permissive and discriminatory regime which encourages distortions of competition between these high cost airlines and the low cost sector. Countries such as France have also been able to abuse the Public Service Obligation (PSO) rules under the regime. Any rules which encourage such abuses must be removed.

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?

Point 12 of the 1994 Guidelines states that the “construction or enlargement of infrastructure projects […] represent a general measure of economic policy which cannot be controlled by the Commission under the Treaty rules on State aids.” Please see our comments at B.3.2, C.3.1, D.1.1, D.1.7 and D.1.9 above in relation to aid for infrastructure upgrades at Category C and D airports.

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?

Please see our comments at B.2.6 above in relation to distortive effects of State aid to flag carrier airlines. Also, given the abuse of PSO rules in some countries, a stricter regime should be in place to prevent such abuses.

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.

G. 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.

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Where protected by copyright or contractual restrictions, please provide the references of the study.