EUROPEAN COMMISSION

Brüssel, 23.02.2012 C(2012) 1011 final

In the published version of this decision, some information has PUBLIC VERSION been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules WORKING LANGUAGE for the application of Article 93 of the EC Treaty, concerning non- disclosure of information covered by professional secrecy. The This document is made available for information omissions are shown thus […]. purposes only.

Subject: State aid SA.24221 – C/2011 (ex NN/2011; CP 281/2007) – – Airport – and other airlines

Sir,

The Commission wishes to inform Austria that, having examined the information supplied by your authorities on the aid/measure referred to above, it has decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union.

1. PROCEDURE

(1) By letter of 5 October 2007 a competitor of Ryanair on the European air passenger transport market, which has requested not to have its identity disclosed , lodged a complaint with the Commission alleging that the Irish Airline Ryanair plc (hereinafter: "Ryanair") has been granted unlawful State aid by the Federal State of , the City of Klagenfurt, Kärnten Werbung Marketing & Innovationsmanagement GmbH (hereafter: “Kärnten Werbung”) and the Airport of Klagenfurt via its operating company Kärntner Flughafen Betriebsgesellschaft mbH.

(2) By letter of 11 October 2007 the Commission has forwarded the complaint to Austria and requested information. The Austrian authorities responded by letter dated 2 January 2008.

Seiner Exzellenz Herrn Dr. Michael SPINDELEGGER Bundesminister für europäische und internationale Angelegenheiten Ballhausplatz 2 A - 1014 Wien

Commission européenne, B-1049 Bruxelles/Europese Commissie, B-1049 Brussel – Belgium Telephone: 00- 32 (0) 2 299.11.11.

(3) The Commission requested additional information from the Austrian authorities by letters dated 15 November 2010 and 24 March 2011. The Austrian authorities responded by letters dated 28 January 2011 and 30 May 2011.

(4) On 8 April 2011 the Commission requested information from Ryanair. Ryanair submitted the information by letter dated 4 July 2011. On 15 July 2011 the Commission forwarded the submission of Ryanair to the Austrian authorities, which provided their comments by letter of 20 September 2011.

2. DESCRIPTION OF THE FACTS

2.1.

(5) Klagenfurt Airport (hereafter: "KLU" or "the Airport") is located in the Land Carinthia, about 4 km of the city centre of Klagenfurt, the capital of Land Carinthia, which is situated in the touristic region of Wörthersee.

(6) Klagenfurt Airport is owned and operated by Kärntner Flughafen Betriebs GmbH (hereafter: "KFBG") which is held by Klagenfurt city (20%) and Kärntner Landes- und Hypothekenbank-Holding (80%). According to publicly available information the 80% share of the State of Carinthia in the Airport had been transferred onto Kärntner Landes- und Hypothekenbankholding in November 2008.

(7) The capacity of the is 600,000 to 650,000 passengers per year which is unchanged since 2000. Operating hours are from 6 to 23:30 hours since the 80s. The capacity of the is unchanged since 2000.

Table 1: traffic figures at KLU year total passengers movements freight in kg 2000 235 503 8 325 78 931 2001 226 701 7 133 67 159 2002 259 717 6 894 29 939 2003 313 557 6 979 47 347 2004 486 274 8 81 57 881 2005 552 697 8 907 53 212 2006 409 004 7 718 41 563 2007 469 033 8 103 34 894 2008 429 889 7 679 23 935 2009 410512 7 785 30 153 2010 425 933 7 482 13 443

(8) The main airlines using the Airport are: , Germanwings, Ryanair, Air , Condor, and charters. (9) In 2010 the carrier with the most passengers was Air Berlin ([…] % of the passengers), followed by Austrian Airlines […]%), Lufthansa and Ryanair (each […]%) and Germanwings ([…]%). (10) In the past also TUIfly contributed a considerable amount of passengers and stopped services in 2010. Ryanair had a peak in 2004 and 2005. In 2005 Ryanair cancelled the flight connection to London-Stansted for economic reasons without stating any details. Air Berlin and Germanwings started services in 2009.

Table 2: passenger numbers by airline […]

(11) The profit and loss accounts of KFBG show that it has been loss making in ordinary activities in 2002 and 2004-2009 and that the shareholders have made contributions to the budget from 2002 to 2006.

Table 3: financial development of KFBG 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Balance 847,470 615,877 67,901 857,682 158,922 586,710 -64,573 729.385,75 912.548,2 266.297,07 990.954,46 sheet profit Profit or 1,137,601 836,992 -89,510 380,114 -1,445,108 -760,566 -690,040 -588.996,41 -491.951,8 -1.204.315,92 466.342,43 loss on ordinary activities Net loss/ 952.169,13 615.877,08 -86.532,46 330.133,33 -1.446,9 -748,3 -1.214,4 -769.896,4 -633.451,8 -1.204.315,92 462.954,46 profit (Jahresfehl- betrag) Share 0 0 181680 559644 1,605,780.10 1.344.979,10 1.149.887 1.563.855,0 0 0 0 -holder contribution Auflösung 0 0 0 0 0 1.563.855,0 1.546.000,0 1.508.000,0 528.000,0 von Kapital- rück- lagen Gewinn- 847.470,13 847.470,13 615.877,08 67.901,23 857,7 158.921,82 -64.572,84 -64.572,84 729.385,75 912.548,2 266.297,07 /Verlust- vortrag aus dem Vorjahr Table 4: Non-aviation revenues

 covered by the obligation of professional secrecy

2.2. The catchment area

(12) Klagenfurt Airport is situated at the following distances /travelling time by car to other airports:

- airport: 71 km, 1 h

- : 128 km, 1 h 10

- Maribor airport: 137 km , 1 h 47

- Trieste airport: 203 km, 1 h 51

- airport: 223 km, 2 h

- Venezia airport: 282 km, 2 h 34

- Treviso airport: 290 km, 2 h 43

(13) The business report of the Airport of 2010 identifies seven competing airports in the catchment area of KLU. KLU is connected with a bus shuttle service to Ljubljana1.

2.3. Entities involved

2.3.1. Destinations Management GmbH

(14) Destinations Management GmbH (hereafter: "DMG") is a 100% subsidiary of Kärntner Flughafen Betriebs GmbH.

1 http://www.klagenfurt-airport.com/default.aspx?SIid=10&LAid=2&ARid=159 2.3.2. Kärnten Werbung, Marketing & Innovationsmanagement GmbH

(15) Kärnten Werbung, Marketing & Innovationsmanagement GmbH is owned by Kärntner Landes- und Hypothekenbank-Holding (until November 2008 by the State of Carinthia) (60%), the Chamber of Economy of Carinthia (30%) and the Chamber of Employees (10%). The purpose of the company is marketing activities for the tourism in Carinthia. It is financed by the State of Carinthia. It is controlled by the supervisory board which is nominated by the shareholders.

(16) The Chamber of Economy of Carinthia is a body of public law (Körperschaft des öffentlichen Rechts) established by the Law on the Chamber of Economy (Wirtschaftskammergesetz). Its task is to represent the interest of its members. It is supervised by the Federal Minister for Economy and Labour. Its tasks and prerogatives are fixed by the law.

(17) The Chamber of Employees is a body of public law established by the Law on the Chamber of Employees (Arbeiterkammergesetz). Its task is to represent the interest of its members. It is supervised by the Federal Minister for Labour and Social affairs. Its tasks and prerogatives are fixed by the law.

2.3.3. Kärntner Landes- und Hypothekenbank-Holding2

(18) Kärtner Landes- und Hypothekenbank-Holding (hereafter: “KLH”) is an ownerless legal personality established by an act of the State of Carinthia which has emerged from the Kärntner Landes- und Hypothekenbank.

(19) The purpose of KLH is to acquire, hold, administer and divest assets, in particular shares in companies, and to found companies. KLH shall carry out a strategic holding policy for all its companies to guarantee synergy effects, clear competences and carry out a centralized controlling. KLH has to carry out its business in the interest of the State of Carinthia. The operative business is carried out by the companies themselves.

(20) For the direct and indirect financing and support of projects which are in the interest of the State of Carinthia a special fund called “Zukunft Kärnten” has been established. The core fund consists out of EUR 500 million. The fund is administered separately from the rest of the assets. The granting of financing by the fund has to be in the frame of directives adopted by the supervisory board of KLH.

(21) The board of KLH is appointed by the supervisory board. When State Government requests KLH to carry out financing of projects in the interest of the State the board has to submit this request for adoption of a decision insofar as the State of Carinthia provides the funding.

(22) The supervisory board is appointed by the State Government. The supervisory board has to agree on investments above EUR 50,000. It delegates members to the supervisory

2 Website of KLH: www.klhd.at and Satzung der Kärntner Landes- und Hypothekenbank-Holding (Kärntner Landesholding) published in Landesgesetzblatt für Kärnten, 18. Jänner 2010 boards of the companies KLH owns. It has to decide on the financing of projects by the special fund “Zukunft Kärnten”.

(23) The special fund has participated in the financing of the following projects3:

 “Low cost Project Ryanair”

 “Low-Cost Tuifly/Air Berlin”

 „Ankauf einer Fluglinie“

 „Zuschüsse an die Kärnten Werbung – 2007“

 „Flughafen Klagenfurt“

2.3.4. Leading Verge.Com Limited

(24) Leading Verge.Com Limited (hereafter: “LV”) is a 100% subsidiary of Ryanair.

2.3.5. Airport Marketing Services (Jersey) Limited

(25) Airport Marketing Services (Jersey) Limited (hereafter: “AMS”) is a 100% subsidiary of Ryanair. Its main activity is to sell advertising space on the Ryanair website.

2.4. The financing of Kärntner Flughafen Betriebs GmbH by the City of Klagenfurt and the State of Carinthia

Table 5: Financial injections into KFBG

3 http://www.klhd.at/uploads/media/KLH_2011-10-27_-_3_Seiten.pdf?PHPSESSID=3a9d1fc61a2a8bb64d387d8e5ca728a5 (26) From the above table it appears that not only the shareholders of KFBG (Land, Stadt), but also the Federal Ministry for the Interior and the Federal Ministry of Finances contributed to the Airport.

Table 6: Budget and expenses of the Diet of Carinthia with regard to KLU:

(27) The figures of the contributions of the "Land" in Table 5 are not the same as in Table 6. The Commission invites the Austrian authorities to clarify which amounts have been transferred to which entity and for what purpose.

(28) For the period 2011 to 2012 it is planned to inject EUR 2 million for incoming air connections. EUR 1.4 million of this amount are financed from KLH's special fund "Zukunft Kärnten"4. The Commission invites the Austrian authorities to clarify if this amount is being transferred to KFBG or is directly transferred to the airlines.

2.5. The airport incentive programme of Kärntner Flughafen Betriebs GmbH of 2005

2.5.1. The base rates of the airport charges

(29) The schedule of charges has not been changed since 2008. Only a minor increase of the tariffs has been made.

(30) It consists out of two parts: Part I: “Tarifordnung” approved by the Federal Ministry for Transport and part II “Entgeltordnung”. Part II deals with the ground handling services

(31) Part I deals with the following tariffs:

 Landing fee (per turnaround)

4 http://www.klhd.at/projektbeschreibung/leitprojekt-infrastruktur-kaernten-airport-2011-2014.html?PHPSESSID=3a9d1fc61a2a8bb64d387d8e5ca728a5  Passenger fee (per departing passenger)

 PRM fee

 Parking fee (per turnaround)

 Infrastructure fee (airside: per turnaround, landside: per passenger)

(32) The infrastructure tariff is for the use of the airport central infrastructure and applies when a ramp / traffic handling service is provided. It consist out of the air side infrastructure tariff which depends on the MTOW of the aircraft and the number of seats (between EUR 40 and 424 in 2009) and a landside infrastructure tariff which is EUR 1.4 per departing passenger.

(33) The fees for ground handling services are divided into two groups: services which have to be paid for independently of the range of the use (traffic handling charge (“THC”) and ramp handling charge (“RHC”) and individual services which have to be paid only with respect to the individual use. The amount of the THC and RHC depends on the MTOW of the aircraft. The THC is between EUR 337 and 3886, the RHC is between EUR 226 and 2404).

2.5.2. The incentive scheme

(34) In 2005 KFBG introduced an incentive scheme for airlines with and from destination of KLU with the objective to enhance the creation of new flight destinations (destinations incentive), to intensify existing flight connections (frequency incentive) and to strengthen and secure existing flight connections (passenger incentive). The scheme entered into force 1 September 2005 and ended 31 December 2008. In December 2008 the incentive programme has been extended for an undetermined time period. The scheme is open to all airlines operating on KLU but applies only for scheduled flights, charter flights are excluded. The application has to be based on a prior agreement between KFBG and the airline on the current and planned frequencies and the routes.

(35) The destinations and frequency incentive scheme grants incentives as a percentage rebate on certain airport charges (Landetarif, luftseitiger Infrastrukturtarif, Vorfeldabfertigungsentgelt) which are laid down in the current fee regulation of KLU.

(36) The passenger incentive is an absolute amount paid per passenger of a departing flight from KLU fixed for the whole duration of the scheme. The incentive is deducted from the same fees as for the destinations and frequency incentive. The amount is indicated as a maximum amount. If the flights are increased or decreased the amount is adapted respectively but not above the maximum amount.

(37) A combination of the destinations/frequency incentive with the passenger incentive is possible insofar as all forms of incentives can be combined but not accumulated. This means the passenger numbers on which are based the destinations and frequency incentives are deduced from the overall passenger number when calculating the passenger incentive. (38) The incentive is paid (refunded) by KFBG at the end of a calendar year. The airline has to prove the number of passengers and flights from and to the destination of KLU.

(39) The passenger incentive scheme has been applied for Austrian Airlines retroactively for 2003 until September 2005 due to a private settlement. This settlement was the result of a law suit between Austrian Airlines and KLU. Austrian Airlines had claimed that Ryanair had been treated preferentially due to the cooperation with Ryanair concerning the flight connections to London. Austrian Airlines had not made an offer on the public tender for this route. Austrian Airlines refused then payments to the Airport. The result of the law suit and the negotiations was that the transparent incentive scheme of 2005 was adopted and an individual settlement was agreed according to which Austrian Airline was treated as if the passenger incentive had already existed in 2003.

(40) The payments resulting from the Marketing Agreement with Leading Verge can be cumulated with the incentives. Table 7: Incentives at KLU since 2005 Year Destinations incentive on Frequencies incentive on Passenger Landetarif, luftseitiger Landetarif, luftseitiger incentive Infrastrukturtarif and Infrastrukturtarif and (maximum) per Vorfeldabfertigungsentgelt Vorfeldabfertigungsentgelt departing passenger

2005- 1st year: 70 % 1st year: 60% EUR 7.62 2008 nd nd 2009 2 year: 60 % 2 year: 50% EUR 5.06

rd rd 2010 3 year: 50 % 3 year: 40 % EUR 4.85

2011 EUR 4,85

Table 8: Application of the incentive scheme on the airlines at KLU 2002-2010

[…]

Table 9: Amount of incentives granted per airline at KLU 2003-2007

in thousand € 2010 2009 2008 2007 2006 2005 [total] Passenger incentive - Incentive

Austrian Airlines Group [...]* [...] [...] [...] [...] [...] [ >2000] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] Ryanair [...] [...] [...] [...] [...] [...] [...] [ <1000] [...] [...] [...] [...] [...] [...] TU IFly (HLX) [...] [...] [...] [...] [...] [...] [ <1000] [...] [...] [...] [...] [...] [...] airberlin [...] [...] [...] [...] [...] [...] [ <500] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] Destination incentive [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] Lufthansa [...] [...] [...] [...] [...] [...] [ <2000] [...] [...] [...] [...] [...] [...] Robin Hood [...] [...] [...] [...] [...] [...] [ <100] [...] [...] [...] [...] [...] [...] Ryanair [...] [...] [...] [...] [...] [...] [ <1000] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] TUIFly (HLX) [...] [...] [...] [...] [...] [...] [...] [ <500] [...] [...] [...] [...] [...] [...] airbe rlin [...] [...] [...] [...] [...] [...] [...] [ <100] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] Frequen cy incentive [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] [...] Germanwings [...] [...] [...] [...] [...] [...] [ <1000] [...] [...] [...] [...] [...] [...] SUM [...] [...] [...] [...] [...] [...]

(41) The Austrian authorities have submitted a cost-benefit analysis based on the actual numbers of 2006 to 2010 for Ryanair on the route Stansted, for Austrian Airlines on the routes to and and for Lufthansa on the route to . 2.6. The 2002 Agreements with Ryanair and with Leading Verge.Com

2.6.1. The tender opened by Destinations Management GmbH for a flight connection to London in 2004

(42) In November 2001 Destinations Management GmbH opened a tender for a scheduled flight connection between London and Klagenfurt. The tender was published in the OJ 14.11.2004, p. 219 and in the official procurement journal of the Federal Ministry of Economy and Labour. The tender offered a contract for a direct daily scheduled flight London-Klagenfurt and back for at least 50,000 passengers per year from a central London (in total 100,000 yearly) airport with a duration of 3 years and an option to extend for 5 years. As a reward Destinations Management GmbH offered:

 a contribution to the marketing activities of the airline with a fixed amount of 2 million ATS (145,345.67 Euros), the marketing support has to be used for the publicity and marketing of the flight connection, the use has to be proved every half year,

 a 97% refunding of the turnaround fees (airport charges, station and ground handling fees and the fee) of Klagenfurt airport. These fees arise when landing in KLU.

(43) The tender foresaw also an alternative offer with 4 flights a week and 30,000 passengers from London (in total 60,000 passengers yearly). In this case the reward offered was a marketing support of 1 million ATS (72,672.82 Euros) and a contribution for the turnaround fees.

(44) The public tender did not result in any offer and was withdrawn consequently. In the following a negotiation procedure without previous publication was carried out and resulted in a contract with Ryanair.

2.6.2. The Cooperation Agreement between Kärntner Flughafen Betriebsgesellschaften mbH and Ryanair of 22 January 2002

(45) On 22 January 2002 KFBG and Ryanair made an agreement which entered into force on 27 June 2002 for a period of […] years with an automatic renewal for further […] years provided that Ryanair fully complies with its obligations under that agreement.

(46) The agreement provides for a further contract in relation to additional rotations.

(47) Ryanair is obliged under the Agreement to operate passenger air services between KLU and London-Stansted Airport (hereafter: “STN”) commencing around the date of entering into force of the Agreement utilising a B737 aircraft on at least a […] basis with low fares and […] rotations per year or […] rotations per calendar quarter.

(48) Ryanair pays KLU an all-inclusive fee of EUR […] per rotation in respect of landing and take-off fees, lighting charges, noise and night fees, ramp and passenger handling, infrastructure charge, local Air Traffic Control and charges for the services at KLU. The Austrian authorities explain that this all-inclusive fee is the same as the refunding of turnaround fees mentioned in the tender made by DMG in 2001.

(49) Ryanair collects on the passenger tickets an amount of EUR […] per departing passenger as a passenger services charge for the Airport.

(50) Ryanair collects on the passenger tickets an amount of EUR […] (fixed by the Austrian Government) per departing passenger as a security fee for the Airport.

(51) Ryanair produces in conjunction with DMG a periodic marketing plan for the flight connections for the information of KLU. Ryanair has complete discretion in the application of the marketing support received with the only condition that it has to link the appropriate tourist websites to Ryanair’s website and to incorporate appropriate logos wherever feasible.

(52) KLU is obliged to provide airport terminal and handling services for the services of Ryanair (including free branding space at the ticketing and check-in desks and boarding gates), to provide public relations and marketing functions with regard to the services of Ryanair (including press conferences), to procure the payment by DMG to Ryanair’s media consultants of an amount of EUR [50 000 – 150 000] per year in respect of the daily rotation commencing on 27 June 2002, payable quarterly in advance at EUR [...]. In the extent that this amount is not paid KLU has to pay the amount to Ryanair. KLU further has to procure the operation of a bus service at modest fares between the Airport and Klagenfurt main station to connect with the scheduled arrival and departure times. KLU also has to assist Ryanair in its negotiations with fuel suppliers at the Airport to achieve the lowest costs.

(53) KLU is obliged to establish and operate a passenger service desk in the main terminal of KLU and to staff it. The desk is to be open two hours before the departure until the departure. For these services KLU receives from Ryanair [...] % commission on all Ryanair fares sold by debit/credit card.

(54) The Marketing Agreement between Destinations Management GmbH and Leading Verge.Com Limited of 22 January 2002

(55) On 22 January 2002 DMG and Leading Verge.Com made an agreement which entered into force the same date with a duration until [...] with an automatic renewal for further [...] years provided that LV fully complies with its obligations under that agreement.

(56) DMG appoints LV to “initiate marketing measures aimed at making the province of Carinthia better known in the English speaking world and to arrange for legally licensed air carriers to provide new scheduled passenger air services from locations within the United Kingdom and/or continental Europe to Klagenfurt airport using aircraft with a capacity of not less than 140 seats (“the Services”).”

(57) The convened “Services” “should continue to be [...] rotations per annum ([...] rotations per quarter). “LV undertakes to procure the introduction and continuation of the Services” “and to generate a promotional plan and web links to DMG’s homepage” and other promotion of promoting the “Services” including links between tourist websites to LV’s air operator client’s websites

(58) DMG pays EUR 145,000 per year in respect of the daily rotation payable quarterly in advance at a rate of EUR 36,250.

(59) The Austrian authorities have not carried out any independent evaluation of the outcome of the marketing activities but claim that there is a positive effect in the passenger numbers of KLU resulting from the permanent cooperation and the success of the flight connections.

Table 10: Refunding and payments of KFGB to Ryanair 2002-2005 in EUR year 2002 2003 2004 2005

Refunding of turnaround fees [...] [...] [...] [2-6 million]

Payments under the marketing agreement [...] [...] [...] [200 000-600 000]

2.7. The 2006 Agreements with Ryanair and with AMS

(60) According to a press release of the State of Carinthia issued on 6 February 2007 certain public authorities had made payments to Ryanair as follows: State of Carinthia 150,000 EUR, Klagenfurt City 150,000 EUR, Kärnten Werbung 45,000 EUR, KFBG EUR 30,000. The Austrian authorities have declared that these contributions have been paid out to Klagenfurt airport as a contribution to the marketing measures of Ryanair, which therefore serve indirectly to minimise the losses of the Airport.

2.7.1. Airport Services Agreement between KFBG and Ryanair of 23 August 2006

(61) On 23 August 2006 KFBG and Ryanair made an agreement which entered into force the same day for a [...]-a-week services operated from 19 December 2006 until 21 April 2007.

(62) The Agreement is based on the published tariffs of KLU and the new charges/incentives scheme introduced in September 2005.

(63) Ryanair is obliged to establish and operate STN-KLU-STN with a [...]-a-week-service which will generate at least [...] departing passengers for the term of the contract.

(64) Ryanair is obliged to pay the official charges of the Airport. The incentive scheme grants an incentive of EUR [...] per departing passenger on new scheduled services.

(65) The Agreement has been extended on 28 February 2007 for a period of [...] years from [...] to [...]. Ryanair commits itself to generate at least [...] departing passengers per year. 2.7.2. Marketing Services Agreement between DMG and Airport Marketing Services (Jersey) Limited of 21 December 2006

(66) On 21 December 2006 DMG and Airport Marketing Services (Jersey) Limited made an agreement which entered into force the 28 February 2007 for a [...]-a-week services operated from 19 December 2006 to [...].

(67) AMS has the exclusive license to offer marketing services on the website www.ryanair.com of Ryanair. The Agreement is rooted in Ryanair’s commitment to operate a route between STN and KLU for the period 19 December 2006 to 21 April 2007.

(68) AMS is obliged under the Agreement to provide a package of marketing per year to the value of EUR [350 000-150 000] as per AMS current Rate Card including a link from www.ryanair.com to a website designated by DMG, content designated by DMG on the Klagenfurt/Carinthia destination page and e-mail offers advertising Klagenfurt/Carinthia sent to subscribers of the website. Additional marketing services exceeding that amount can be decided.

(69) The websites designated by DMG cannot provide flights, car rental, accommodation and any services that in future may be offered by www.ryanair.com but will present tourist attractions and business opportunities of Klagenfurt/Carinthia.

(70) DMG is obliged to pay for the marketing services in monthly instalments on the basis of invoices.

(71) On 28 February 2007 the Agreement was extended for a period of […] five years from 22 April 2007 to […]. The basis of the Agreement is a year-round, […]-a-week service STN- KLU-STN. The yearly package of marketing in its content and rates are to be adapted amicably each year.

2.8. Marketing cooperation with TUIfly and Air Berlin

(72) The Austrian authorities explain that other airlines than Ryanair do either not profit from payments for new routes from and to KLU. Public money in this context is only spent with regard to marketing measures for tourism advertising.

(73) , funds for marketing activities of the airlines came from the State of Carinthia, the City of Klagenfurt and KFBG. The funds were transferred to KFBG. The funds were then used by KFBG's subsidiary DMG for marketing arrangement with the airlines.

(74) According to publicly available information,for the extention of cooperations between KFBG and TUIfly and Air Berlin an investment of EUR 15.8 million from which EUR 1.5 million are provided from KLH's fund "Zukunft Kärnten" was planned for the period of five years starting with 1 April 20045.

5 http://www.klhd.at/projektbeschreibung/low-cost-tuiflyair-berlin.html (75) In 2007 the State of Carinthia transferred EUR 1,205,287 for marketing activities of DMG with Hapag Lloyd (which later became TUIfly) and Ryanair to the Airport. It is unclear which share of the amount was given to which airline.

(76) The Austrian authorities refused to submit to the Commission information concerning payments to other airlines at Klagenfurt airport as they consider that this information does not relate to the present case.

(77) The Austrian authorities are nevertheless of the opinion that payments to other airlines conform to the market economy investor principle.

Table 11: Payments of the State to KFBG with regard to marketing activities of LCCs

3. COST-BENEFIT ANALYSES SUBMITTED BY THE AUSTRIAN AUTHORITIES

3.1. Incentive Scheme of 2005

(78) The Austrian authorities have presented three model calculations for three possible projects. These calculations were made at the time of the introduction of the incentive scheme in 2005.

 project 1: aircraft with 189 seats (e.g. B 737-800), 3 flights per week

 project 2: aircraft with 72 seats (Dash 8-400), 1 flight per day

 project 3: aircraft with 46 seats (ATR 45), 1 rotation per week

(79) They explain that according to these calculations not only variable costs of the three model projects are covered but also full costs.

(80) The Austrian authorities are therefore of the opinion that the incentives comply with the market economy investor principle. (81) The Austrian authorities provided three different ex-ante project analyses to demonstrate that offering an incentive scheme to an airline would provide positive return for the airport.

(82) The analysis features a five year model. In the first three years a digressive destination incentive is applied (70% in Y1, 60% in Y2, 50% inY3) followed by a passenger incentive in year four and five. (EUR 7.62 per pax).

(83) All scenarios assume that each additional passenger brings EUR 7 of non-aviation revenue. Costs are calculated as the sum of (i) 51% of the traffic handling revenues, (ii) cost dependent on number of flights is calculated as the number of flights per year multiplied by MTOW multiplied by the cost factor (EUR 30.6) and (iii) cost dependent of number of passengers is calculated as the number of passengers per year multiplied by the cost factor (EUR 7.13).

(84) The different scenario vary in their assumption of new flights per year that the scheme allowed, the load factor of these flights over the years, the type of flights. They all represent positive net present value at a 8% discount rate. The internal rate of return of the project over the five years ranges from 30% to 52% depending on the different scenarios.

(85) The Austrian authorities also provided a similar analysis, this time on an ex-post basis, based on the actual figures from 2006 until 2010 for three companies that benefited from the incentive schemes (Ryan Air, Austrian Airlines and Lufthansa).

(86) In the case of Ryanair, the main assumption is that the scheme allowed for […] additional flights per week. Revenues are based on the actual aviation revenue deriving from the additional flights brought by the incentive scheme. Non-aviation revenues rely on the assumption that each passenger spent EUR […] on average. Cost assumptions are similar as the ones from the ex-ante analysis, except a different cost factor for each year has been used. For each airline, the analysis shows that the scheme was profitable to the airport (positive NPV at 8% discount rate, and high internal rate of return – […]% in the case of Ryanair flights).

3.2. Cooperation with Ryanair for 2002 to 2005

(87) The Austrian authorities explain that cooperation with LCCs is necessary to develop the Airport and to ensure a cost digressive use of the considerable infrastructure investments.

(88) The benefit of the cooperation agreement with Ryanair consists in a long-term establishment of scheduled air connection between KLU and London, which is important as well for inbound flights (tourism) as for outbound flights (mobility for the Carinthian population)

(89) In addition, a cost-benefit analysis of the cooperation agreement between the airport and Ryanair for the period 2002-2005 intends to demonstrate that the deal was globally profitable for the airport. This however relies on implicit cost assumptions regarding the three cost items used in the methodology. (90) The Austrian authorities are of the opinion that the cooperation with Ryanair conforms to the market economy investor principle as it is necessary for the economic development of the Airport.

4. COMMENTS FROM RYANAIR

4.1. Comments

(91) Ryanair considers that it has not received any State aid at KLU. Ryanair expects the Commission to assess the agreements concerning KLU under the market economy investor principle taking into account all relevant factors, in particular non-aeronautical revenues and network externalities. Cost benefit analysis should be based on incremental costs and infrastructure and fixed operating costs should be considered as sunk costs. With regard to airport fees the reduced needs of Ryanair should also be taken into account. Ryanair expects the Commission to rely on the market based comparator market economy investor principle and not on a cost-based market economy investor principle. Ryanair has provided documentation with regard to the value of its marketing activities.

4.2. Oxera study

(92) Ryanair had appointed Oxera to carry out an assessment whether the agreements between Ryanair and the fees paid by Ryanair at KLU conform to the market economy investor principle. Not included in the assessment is the Marketing Services Agreement between DMG and Airport Marketing Services (Jersey) Limited of 21 December 2006.

(93) Oxera has carried out two analyses: a comparator analysis and a profitability analysis. Oxera has found that […] and […] airports are similar to KLU based on a range of characteristics. Oxera has compared the charges paid by Ryanair in these airports deducting the marketing support payments Ryanair receives under the 2002 agreement with DMG but not the payments it receives under the 2006 Marketing Services Agreement. It has compared the charges paid per turnaround and per passenger and comes to the conclusion that the charges at KLU have always been higher than at the two other airports.

(94) Oxera’s profitability analysis is an ex-ante assessment based on incremental costs and revenues and a single till approach and only concerns the 2002 agreements. It comes to the conclusion that the 2002 agreements were profitable for the airport and had a positive net present value.

5. COMMENTS FROM THE AUSTRIAN AUTHORITIES ON THE COMMENTS OF RYANAIR

(95) The Austrian authorities are of the opinion that for the calculation of the profitability of an air connection the marginal cost calculation should be used instead of the normal full cost calculation as the airport infrastructure is made for a long term use but air connections are based on short-term decisions. Additionally security measures can only be made with long term depreciations. They also support the single till approach which includes non-aviation revenues into the profitability calculations.

(96) KLU is considered as a regional airport for Carinthia with a strong summer and winter tourism. Additionally it shall serve the mobility of the Carinthians. It does not intend to be a secondary airport for Slovenia, at least only in a very small degree.

(97) With regard to the Oxera study the Austrian authorities share its result that the activities of the Airport fulfil the market economy investor principle. It appears difficult to identify the comparator airports. The comparability of KLU with […] seems to be very limited due to other numbers of passengers, considerably higher volatility in the numbers of flights and due to different geographic surroundings. The Austrian authorities also share the analysis of the incremental assessment. They also share the doubts in the general necessity of business plans.

6. COMMENTS FROM THE AUSTRIAN AUTHORITIES

6.1. Financing of the Airport

(98) The Austrian authorities explain that the reasons for the continuing losses of the Airport are the following: The Airport is a regional airport with currently only 400,000 passengers per year and this figure can only be increased to a limited extend. Due to the considerable investments which are necessary for technical and security reasons the Airport had yearly depreciations of EUR 2.2 to 2.5 million in the recent years. These fixed costs can actually not be used in an optimal way. Additionally marketing efforts have to be made to keep the Airport on the market. The losses are compensated by the contributions of the shareholders of the Airport.

(99) The Austrian authorities are of the opinion that the operation of the Airport is a service of general economic interest. The State of Carinthia is a region which is enclosed by mountains with a population of about 560,000 inhabitants. As the potential of the catchment area is limited the use of capacity of the routes is always problematic. It is important for Carinthia to be accessible from outside for tourism and the regional economy and to secure the mobility for its citizens outbound. The Austrian authorities declare that no formal act of entrustment has been made but that this was ensured on the basis of corporate law.

(100) The Austrian authorities have submitted a study of Österreichische Gesellschaft für Marketing evaluating the economic impact of the Ryanair route to London to illustrate the importance of flight connections to Klagenfurt for the tourism industry in Carinthia.

(101) The Austrian authorities explain that all airports except for those across the border are more than 1.5 hours away from the Airport. Public transport to the other airports is not available. The Airport is the only one in Carinthia region. Tourists coming to Carinthia would not accept a distance between the final holiday destination and the airport of more than 100 km or more than one hour drive. This is even more the case with business travellers. With regard to the Ljubljana and Trieste airports there is additionally a barrier of different languages and mentalities. The Austrian authorities are of the opinion that there is no direct competition with other airports and no distortion of trade in Europe.

(102) The Austrian authorities declare that the commercial activities of KLU are restricted exclusively to activities which are directly linked to the operation of the Airport as parking lots, lease of spaces to the gastronomy, to small shops and transport companies (e.g. car rentals) and to duty free shops. It appears that there is no competitive situation with other companies outside the Airport. Additionally, the non-aviation business has regularly positive results. Therefore there are no anti-competitive spill-over effects.

6.2. Agreements with Ryanair

(103) The Austrian authorities explain that they have not notified the marketing measures with regard to Ryanair as they do not constitute State aid.

(104) They cannot explain whether the reduction of frequencies between Graz Airport and Stansted was due to the reestablishment of route between KLU and Stansted but say that due to this a new route between Maribor (SLO) and Stansted was established.

6.3. Incentive Programme

(105) As a defence the Austrian authorities have provided the Commission with a table showing that also other airports in Austria (Vienna, , Graz, Linz) and other Member States (Frankfurt-Hahn, Malta, Lübeck) offer incentive programmes to airlines6.

7. ASSESSMENT OF THE EXISTENCE OF AID

(106) The Commission has analysed whether the following measures may qualify as State aid:

 the financing of KFBG  the incentive scheme introduced in 2005 and its retroactive application for Austrian Airlines  the 2002 agreements with Ryanair and its subsidiary Leading Verge.Com Ltd.  the 2006 agreements with Ryanair and its subsidiary Airport Marketing Services (Jersey) Ltd.  the financial contributions to TUIfly and Air Berlin (107) By virtue of Article 107 (1) TFEU "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market."

6 The Commission has initiated the formal investigation procedure for Frankfurt-Hahn (C 29/2008) and Lübeck (C 24/2007, SA.27585 (2012/NN) SA.31149 (2012/NN) and has approved the Air Route Development Scheme N 640/2006 – Malta (108) The criteria laid down in Article 107 (1) TFEU are cumulative. Therefore, in order to determine whether the measure in question constitutes State aid within the meaning of Article 107 (1) TFEU all of the following conditions need to be fulfilled. Namely, the financial support should: - be granted by the State or through State resources, - favour certain undertakings or the production of certain goods, - distort or threaten to distort competition, and - affect trade between Member States. 7.1. The aid nature of the financing of KFBG

State resources and imputability to the State (109) The Austrian authorities acknowledged that annual capital injections are carried out by the Federal Ministry for the Interior / for Finances, the State of Carinthia and the City of Klagenfurt (see Table 5). (110) Accordingly, the Commission can conclude that the annual financing provided to KFBG involve State resources in form of direct grants from the State budget and is thus imputable to the State. Economic activity and notion of undertaking

(111) The Commission must first establish whether KFBG is an undertaking within the meaning of Article 107 (1) TFEU. According to settled case-law, the concept of an undertaking covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed:7 Any activity consisting in offering goods and services on a given market is an economic activity.8 (112) In its "Leipzig/Halle airport" judgement the General Court confirmed that the operation of an airport is an economic activity, of which the construction of airport infrastructure is an inseparable part.9 Once an airport operator engages in economic activities, regardless of its legal status or the way in which it is financed, it constitutes an undertaking within the meaning of Article 107 (1) TFEU, and the Treaty rules on State aid therefore apply.10 (113) The Court also held in its "Leipzig/Halle airport" judgement that it is not relevant whether the construction or the extension of an airport infrastructure pursues objectives of regional, economic or transport policy. It is not relevant which purposes are followed by specific measures but rather what effects they cause.11

7 Case C-35/96 Commission v Italy [1998] ECR I-3851, para 36; C-41/90 Höfner and Elser [1991] ECR I-1979, para 21; Case C-244/94 Fédération Française des Sociétés d'Assurances v Ministère de l'Agriculture et de la Pêche [1995] ECR I-4013, para 14; Case C-55/96 Job Centre [1997] ECR I-7119, para 21. 8 Case 118/85 Commission v Italy [1987] ECR 2599, para 7; Case 35/96 Commission v Italy [1998] ECR I-3851, para 36. 9 Joint Cases T-455/08 Flughafen Leipzig-Halle GmbH and Mitteldeutsche Flughafen AG c/ Commission and T-443/08 Freistaat Sachsen and Land Sachsen-Anhalt c/ Commission, (hereinafter: "Leipzig/Halle case"), [2011], not yet published in ECR, see also Case T-128/89 Aéroports de Paris v Commission [2000] ECR II-3929, cofirmed by the ECJ, Case C-82/01P, ECR 2002 Page I-9297, and Case T-196/04 Ryanair v Commission [2008], ECR II-3643, paragraph 88. 10 Cases C-159/91 and C-160/91, Poucet v AGV and Pistre v Cancave [1993] ECR I-637. 11 Leipzig-Halle case, paragraph 102 following. (114) KFBG, which is the subject of the present decision, owns and operates the Airport. The Commission therefore concludes at that KFBG is an undertaking in the sense of EU competition law. Economic advantage (115) The annual capital injections reduce the costs that KFBG would normally have to bear and it appears that KFBG does not pay dividends in any form to its shareholders. Therefore the capital injections confer an economic advantage on KFBG. Market economy investor principle test

(116) However, it could be argued that the capital injections granted to KFBG do not constitute State aid within the meaning of Article 107 (1) TFEU if the market economy investor principle test can be shown to be applicable in this case. In this regard the European Court in the Stardust Marine Judgment declared "capital placed directly or indirectly at the disposal of an undertaking by the State in circumstances which correspond to normal market conditions cannot be regarded as State aid".12

(117) The Austrian authorities do not argue that the public funding granted annually to KFBG complies with the market economy principle investor test. No business plan or profitability estimations have been provided to the Commission by the Austrian authorities, which would show that when deciding to cover annual losses, the State was in fact guided by profitability projections. (118) Moreover, there is no indication that KFBG paid dividends to the State. On the basis of the information available, the Commission observes that KFBG was loss-making in ordinary activities in 2002 and from 2003 to 2009. On the basis of information at its disposal the Commission takes the preliminary view that KFBG would not be able to remain on the market and would have to enter into bankruptcy without the capital injections of the shareholders. In view of the losses at the current stage it cannot be excluded that KFBG is an undertaking in difficulty in sense of the Rescue and Restructuring Guidelines. (119) From the information available it is not clear whether the public authorities considered a closing of the airport as an alternative. The Commission invites the Austrian authorities to comment on a potential closing scenario and provide the Commission with an analysis of the costs of closure in case such an analysis has been carried out. (120) On the basis of the information currently at its disposal, the Commission takes the preliminary view that the State's funding of the KFBG was not similar to one which would have pursued by a market economy investor. It therefore takes the preliminary view that the annual subsidies received by KFBG provide the latter with an economic advantage that it would not obtain on the market. (121) The Commission invites the Austrian authorities and interested parties to comment on the application of the market economy investor principle test and to provide, if available a business plan for KFBG or profitability calculations. The Commission also invites the

12 Stardust Marine Judgement, paragraph 69. Austrian authorities and the interested parties to comment on the financial situation of KFBG. Service of general economic interest

(122) The Austrian authorities contend that the capital injections in question should be considered compensation for the discharge of public service obligations. In order to conclude on whether or not the compensation for public services constitutes an advantage within the meaning of Article 107 TFEU, the Court set out the following criteria in its judgement in the Altmark case13: 1.) the recipient undertaking must actually have public service obligations to discharge and these obligations must be clearly defined (hereinafter Altmark 1);

2.) the parameters on the basis of which the compensation is calculated must be established in advance in an objective and transparent manner (hereinafter Altmark 2);

3.) the compensation cannot exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit for discharging those obligations (hereinafter Altmark 3);

4.) where the undertaking which is to discharge public service obligations, in a specific case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable of providing those services at the least cost to the community, the of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant revenues and a reasonable profit for discharging the obligations (hereinafter Altmark 4).

(123) Altmark 4 provides that the compensation must be the minimum necessary for an efficient undertaking in order to escape State aid qualification. This criterion is deemed to be fulfilled if the recipients of the compensation have been chosen following a tender procedure ensuring the provision of services at the least costs for the community or, failing that, the compensation has been calculated by reference to the costs of an efficient undertaking. (124) In this case the beneficiary appears not having been chosen following a public tender procedure. The State of Carinthia appears not having put out to tender the operation of KLU but simply established the company operating it. (125) Moreover, the Austrian authorities have not indicated to the Commission that the level of compensation has been determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant revenues and a reasonable profit for

13 Case C-280/00 - Altmark Trans and Regierungspräsidium Magdeburg [2003] ECR I-7747. discharging the obligations. The capital injections simply seem to cover the financial need of KFBG without any analysis of the costs. (126) Consequently, at this stage the Commission has no evidence to support the argument that the beneficiary in fact provides airport services at the least cost to the community. (127) Since the Altmark criteria are cumulative, it is sufficient at this stage for the Commission to observe that the fourth criterion is not met in the present case. Therefore the Commission concludes that the measure provides the recipients with an economic advantage. Selectivity (128) Article 107 (1) TFEU requires that a measure, in order to be defined as State aid, favours "certain undertakings or the production of certain goods". In the case at issue, the Commission notes that the advantages in question were granted to KFBG only. As the public funding was directed at a single undertaking, it is selective within the meaning of Article 107 (1) TFEU. Distortion of competition and affectation of trade (129) When aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in the internal market, the latter must be regarded as affected by that aid. In accordance with settled case law14, for a measure to distort competition it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition. (130) In the case at stake, Austria is of the opinion that there is no direct competition with other airports and trade is not affected. (131) KLU serves currently approximately 425,000 passengers per year. Thus, it a “small regional airport” (so-called “category D” airport), for the purposes of the Community Guidelines on financing of Airports and Start-up Aid to Airlines departing from Regional Airports (hereafter. “2005 Aviation Guidelines” or “Guidelines”). According to paragraph (40) of the Guidelines it cannot be excluded a priori that a category D airport does not affect trade between the Member States. The size of the airport and its proximity to other European airports (see above paragraph (12), in particular Ljubljana Airport, does not allow to consider that trade between Member States is not liable to be affected. The Commission notes in this context that KLU offers a bus shuttle service to Ljubljana which proves that it attracts customers from the catchment area of Ljubljana. Also the business report of KLU of 2010 notes: “Unter Berücksichtigung der begrenzten Marktgröße und der Dichte der Verkehrsflughäfen im Einzugsgebiet des Flughafens Klagenfurt – immerhin sieben Konkurrenzflughäfen in einem bevölkerungsschwachen und kleinen geographischen Raum – ist ein massives Wachstum nicht prognostizierbar.“ (132) On the basis of what precedes the economic advantage which KFBG receives strengthens its position vis-à-vis its competitors on the European market of providers of airport services. Therefore, the public funding under examination distorts or threatens to distort competition and affects trade between the Member States.

14 Case T-214/95 Het Vlaamse Gewest v Commission [1998] ECR II-717. Conclusion (133) For the reasons set out above the Commission takes the preliminary view that the financing provided to KFBG amounts to State aid within the meaning of Article 107 (1) TFEU. 7.2. The aid nature of the incentive scheme introduced in 2005 and its retroactive application for Austrian Airlines

State resources and imputability to the State

(134) In the case at hand the discounts have been introduced by KFBG. (135) Until November 2008 KFBG was 20% owned by the City of Klagenfurt and 80 % by the State of Carinthia. Today the latter's share is owned by KLH. KLH is ownerless but has been established by law and its purpose is to serve the interest of Carinthia and it is controlled by its Government. KFBG was and still is therefore a public undertaking according to Article 2 (b) of Commission Directive 2006/111/EC. (136) However, the Court has also ruled that, even if the State is in a position to control a public undertaking and to exercise a dominant influence over its operations, actual exercise of that control in a particular case cannot be automatically presumed. A public undertaking may act with more or less independence, according to the degree of autonomy left to it by the State. Therefore, the mere fact that a public undertaking is under State control is not sufficient for measures taken by that undertaking, such as the capital injections in question, to be considered imputable to the State. On that point, the Court indicated that the imputability to the State of a measure taken by a public undertaking might be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken.15 (137) Such indicators can be the integration of the undertaking into the structures of the public administration, the nature of its activities and the exercise of the latter on the market in normal conditions of competition with private operators, the legal status of the undertaking (in the sense of its being subject to public law or ordinary company law), the intensity of the supervision exercised by the public authorities over the management of the undertaking, or any other indicator showing, in the particular case, an involvement by the public authorities in the adoption of a measure or the unlikelihood of their not being involved, having regard also to the compass of the measure, its content or the conditions which it contains16. (138) At the current stage the Commission has no detailed information on how the influence of the State of Carinthia onto KFBG is carried out. The Commission therefore invites the Austrian authorities to provide the articles of incorporation of KFBG and to explain to which extent the control of the State has been exercised with regard to the incentive scheme of KLU and also provide documentation to which extent the financing of KFBG was linked to specific measures of KFBG. However, the Commission preliminarily concludes from the

15 Stardust Marine Judgment, paragraph 52 and 57. 16 Stardust Marine Judgment, paragraph 55 and 56. publicly available information that the incentive scheme has been introduced and maintained under the control of the State. Carinthia considers the Airport as a tool for its tourism industry and flight connections and the attraction of airlines are a regular topic on the political level of Carinthia. The control of the State is exercised directly in the supervisory board of KFBG and indirectly via the supervisory board of KLH (see also above paragraph 22).17For the period before 2008 the control of the State was directly exercised as a shareholder of KFBG. (139) At this stage it seems that the State exercised control over the introduction and maintenance of the incentive scheme through its representatives in the supervisory board. Therefore, at this stage the Commission takes the preliminary view that the incentive scheme is imputable to the public authorities and invites Austria to provide information to clarify this aspect. (140) With regard to the settlement with Austrian Airlines the Commission has only little information on its background. At this stage the Commission has doubts that a settlement with a major airline of KLU has been made without the consent of the shareholders or at least the supervisory board. The Commission invites the Austrian authorities to provide information on this aspect. Notion of Undertaking and Economic Activity

(141) The airlines using the airport are undertakings in the sense of EU competition law. Economic Advantage

(142) The Austrian authorities claim that the Airport has acted as a private investor when introducing the incentive scheme. (143) A market economy investor may grant discounts for commercial reasons, for instance if they are of limited duration or do not discriminate between users of the airport infrastructure, and if they do not jeopardize the economic viability of the airport, but rather improve it. In any case rebates and discounts should reflect economy of scale or other costs saving for the airport operator or be based on some economic rationale so that it is economically convenient for the airport operator to grant them.18 (144) Moreover, discounts that lead to the result that the airport charges paid by the airlines are lower than the cost of the underlying operation provided by the airport to the airlines would make no sense from an economic point of view, in particular where the operator is in financial difficulties, as they would only have the effects of increasing the losses of the airport operator. Therefore, a market economy operator would normally not grant them under normal market conditions. It follows that such discounts would provide an advantage to the airlines which they would not obtain under normal market conditions.

(145) In order to assess whether the discounts have been granted according to market conditions the Commission needs to test whether they were made in circumstances which would be

17 E.g. ÖVP Kärnten Press release, 24 November 2011: http://www.ots.at/presseaussendung/OTS_20111124_OTS0329/oevp-lps-rumpold-zu-flughafen-diskussion-zunaechst-sind- die-geschaeftsfuehrung-und-der-aufsichtsrat-der-flughafen-bges-am-zug 18 Commission decision of 18 February 2011, State aid case NN 26/2009 - Greece – Ioannina airport development. acceptable for an investor operating under normal market conditions having regard to the information available and foreseeable developments at the date of signing the agreements.

(146) The Austrian authorities have provided the Commission with an ex ante and an ex post cost-benefit analysis of the incentive scheme. These calculations come to the result that the incentive scheme would be and finally also was profitable to the Airport.

(147) The Austrian authorities declare that the calculation has been made on a full cost basis. However they did not provide any explanation on how they calculated the cost factor of EUR 30.6 for the costs depending on the number of flights and of EUR 7.62 depending on the number of passengers and why they calculated with 51% of the traffic handling costs.

(148) Based on the information available at this stage, it appears that the reduced charges did not cover the costs that an airport operator incurs when discharging its services. The Commission notes that the airport was loss making in ordinary activities in 2002 and from 2004 to 2009. The losses were covered by payments from the public shareholder.

(149) Consequently a market economy owner would have needed to consider whether a closing of the airport was more favourable than a continuation of the activity. The Austrian authorities are invited to provide information regarding the costs of the closing compared with the costs of maintaining the activity.

(150) As regards the profitability of the airport, the Commission invites the Austrian authorities to state for each year of the period 2005-2010 for KLU the total costs, broken down into investment costs and operating costs, and further detail the investment costs, the depreciation costs and the costs of the financing of fixed assets including the following:

 the annual technical capacity by number of passengers and by number of turnarounds of the airport for the period 2003-2011 taking into account capacity restraints such as slots, security, environmental issues and others

 the annual proportion of the airport capacity by passenger and by turnaround used in the same period by each airline benefitting from the discounts.

 The annual amount of investment costs supported by the airport during the same period

 The proportion of annual investment costs of the airport actually paid by each airline benefitting from the discounts

 The annual amount of operating costs supported by the airport during the same period

 The proportion of annual operating costs of the airport actually paid by each airline benefitting from the discounts (151) The Austrian authorities are further invited to state the net payments each airline benefitting from the discounts per year for each year of services at KLU. (152) The Commission invites the Austrian authorities to state for each year of the period 2003- 2010 the amount that each passenger of each airline benefitting from the discounts generated at KLU as non-aeronautical income (e.g. by paying parking fees, shopping, additional expenses). The Austrian authorities are also invited to explain the reasons for discontinuing routes of the airlines and explain and detail whether there had been negotiations prior to discontinuing routes. The Commission invites the Austrian authorities to provide an overview of the number of passengers and the load factor for each month per each route offered from KLU by each airline benefitting from the discounts since the entering into force of the discounts. (153) The Commission invites the Austrian authorities to provide further details whether all airline users of the Airport infrastructure have the same open and non-discriminatory access to it and pay the same fees for the same level of services as the other users.

(154) At the current stage, the Commission comes to the preliminary conclusion that the reduced charges paid by the airlines benefitting from the discounts would not have been offered by a market economy investor in the same way and under the same conditions as set out in the incentive schemes.

(155) The Commission considers at this stage that such discounts have not been justified by an objective reason that a market economy operator could have accepted. The Commission considers therefore that the airlines benefitting from the discounts have received a selective economic advantage.

(156) With regard to the settlement with Austrian airlines it appears that this settlement has been made on the assumption that there might be a legal basis for an equal treatment of Austrian airlines with regard to the application of the incentive scheme. As the the incentive scheme appears to constitute illegal State aid, there appears to be no economic reasonability of the settlement according to the market economy investor principle. The Commission invites the Austrian authorities to provide the document of the settlement agreement and any document explaining the background of its conclusion. At this stage the Commission therefore considers that it can be considered as an economic advantage.

Distortion of competition and affectation of trade

(157) When aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intra-EU trade, the latter must be regarded as affected by that aid19. In accordance with settled case law20, for a measure to distort competition it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition.

(158) The reduction of airport fees reduces the normal operating costs of the airlines benefitting from such reduction. Therefore the airlines are capable of strengthening their position on the market. Moreover, the air transport sector is characterised by intense competition between operators from different Member States, in particular since the entry into force of

19 Case 730/79, Philip Morris [1980] ECR I-2671, para 11. 20 Case T-214/95 Het Vlaamse Gewest v Commission [1998] ECR II-717, para 46. the third stage of liberalisation of air transport ("third package") on 1 January 199321. It follows that the discounted fees affect trade between Member States and distort or threaten to distort competition in the air transport sector.

Conclusion

(159) Under these conditions the Commission takes the preliminary view that the discounted airport charges by the airlines amount to State aid within the meaning of Article 107 (1) TFEU.

Possible exemption from notification obligation

(160) As far as the financing provided to KFBG was irrevocable committed prior to the Commission decision, through legally binding acts by which the Austrian authorities undertook to grant the aid, the question arises as to whether Austria has respected the prohibition of Article 108 (3) TFEU. (161) 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 (hereinafter: "2005 SGEI Decision") exempts from prior notification State aid in the form of public service compensation to airports for which the annual traffic does not exceed 1 million passengers or if it is granted to airport operators with an annual turnover before tax of less than 100 million during the two financial years preceding that in which the service of general economic interest was assigned, and which receive annual compensation of less than EUR 30 million. In order to benefit from this exemption, public service compensation for the operation of SGEI must also comply with the detailed conditions which are set out in Articles 4, 5 and 6 thereof. (162) Article 4 of the 2005 SGEI Decision requires that the SGEI be entrusted to the undertaking concerned by way of one or more official acts, setting out, inter alia, the nature and duration of the public service obligations, the parameters for calculating, controlling and reviewing the compensation, and the necessary arrangements for avoiding and repaying any overcompensation. (163) Article 5 of the 2005 SGEI Decision lays down that the amount of compensation has to be limited to what is necessary to cover the costs incurred in discharging the public service obligations, taking into account the relevant receipts and a reasonable profit. (164) Finally, Article 6 of the 2005 SGEI Decision requires Member States to carry out regular controls to ensure that undertakings are not receiving compensation in excess of the amount determined in accordance with Article 5. (165) The Austrian authorities submit that the operation of the Airport should be considered as SGEI. However, no information has been provided to the Commission to demonstrate the

21 Regulation 1008/2008 fact that the areas served by Klagenfurt airport would be insufficiently connected to the rest of the country if left to the market forces alone. In other words, the Austrian authorities have not demonstrated that in the absence of the aid, the catchment area of airport would be isolated from the rest of the country to an extent that would prejudge its social and economic development. At the current stage, the Commission observes that the catchment area of Klagenfurt airport could be in principle served also by other airports in its proximity. (166) As detailed above, Klagenfurt airport is located within a distance of 71 km from Ljubljana airport. Following its decision making practice, the Commission considers that the apparent overabundance of airports in certain regions may hinder the development of other airports. Therefore, the Commission considers at this stage that the operation of Klagenfurt airport cannot be declared an SGEI, and that any act imposing an SGEI on Klagenfurt airport appears to contain a manifest error insofar as the operation of the airport has been defined as SGEI without an effective need to ensure a proper connection of the catchment area of Klagenfurt airport to the rest of the country. Even in case that also Ljubljana airport would cease its operations, the Commission notes that a number of other airports continue to service the catchment area. (167) Moreover, the Austrian authorities explain that no formal act of entrustment has been made but that the same aim was ensured on the basis of corporate law without further specifying. (168) The Commission considers that as no formal act of entrustment has been made the conditions of the Decision are not met. Additionally it is not clear that eligible costs are restricted to the core activities of the Airport. Moreover the necessary parameters for compensation seem not having been set out. (169) At this stage the Commission takes the preliminary view that the criteria laid down by the 2005 SGEI Decision are not complied with in the present case. Consequently, the Commission considers at this stage that the operating subsidies paid yearly to the airport were not exempted from the notification requirement, and therefore granted in violation of Article 108 (3) TFEU. (170) Furthermore, the Commission draws the attention of the Austrian authorities to the fact that pursuant to Article (2) (e) of the Commission Decision 20 December 2011on the application of Article 106(2) of the Treaty on the Functioning of the European Union 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: "2012 SGEI decision"), airports are only exempted from notification if they have less than 200 000 passengers . Pursuant to Article 10 (a) of the 2012 SGEI decision, any aid scheme put into effect before the entry into force of this Decision that was compatible with the internal market and exempted from the notification requirement in accordance with Decision 2005/842/EC shall continue to be compatible with the internal market and exempt from the notification requirement for a further period of two years as of the entry into force of the 2012 SGEI decision. (171) Therefore, as of 31 January 2014, even if Klagenfurt airport was exempt from notification under the 2005 SGEI decision, it would no longer be exempted from notification, except if its passenger number was below 200 000. 7.3. The aid nature of the 2002 agreements with Ryanair and its subsidiary Leading Verge.Com Ltd.

State resources and imputability to the State

(172) The same reasoning as for the incentive scheme introduced by KFBG applies for the Cooperation agreement between Ryanair and KFBG. The Marketing Agreement between DMG a 100% subsidiary of KFBG and Leading Verge.Com Ltd a 100% subsidiary of Ryanair was already foreseen in the Cooperation agreement, therefore the same reasoning also applies for that contract. The cooperation with Ryanair was dealt with on the political level of the Carinthian State Government as press reports show22. Notion of Undertaking and Economic Activity

(173) Ryanair is an undertaking in the sense of EU competition law. Economic Advantage

(174) In order to verify whether Ryanair has benefited from an economic advantage induced by concluding the agreements with KFBG and its subsidiary DMG, the Commission applies the criterion of the “market economy investor principle”. (175) According to the principles established in the case law the Commission has to compare the conduct of KFBG and its subsidiary DMG to a market economy operator guided by prospects of profitability.23 In accordance with settled case-law, it is necessary to assess whether, in similar circumstances, a private airport operator would have entered into same or similar commercial arrangements as KFBG, having regard in particular to the information available and foreseeable developments at the date of those contributions.24 (176) The assessment should leave aside any positive repercussions on the economy of the region in which the airport is located, since the Commission assesses whether the given measure constitutes aid by considering whether "in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional-policy and sectorial considerations, would have subscribed the capital in question"25 (177) In order to be able to apply the private investor test the Commission has to place itself at the time the agreements were signed. KFBG and DMG signed the agreements on 22 January 2002. The Commission must also base its assessment on the information and assumptions which were at the disposal of KFBG when the Contract was signed.

22 http://www.ots.at/presseaussendung/OTS_20020628_OTS0005/lh-haider-britische-gaeste-sollen-verstaerkt-kaerntenurlaub-machen

23 Case C-305/89 Italy v Commission ("Alfa Romeo"), [1991] ECR I-1603, paragraph 20, Case T-296/97 Alitalia v Commission [2000] ECR II-3871, paragraph 84. 24 Ibidem, paragraph 70, see also Case C-261/89 Italy v Commission [1991] ECR I-4437, paragraph 8; Case C-42/93 Spain v Commission [1994] ECR I-4175, paragraph 13. 25 See 2005 Guidelines, paragraph 46. (178) The Austrian authorities have provided the Commission with a cost-benefit analysis of the cooperation with Ryanair from 2002 to 2005 taking into account the refunded turnaround fees and the marketing fees. This analysis comes to the conclusion that the cooperation with Ryanair was profitable. However, the Commission notes that it remains unclear which costs were taken into account and why the cost factor depending on the number of passengers was set at EUR […] and the cost factor depending on the number of flights was set at EUR […]. (179) The Commission therefore invites the Austrian authorities to explain whether the cost- benefit analyse was made at the time of the decision and on what basis the decision to conclude these agreements was made at that time and to explain which costs have been taken into account in particular if the Airport has calculated with full costs or with incremental costs. (180) In the view of the above, the Commission considers at this stage that the agreements with Ryanair were not concluded under normal market conditions as they do not cover full costs. Therefore, it takes the preliminary view that Ryanair has received an economic advantage. Selectivity

(181) Article 107 (1) TFEU requires that a measure, in order to be defined as State aid, favours "certain undertakings or the production of certain goods". In the case at issue, the Commission notes that the agreements concerns Ryanair only. Thus it is selective within the meaning of Article 107 (1) TFEU. Distortion of competition and affectation of trade

(182) The same reasoning as for the incentive scheme applies. Conclusion

(183) Under these conditions the Commission takes the preliminary view that the agreements amount to State aid within the meaning of Article 107 (1) TFEU. 7.4. The aid nature of the 2006 agreements with Ryanair and its subsidiary Airport Marketing Services (Jersey) Ltd.

(184) For the 2006 agreements essentially the same reasoning as for the 2002 agreements applies with the difference that in 2006 already the incentive scheme applied. Also the Marketing Services Agreement is concluded with another subsidiary of Ryanair, AMS, and the content is different: While the previous marketing services consisted also and mainly in the flight connections of Ryanair between KLU and STN, the obligation in the new Marketing Services Agreement is purely advertisement related and consists in link on Ryanair's website to a Corinthian tourism website and advertising e-mails from Ryanair. (185) The Austrian authorities have not provided any documentation on the basis of which the Commission could assess whether the market economy investor principle is fulfilled or not. From the circumstances it appears that the Marketing Services Agreement is a mere vehicle to grant further discounts onto the airport charges rather than to provide a contractual basis for marketing activities: The Marketing Services Agreement was concluded "for an initial term starting on the date of its signature for […]-a-week services operated from 19 December 2006 until […]" and according to the Oxera study the per passenger fees for Ryanair would have been […] times higher in 2006/7 than in 2004/526. (186) Additionally, the Commission has serious doubts whether a market investor airport would have commissioned marketing activities for the same price,, in particular as this marketing also benefits to its provider Ryanair by attracting passengers to new destinations serviced by Ryanair and not only to Carinthia. The Commission invites the Austrian authorities and other interested parties to provide information on this question. (187) Under these conditions the Commission takes the preliminary view that the agreements amount to State aid within the meaning of Article 107 (1) TFEU. 7.5. The aid nature of the financial contributions to TUIfly and Air Berlin

(188) Funds for marketing activities of the airlines came from the State of Carinthia, the City of Klagenfurt and KFBG. The funds were transferred to KFBG. The funds were then used by KFBG's subsidiary DMG for marketing arrangements with the airlines.

(189) From the limited information received from the Austrian authorities and from publicly available information it appears that also Air Berlin and Hapag Lloyd/TUIfly have received payments under marketing agreements. The Commission has doubts that these agreements are anything else than further rebates on the airport charges. Therefore the same reasoning as above applies. (190) The Commission therefore invites Austria to provide documentation on the contracts concluded with airlines which provide for payments of State owned entities to airlines using KLU or granting them further rebates than foreseen in the incentive scheme. The Commission further invites the Austrian authorities with any business plans, cost-benefit analyses etc. available at the time those contracts were concluded as to give the Commission the possibility to assess whether these contract are in line with the market economy investor principle.

(191) Under these conditions the Commission takes the preliminary view that the agreements amount to State aid within the meaning of Article 107 (1) TFEU.

8. ASSESSMENT OF THE COMPATIBILITY OF THE AID

(192) The Commission must assess if the aid identified above can be found compatible with the internal market. According to the case-law of the Court, it is up to the Member State to invoke possible grounds of compatibility, and to demonstrate that the conditions for such compatibility are met27. To the extent that the aid is to be qualified as operating aid, the Commission recalls that according to the case-law, such operating aid cannot be held to be

26 Oxera study on Klagenfurt Airport, table 2.4 27 C-364/90, Italy/Commission, point 20 compatible with the common market pursuant to Article 107 (3) (c) TFEU, inasmuch as, by its very nature, it distorts competition in the sectors in which it is granted and is liable to affect trading conditions to an extent contrary to the common interest, whilst nevertheless being incapable of achieving any of the objectives of the exceptions laid down by that provision.28 (193) Certain exemptions to the general rule of incompatibility set out in Article 107(1) TFEU are provided in Article 107(3) TFEU, which stipulates that: "aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest", may be considered to be compatible with the internal market.

8.1. The compatibility of the financing of KFBG

(194) The Austrian authorities argue that the capital injections are to cover the losses of the Airport which are caused by investments in the airport infrastructure and for marketing efforts to keep the Airport on the market. (195) The Commission invites the Austrian authorities to clarify if also the contributions from the Federal Ministries were used for that purpose and how the numbers provided (table 5 second part) correspond with those in the balance sheet. Compatibility as compensation for a SGEI

(196) The Austrian authorities contend that the operation of the Airport constitutes a Service of General Economic Interest. In this regard, the 2005 Airport Guidelines specify that certain activities carried out by airports can constitute SGEI. In such a case, the public authority imposes on the airport operator certain public service obligations and the latter may be compensated for the additional costs deriving from their discharge. The 2005 Airport Guidelines however specify that the overall management of an airport may only in exceptional cases be considered a service of general economic interest. Such exceptional circumstances would in particular relate to the isolation of the area concerned.29 It is also specified that certain activities not clearly linked to the airports' basic activities cannot be considered as public mission and consequently cannot be subsidised. On the basis of the information available it seems that the costs of all the activities of Klagenfurt airport have been subsidised. No specific provision to restrict eligible costs to the core activities of the airports has been made as there is no formal act of entrustment. Already for this reason, the Commission has at this stage doubts whether the operating aid can be declared compatible as compensation for an SGEI. (197) Furthermore, in accordance with point 63 of the 2005 Airport Guidelines, operating aid may be declared compatible with the internal market on the basis of Article 106,

28Case T-459/93, Siemens v Commission [1995] ECR II-01675, paragraph 48.

29 See paragraph 34 of the 2005 Airport Guidelines. paragraph 2, TFEU if they meet certain conditions which will ensure they are necessary to operating a service of general economic interest and do not affect the development of trade to an extent contrary to the interests of the EU. These conditions are laid down in points 64 to 68 of the 2005 Guidelines. They are similar to those contained in the 2005 SGEI decision. For the reasons set out above, the Commission takes the preliminary view that they are not met. (198) The Commission draws the attention of the Austrian authorities and of interested third parties to the fact that since 31 January 2012, the rules contained in points 63 to 68 of the 2005 Guidelines have been complemented by the 2012 SGEI Framework30. Point 69 of the 2012 SGEI Framework stipulates that these principles apply to all unlawful aid on which the Commission takes a decision after the 31 January 2012, even if the aid was granted before that date. Certain provisions do, however, not apply. The Austrian authorities have not yet been able to take a view on these provisions, as they only entered into force on 31 January 2012. The Commission therefore invites them to do so. (199) The Commission furthermore draws the attention of the Austrian authorities and of interested third parties to the fact that if the payments were exempt from notification on the basis of the 2005 SGEI decision, but no longer so under the 2012 SGEI decision31, they shall remain compatible with the internal market and exempt from the notification requirement for a further period of 2 years, i.e. until 31 January 2014 at the latest (2 years since the entry into force of the 2012 SGEI Decision). For the period as of 31 January 2014, in case the payments were not exempt from the notification obligation under the 2012 Decision, the compatibility of the compensation would have to be assessed on the basis of points 64 to 68 of the 2005 Airport Guidelines and of the 2012 SGEI Framework. In that case, the operating aid would be considered to be new aid as of 31 January 2014, and therefore all provisions of the 2012 SGEI Framework would apply. Compatibility on the basis of the 2005 Aviation Guidelines

(200) For the period before the 2005 Guidelines entered into force, i.e. the years 2000-2005 , the Commission applies directly Article 107 (3)(c) TFEU for the compatibility of the measure taking into account, in particular, of its past practice in this area. In this regard, the Commission notes that on 19 January 2005 it adopted a decision relating to a framework scheme for the construction and development of regional airports32, in which it concluded that the development and improvement of regional airports could give rise to issues of State aid concern but that under certain conditions this could be declared compatible with the Treaty. The 2005 guidelines take in these conditions and consolidate the practice of the Commission in this regard. For this reason the Commission will make reference to the 2005 guidelines only as regards these two periods of time.

30 Communication from the Commission, European Union framework for State aid in the form of public service compensation, OJ C 8, 11.01.2012, p. 23-27.

31 Commission Decision of 20 December on the application of Article 106(2) of the Treaty on the Functioning of the European Union to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, Official Journal L7, 11.01.2012, p. 3-10

32 State aid N644i/2002 Germany (201) The 2005 Guidelines provide a framework for assessing whether infrastructure aid to airport operators may be declared compatible pursuant to Article 107 (3) of the TFEU. (202) The Austrian authorities have argued that the capital injections are partly aimed at the financing of infrastructure investments. The Commission notes that the capital injections are not specified and it is unclear to what extend they finance infrastructure investment, the operation of the Airport or marketing activities. They simply seem to cover all losses independently of their cause. Additionally it is excluded that such a mechanism triggers any incentive effect with regard to an investment. The Austrian authorities also seem not to expect that the airport will ever break-even but will need continuous operating aid from the State. Moreover the operation seems to interfere with Ljubljana Airport which is only 71 km away. Consequently the Commission has doubts whether the criteria laid down in the 2005 Aviation Guidelines are complied with in the present case. Compatibility on the basis of the Rescue and Restructuring Guidelines

(203) The annual contributions, which were paid to KFBG for the operation of the Airport, might constitute rescue and/or restructuring aid. (204) According to Section 2.2. of the Community Guidelines on State aid for rescuing and restructuring firms in difficulty (hereinafter the Rescue and Restructuring Guidelines)33 rescue aid is by nature a temporary and reversible assistance. Its primary objective is to make it possible to keep an ailing firm afloat for the time needed to work out a restructuring or liquidation plan. Once a restructuring or liquidation plan for which aid has been requested has been established and is being implemented, all further aid will be considered as restructuring aid. (205) In order to become an eligible beneficiary of aid under the Rescue and Restructuring Guidelines a company must qualify as a firm in difficulty within the meaning of these Guidelines34. Under the Rescue and Restructuring Guidelines, the Commission regards a firm as being in difficulty where it is unable, whether through its own resources or with the funds it is able to obtain from its owner/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term. (206) According to the current information it seems probable that KFBG could be considered as a firm in difficulty. According to the Austrian authorities KFBG was at loss-making since 2002. (207) The Commission therefore invites the Austrian authorities to clarify this aspect and to explain whether measures were taken according to the Rescue and Restructuring Guidelines. Conclusion

33 OJ C 244 of 1.10.2004, p. 2. 34 Points 9 to 13 Rescue and Restructuring Guidelines. (208) At this stage the Commission takes a preliminary view that annual subsidies granted to KFBG represent aid, reducing the airport operator's current expenditure. At this stage the Commission has doubts on the compatibility of the aid. 8.2. The compatibility of the incentive scheme introduced in 2005 and its retroactive application for Austrian Airlines and the agreements with Ryanair of 2002 and 2006 and financial contributions to TUIfly and Air Berlin

(209) In relation to the financing by the public authorities of the incentive scheme introduced in 2005, the 2006 agreements with Ryanair and the financial contributions to TUIfly and Air Berlin the Commission must have regard to the 2005 Aviation Guidelines. For the retroactive application of the incentive scheme for Austrian Airlines and for the agreements with Ryanair of 2002 the Commission must directly apply the TFEU as these measures were introduced before the 2005 Guidelines entered into force on 9.12.2005, and these guidelines stipulate in their recital 85 that unlawful aid that started to be paid before that date will be assessed on the basis of the rules applicable when the aid started to be paid. (210) On the basis of Article 107(3)(c), the Commission can declare compatible aid granted to air carriers with a valid operating licence issued by a Member State for new air routes linking a regional airport in category C or D (or exceptionally category B) to another EU airport when the route will ultimately be viable, if the amount of aid is strictly linked to the additional start-up costs, is digressive and granted for a limited time and linked to the net development of the number of passengers transported, non-discriminatory and transparent, and provided the aid measure provides for a sanction mechanism in the event that the carrier does not respect the commitments entered into. (211) It therefore only follows the constant practice of the Commission that aid can be declared compatible with the common market if:

 it contributes to an objective of common interest, this is to say it finances new routes connecting a regional airport of category C or D, or exceptionally B, with another EU airport, when the route will ultimately be viable,

 the amount of aid is necessary and proportional to the additional costs of launching the route and has an incentive effect;

 it is granted in a transparent and non-discriminatory manner

 it provides for sanctions for non-implementation

 it does not distort competition to an extent contrary to the common interest. (212) With regard to the retroactive application of the incentive scheme on Austrian Airlines it does not appear that a new route or another objective of common interest is financed. The Commission also doubts that routes established by Ryanair from Klagenfurt could be considered as viable as services have been interrupted in 2005. (213) Start-up aid has to be limited in time, proportional to the goal to be achieved and digressive in order to meet its objective, that is to persuade air carriers to set up new routes from regional airports which will become economically viable in the medium-term, and provide an incentive effect, that is to encourage air lines to establish links and increase their efficiency. Neither the payments to Austrian Airlines nor those to Ryanair were digressive. (214) The Commission furthermore considers that the Austrian authorities have not shown that the intensity of the aid is necessary for making the new routes economically viable. Hence the Commission has at this stage doubts as to the necessity and proportionality of the aid. (215) With respect to the incentive effect, the Commission considers that due to the absence of a digression of the aid, there is unlikely an incentive effect. (216) The aid has to be granted in a transparent and non-discriminatory manner. The retroactive application of the incentive scheme exclusively for Austrian Airlines appears to be discriminatory. At this stage the Commission therefore has doubts as to whether this criterion is met. (217) The Commission also notes that there appear to be no sanctions foreseen in case of non- implementation, so that it has doubts whether this criterion is met. (218) Distortion of competition contrary to common interest: The Commission notes that the aid might have negative effects on other airlines, which might have operated from Klagenfurt airport and which were offered different fees. (219) In view of these elements, the Commission has doubts as to whether the aid to Austrian Airlines and Ryanair can be declared compatible with the common market. (220) The Austrian authorities so far did not show that the aid fulfilled the requirements in order to be compatible. According to the case-law of the Court, it is up to the Member State to invoke possible grounds of compatibility, and to demonstrate that the conditions for such compatibility are met. (221) For the period after entering into force of the 2005 Guidelines, the Commission examines the compatibility of the aid as a possible start-up aid under the 2005 Guidelines. (222) The 2005 Guidelines take into account that small airports often have not the critical mass of passengers to reach a break-even point and that as a consequence "airlines are not always prepared, without appropriate incentives, to run the risk of opening routes from unknown and untested airports", explains paragraph 74 of the 2005 Guidelines. For this reason the Commission accepts that under a set number of conditions public aid can be granted to create an incentive for "new routes or new schedules from regional airports and to attract the passenger numbers which will enable them to break even within a limited period". (223) The Guidelines set out a number of conditions to be complied with in order for start-up aid to be found compatible with the internal market under Article 107 (3) (c) TFEU. The Commission invites the Austrian authorities to submit all the information necessary to enable it to assess whether the measures in question can be considered as compatible with the Guidelines. According to point 79 of the Guidelines: (224) (a) …"the aid is paid to air carriers with a valid operating licence issued by a Member State pursuant to Council Regulation (EEC) No 2407/9235 on licensing of air carriers". (225) The Austrian authorities are invited to declare whether all air carriers receiving aid and using the Airport have a valid operating licence. (226) (b) "… the aid is paid for routes linking a regional airport in category C or D to another EU airport." (227) KLU is category D airport (“small regional airport”), with an annual passenger volume of less than 1 million. (228) (c) "… aid will apply only to the opening of new routes or new schedules, (as defined in the 2005 Guidelines), which will lead to an increase in the net volume of passengers. This aid must not encourage traffic simply to be transferred from one airline or company to another. In particular, it must not lead to a relocation of traffic which is unjustified with regard to the frequency and viability of existing services leaving from another airport in the same city, the same conurbation or the same airport system, which serve the same or a similar destination under the same criteria". (229) With regard to the incentive scheme the passenger incentive is granted neither for new routes nor for new schedules. (230) With regard to the 2006 agreements with Ryanair and other airlines this criteria also does not appear to be met. The Commission invites the Austrian authorities to provide the relevant information. (231) (d) "… the route receiving the aid must ultimately prove profitable, i.e. it must at least cover its costs, without public funding. For this reason start-up aid must be digressive and of limited duration. (232) With regard to the incentive scheme this condition is not met for the passenger incentive. In addition, as the incentive scheme is permanent, the profitability of the routes is not ensured. (233) With regard to the 2006 agreements with Ryanair and with other airlines it seems that this condition is not met. The Commission invites the Austrian authorities to provide the relevant information. (234) (e) "…the amount of aid must be strictly linked to the additional start-up costs incurred in launching the new route or frequency and which the air operator will not have to bear once it is up and running". (235) With regard to the incentive scheme this condition is not met for the passenger incentive, as it is a permanent incentive. For the other two incentives it is not clear which costs are covered by the aid. The Commission invites the Austrian authorities to provide the relevant information.

35 Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing of air carriers (OJ L 240, 24.8.1992, p.8) (236) With regard to the 2006 agreements with Ryanair and other airlines it appears that there is no link to the start-up costs. The Commission invites the Austrian authorities to explain which costs are covered by the aid. (237) In view of the above, the Commission has doubts whether this condition has been complied with. (238) (f) "…digressive aid may be granted for a maximum period of three years. The amount of aid in any one year may not exceed 50% of total eligible costs for that year and total aid may not exceed an average of 30% of eligible costs.” (239) With regard to the incentive scheme it is unclear which costs are covered by the charges. In any event the passenger incentive is unlimited in time. The Commission invites the Austrian authorities to provide the relevant information. (240) With regard to the agreements with Ryanair and other airlines it appears that these are not limited in time but extended without any restriction. It is also unclear which costs are covered. The Commission invites the Austrian authorities to provide the relevant information. (241) The Commission as therefore doubts, whether this condition is complied with. (242) (f), 3rd paragraph "In any event, the period during which start-up aid is granted to an airline must be substantially less than the period during which the airline undertakes to operate from the airport in question". Furthermore, the aid should be stopped once the objectives in terms of passengers have been reached or when the line breaks even, even if this is achieved before the end of the period initially foreseen". (243) It appears that this criterion is not met by any of the aid granted to the airlines. (244) (g) "…aid payments must be linked to the net development of the number of passengers transported". (245) It appears that this condition is only met by the passenger incentive. (246) (h) "… any public body which plans to grant start-up aid to an airline for a new route, whether or not via an airport, must make its plans public in good time and with adequate publicity to enable all interested airlines to offer their services. The notification must in particular include the description of the route as well as the objective criteria in terms of the amount and the duration of the aid". (247) With regard to the incentive scheme it appears to fulfil the requirement of publicity except for the passenger incentive where only the maximum amount of aid is indicated. The agreements with the airlines seem not having been published at all in advance. (248) (i) "… when submitting its application, any airline which proposes a service to a public body offering to grant start-up aid must provide a business plan showing, over a substantial period, the viability of the route after the aid has expired. The public body should also carry out an analysis of the impact of the new route on competing routes prior to granting start-up aid." (249) The Commission has doubts whether a business plan has been submitted to KFBG in any of the cases and that KFBG has carried out the impact analysis. (250) (j)"States must ensure that the list of routes receiving aid is published annually for each airport, in each instance indicating the source of public funding, the recipient company, the amount of aid paid and the number of passengers concerned". (251) At the current stage, the Commission has no information whether KFBG publishes a report listing all supported routes and indicating the origin of the government contribution, the beneficiary, the amount of the aid and the number of passengers for each route. (252) Therefore, the Commission has doubts whether this conditions is complied with. (253) (k) "…where applicable, appeal procedures must be provided for at Member State level to ensure that there is no discrimination in the granting of aid". (254) At the current stage, the Commission has doubts whether the Austrian authorities have provided for appeal procedures to deal with possible complaints. Therefore, the Commission has doubts whether this condition is complied with. (255) (l) "… penalty mechanisms must be implemented in the event that a carrier fails to keep to the undertakings that it gave in relation to an airport when the aid was paid." (256) At the current stage, the Commission has no information whether KFBG has implemented penalty mechanisms. Therefore, the Commission has doubts whether this condition is complied with. (257) In addition, Point 80 of the 2005 Guidelines provides that "start-up aid cannot be combined with other types of aid granted for the operation of a route, such as aid of a social nature granted to certain categories of passengers and compensation for discharging public services. In addition, such aid cannot be granted when access to a route has been reserved for a single carrier under Article 4 of Regulation (EEC) No 2408/92, and in particular paragraph 1(d) of that Article. Also, in accordance with the rules of proportionality, such aid cannot be combined with other aid granted to cover the same costs, including aid paid in another State." (258) At the current stage the Commission has no information whether the aid can be combined with other types of aid. Therefore, the Commission has doubts, whether this condition has been complied with. (259) In the view of the above, the Commission considers at this stage that not all conditions for compatibility as set out in the 2005 Guidelines have been satisfied in the present case. (260) Accordingly, the Commission has doubts whether the incentives and the funding granted under the incentive scheme and the agreements with the airlines can be considered compatible with the internal market pursuant to Article 107 (3) (c) TFEU. (261) These measures do not appear to quantify for any other exception provided for by the Treaty. Therefore, at the current stage the Commission cannot exclude that the incentive scheme and the agreements with Ryanair and the other airlines involve illegal and incompatible State aid.

9. DECISION

In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union, requests Austria to submit its comments and to provide all such information as may help to assess the aid/measure, within one month of the date of receipt of this letter. Austria will submit a non-confidential version of its comments and relevant information to the Commission.

The Commission requests your authorities to forward a copy of this letter to the potential recipient of the aid immediately. In this context, Austria will ensure that information relating to other companies, and covered by the obligation of professional secrecy within the meaning of the Commission notice C(2003) 4582 of 1 December 2003 on the obligation of professional secrecy in decisions on state aid, is not divulged to the companies concerned.

The Commission wishes to remind the United Kingdom of Great Britain and Northern Ireland that Article 108 (3) of the EC Treaty has suspensory effect and would draw your attention to Article 14 of Council Regulation (EC) No 659/1999, which provides that all unlawful aid may be recovered from the recipient.

The Commission warns Austria that it will inform interested parties by publishing this letter and a meaningful summary of it in the Official Journal of the European Union. It will also inform interested parties in the EFTA countries which are signatories to the EEA Agreement, by publication of a notice in the EEA Supplement to the Official Journal of the European Union and will inform the EFTA Surveillance Authority by sending a copy of this letter. All such interested parties will be invited to submit their comments within one month of the date of such publication. Interested parties are also asked to submit a non-confidential version of their comments.

If this letter contains confidential information which should not be published, please inform the Commission within twenty working days of the date of receipt. In this context and in an effort to establish a non-confidential version, Austria is invited to consult the companies listed in this decision in order to ensure that the latter does not contain any information covered by the obligation of professional secrecy within the meaning of the abovementioned notice. If the Commission does not receive a reasoned request by that deadline, Austria will be deemed to agree to publication of the full text of this letter. This request and the aforementioned information requested by the Commission should be sent by registered letter or fax to the following address:

European Commission, Directorate-General Competition State Aid Greffe B-1049 Bruxelles Fax: +32 2 296 12 42 [email protected]

Yours faithfully, For the Commission

Joaquín Almunia Vice-President