Klagenfurt Airport gets funding green light but airlines must repay aid

The European Commission has found that public funding granted by Austria to Klagenfurt airport is in line with European Union (EU) state aid rules, but as ruled that certain airport services and marketing agreements concluded between the airport operator and airlines Ryanair, Hapag-Lloyd Express and TUIfly gave the latter “an undue advantage”, which cannot be justified under state aid rules.

The in-depth investigation revealed that various grants provided to the airport operator Kärntner Flughafen Betriebsgesellschaft (KFBG) from 2000 to 2011 by its public owners gave the company a selective advantage over competitors. However, these were in line with EU state aid rules despite generally falling into the state aid criteria within the meaning of the EU rules.

The Commission's 2014 Aviation Guidelines allow Member States to support regional airports under “certain conditions”. The Commission's investigation found that Klagenfurt airport is an important factor for the development and accessibility of the Carinthia region.

“How can an airport grow profitably? European airports – particularly smaller ones - face this challenge every day, closely watched by regulators, who restrict the support Governments and municipalities can give.”

Jeremy Robinson
Partner, Watson Farley & Williams LLP

Moreover, the airport is located in a mountainous area with long travel times to other airports, especially during winter (the closest airport in Ljubljana is around 80 km away). This reduces “potential negative effects of the support on competition and trade”, said the Commission and “which are outweighed by the benefits to the connectivity of the region”, in line with EU state aid rules.

An investigation into bilateral arrangements between KFGB and various airlines delivered a mixed response. These arrangements typically set the level of airport charges to be paid in respect of specific routes for a given period, on top of discounts available under the scheme, and in certain cases provided that the airlines would carry out marketing services for KFBG in exchange for remuneration.

The Commission found that the terms of the agreement concluded between KFBG and both Austrian Airlines and airberlin, would have been acceptable to a profit-driven airport manager and therefore involved no state aid. But, on the other hand, airport services and marketing agreements concluded with Ryanair, TUIfly and Hapag-Lloyd Express (now actually part of TUIfly) could not, when they were concluded, have been expected to generate more revenues than additional costs and therefore were deemed state aid to the airlines.

These agreements, the Commission said, simply reduce the operating costs of the airlines, without contributing to common transport objectives and therefore distort competition in the Single Market in breach of EU state aid rules. TUIfly (€1.1 million for own aid and €9.6 million for Hapag-Lloyd Express) and Ryanair (€2 million) will now have to pay this money back to Austria.

STATE AID GUIDELINE: Public interventions in favour of companies that carry out economic activities can be considered free of state aid within the meaning of EU rules when they are made on terms that a private player operating at market conditions would have accepted (the market economy investor principle – MEIP). If the MEIP is complied with, the measure confers no advantage to the company and therefore involves no state aid. If the MEIP is not complied with, the measure involves state aid and the Commission then examines whether it can be found compatible with common EU rules that ensure a level playing field in the EU's Single Market.

The Commission also assessed a scheme set up by KFBG in 2005 to incentivise airlines to increase traffic to Klagenfurt airport. Under this scheme, discounts to airport charges were granted under certain conditions, for instance when a new route was opened or frequency was increased on an existing route.

The Commission's investigation has shown that this scheme was “expected to contribute to the profitability” of the airport operator and that a “profit-driven airport manager therefore would have been prepared to put in place” such a scheme. The reduced airport charges therefore “involved no state aid within the meaning of EU rules”, said the Commission.

It has gained a lot of experience in assessing whether public measures for promoting airports and airlines are compatible with the internal market. In the last two years it has adopted seven decisions concerning various forms of incompatible operating aid to airlines at the airports of Pau, Angoulême, Nîmes, Zweibrücken, Alghero, Altenburg and Sardinia.

“How can an airport grow profitably? European airports – particularly smaller ones - face this challenge every day, closely watched by regulators, who restrict the support Governments and municipalities can give,” Jeremy Robinson, partner at Watson Farley & Williams LLP told Routesonline.

Jeremy Robinson is an expert in aviation competition and regulatory law and regularly represents airlines in regulatory investigations by the Office of Fair Trading, Civil Aviation Authority and European Commission and in partnership with air service development consultancy Airport Strategy & Marketing (ASM) offers a special Negotiating Airline Deals & Legal Guidelines training course to highlight how to structure route development deals with airlines and how to meet the legal guidelines.

“The EU’s decisions - including this latest concerning Klagenfurt - show why airports (and airlines) must know their regulatory risks up-front. ‘Will this deal make us money?’ is a core question for airports to answer before signing on the dotted line. What legal and economic analysis do you need to conduct to know whether your deal will survive?”

Jeremy Robinson
Partner, Watson Farley & Williams LLP

It is clear that route development decisions are influenced by incentives and negotiation skills are crucial. Incentive packages are substantial investments made by airports and stakeholders so it’s important everyone understands the benefits and risks before committing to an agreement.

“The EU’s decisions - including this latest concerning Klagenfurt - show why airports (and airlines) must know their regulatory risks up-front. ‘Will this deal make us money?’ is a core question for airports to answer before signing on the dotted line. What legal and economic analysis do you need to conduct to know whether your deal will survive?” added Robinson.

There are four ASM Negotiating Airline Deals & Legal Guidelines training sessions planned for 2017 in London (May 11-12, 2017 and October 17-18, 2017), Washington (August 1-2, 2017) and Singapore (September 5-6, 2017).

These deals with Klagenfurt Airport were negotiated as the airport attempted to put itself on the international network map. The small regional airport, located in the south of the State of Carinthia in Austria, is owned by the State of Carinthia and the City of Klagenfurt and generates annual traffic of between 200,000 and 500,000 passengers per year. It is currently served multiple times daily by Austrian Airlines from Vienna and linked to Cologne/Bonn, Hamburg and Berlin by Lufthansa affiliates Eurowings and Germanwings, although flights to the German capital are due to end in March 2017.