EUROPEAN COMMISSION

Brussels, 5.1. 2017 C(2016) 8919 final

PUBLIC VERSION

This document is made available for information purposes only.

Subject: State Aid SA.44097 (2016/N) Operating aid to

Sir,

1. PROCEDURE

(1) On 1 December 2016, the Finnish authorities notified operating aid to Lappeenranta airport ("the measure").

(2) The Commission requested additional information on the proposed measure on 2 May 2016, 25 September 2016 and 17 October 2016. The information requested was submitted by the Finnish authorities on 2 May 2016, 10 October 2016 and 4 November 2016.

2. DESCRIPTION OF THE MEASURE

2.1. The beneficiary: the airport operator Lappeenrannan Lentoasema Oy

(3) Lappeenranta airport is a small airport situated in Lappeenranta, a city in South- Eastern Finland near the Russian border, belonging to the region of South Karelia.

(4) The airport is owned by Saimaan lentoasemasäätiö sr, a Finnish foundation that is owned by the city of Lappeenranta (70%) and the regional Council of South Karelia (30%).

(5) The airport is operated by Lappeenrannan Lentoasema Oy (Lappeenranta Airport Ltd), a Finnish limited liability company that is currently owned by the foundation and that rents the airport property from the foundation. Until 2016, the airport was owned and operated by . Mr Timo Soini Ministry for Foreign Affairs PO Box 412 00023 Government Finland

Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111 (6) Currently, there are no regular commercial flights to or from Lappeenranta airport. The airport has only charter flights by tour operators, mainly to popular European holiday destinations, and occasional official and civil flights.

(7) Until October 2015, operated weekly scheduled flights to Lappeenranta from Girona, Bergamo and Weeze. AirBaltic flew to Lappeenranta from November 2009 to January 2014.

(8) The airport is the only passenger airport in South Karelia. The domestic catchment area contains three counties with a population of 460 000, the international catchment area contains the region of St Petersburg with 7 million inhabitants. In 2014, Lappeenranta airport had 65% flight passengers from Russia.

(9) The closest commercial passenger airports1 are:

(a) (approximately 166 km, or 1h 58 minutes by car); (b) Vantaa (approximately 223 km, or 2h 24 minutes by car) and (c) St Petersburg Pulkovo, Russia (approximately 240 km, or 2h 53 minutes by car). (10) Lappeenranta airport has a basic capacity of 300 000 passengers per year. The airport currently serves less than 100 000 passengers per year and passenger numbers have been decreasing in recent years due to Ryanair's decision to stop commercial flights from Lappeenranta airport and AirBaltic's withdrawal. Annual passenger traffic registered at the airport was as follows:

Table 1: Passenger development at Lappeenranta airport 2009 – 2015

Actual passengers:

Year 2009 2010 2011 2012 2013 2014 2015 Passengers 14 000 61 000 116 000 93 000 98 000 89 000 35 000

Source: Information provided by the Finnish authorities

(11) The Finnish authorities submitted the business plan dated 25 February 2016. Traffic forecasts in the business plan of the airport (2016-2024) foresee a growth to 230 160 passengers by 2021. The airport aims to attract additional airlines and consequently to increase passenger numbers. The business plan foresees the development of point-to-point flights to important European (business) destinations, flights to some Northern European hub , e.g. Riga, Tallinn, Copenhagen, Stockholm, and strengthening of the holiday charter segment, especially by cooperation with European and Russian tour operators2.

1 All distances in road kilometres/travel time are based on the fastest route. Source: maps.google.com, accessed on 11 October 2016. 2 In order to attract tourists, the airport will promote the attractiveness of the Lake Saimaa district where the airport is located. Also a possible passengers grow can be expected due to upcoming international events such as the FIFA World Cup 2018, which will be held in neighbouring Russia which will also contribute to promote the region.

2 (12) Based on the business plan, Lappeenranta airport would be economically viable with 230 000-300 000 passengers per year. According to the Finnish authorities this level could realistically be reached between 2021-2024 by having three daily flights.

2.2. Overview of the measure

2.2.1. Operating aid 2016 - 2019

(13) The measure consists in operating aid to the operator of Lappeenranta airport from 1 January 2016 to 31 March 2019.

(14) The initial operating funding gap is a yearly average of the operating funding gaps calculated from 2009 till 2013. The initial operating funding gap for Lappeenranta airport amounts to EUR 994 200 (see Table 2). The maximum permissible aid amount of EUR 2 584 920 is calculated on the basis of 80% of the initial operating funding gap during the years 2016 – 03/2019 (80% x 994 200 x 3.25). The notified aid amount is EUR 2 469 713 which is the discounted maximum permissible aid amount using a rate of return 0.95%. The Ministry of Transport and Communications, the Regional Council of South-Carelia and the City of Lappeenranta would cover the airport's operating funding gap during the years 2016 – 03/2019, up to EUR 2 469 713.

(15) Table 2: Initial operating funding gap (in euro)

Year 2009 2010 2011 2012 2013 Average The 2009 - maximum 2013 aid amount

Operating 953 1 059 1 021 1 098 840 000 994 200 2 584 920 funding 000 000 000 000 gap

(16) The measure will be awarded in the form of a direct grant.

(17) On the basis of the traffic forecast (see Table 3), the Finnish authorities expect the actual operating losses for 2016 to 03/2019 to be as shown in Table 4.

Table 3: Projected passenger numbers

Year 2016 2017 2018 2019 2020 2021 Passengers 26 240 54 800 85 000 120 480 191 200 230 160

Table 4: Expected operating losses (in euro)

Year 2016 2017 2018 2019 (3M)

Deficit (in euro) 561 852 907 361 904 272 98 996

3 (18) The Finnish authorities consider, however, that the future costs and revenue developments are surrounded by a particularly high degree of uncertainty due to the small size of the airport and the lack of regular commercial flights.

(19) Due to this uncertainty, the Finnish authorities notify a maximum aid amount of EUR 2 469 713, even though they commit to only compensate the actual operating funding gap in the years 2016 to 03/2019.

2.3. Legal basis

(20) The legal basis for the operating aid to Lappeenranta airport is the Act on Discretionary Government Transfers (Valtionavustuslaki) No 688/2001.

2.4. Commitments by Finland

(21) With regard to the operating aid granted for 2016 to 03/2019, which is capped at 80% of the initial operating funding gap for a period 2016 – 03/2019, the Finnish authorities committed that the amount of aid to be paid to the airport of Lappeenranta will cover only the actual annual operating funding gap.

(22) The Finnish authorities commit to comply with the rules on transparency as provided for in points 162 and 163 of the Commission Guidelines on state aid to airports and airlines ("the Aviation Guidelines"3), as amended by the "Transparency Communication"4.

3. ASSESSMENT OF THE MEASURE

3.1. Existence of aid

(23) By virtue of Article 107(1) of the Treaty on the Functioning of the European Union5 ("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."

(24) The criteria laid down in Article 107(1) TFEU are cumulative. Therefore, for a measure to constitute State aid within the meaning of Article 107(1) TFEU, all of the following conditions need to be fulfilled. The financial support must:

− 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.

3 OJ C 99, 4.4.2014, p. 3. 4 Communication from the Commission amending the Communications from the Commission on EU Guidelines for the application of State aid rules in relation to the rapid deployment of broadband networks, on Guidelines on regional Sate aid for 2014-2020, on State aid for films and other audiovisual works, on Guidelines on State aid to promote risk finance investments and on Guidelines on State aid to airports and airlines, OJ C198/30 of 27.6.2014. 5 OJ C326, 26.10.2012, p. 47. 4 (25) In the following sections, the Commission will assess whether the measure meets these cumulative criteria and thus constitutes aid within the meaning of Article 107(1) TFEU.

3.1.1. Notion of undertaking and economic activity

(26) According to settled case law, the Commission must first establish whether the operator of the airport of Lappeenranta is an undertaking within the meaning of Article 107(1) TFEU. 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 financed6. Any activity consisting in offering goods and services on a given market is an economic activity7.

(27) In the "Aéroports de Paris" judgment, the General Court stated that the operation of an airport, including the provision of airport services to airlines and to the various service providers within airports, is an economic activity8. This was confirmed by the Court of Justice in its "Leipzig-Halle airport" judgment where it found that the operation of an airport for commercial purposes and the construction of airport infrastructure constitute an economic activity9.

(28) The beneficiary charges users for the use of the airport infrastructure and consequently operates the airport on a commercial basis.

(29) It follows that the beneficiary is an undertaking for the purposes of Article 107(1) TFEU.

3.1.2. Use of state resources and imputability to the State

(30) The operating aid is financed out of the budgets of the Finnish government, the Regional Council of South-Carelia and the City of Lappeenranta. The funding is thus imputable to the State and involves State resources.

3.1.3. Economic advantage

(31) As the compensation for operating losses in the future relieves the beneficiary from the burden of covering its own operating losses it confers an economic advantage to the beneficiary.

3.1.4. Selectivity

(32) Article 107(1) TFEU requires that a measure, to be qualified as State aid, favours "certain undertakings or the production of certain goods". The Commission notes

6 Case C-35/96 Commission v Italy, ECLI:EU:C:1998:303, para 36; C-41/90 Höfner and Elser, ECLI:EU:C:1991:161, para 21; Case C-244/94 Fédération Française des Sociétés d'Assurances v Ministère de l'Agriculture et de la Pêche, ECLI:EU:C:1995:392, para 14; Case C-55/96 Job Centre, ECLI:EU:C:1997:603, para 21. 7 Case 118/85 Commission v Italy ECLI:EU:C:1987:283, para 7; Case 35/96 Commission v Italy ECLI:EU:C:1998:303, para 36. 8 Case T-128/89 Aéroports de Paris v Commission [2000] ECR II-3929, confirmed by the Court of Justice in Case C-82/01 P [2002] ECR I-9297. 9 Case C-288/11 Mitteldeutsche Flughafen and Flughafen Leipzig-Halle v Commission, ECLI:EU:C:2012:821; see also Case C-82/01Aéroports de Paris v Commission, ECLI:EU:C:2002:617, and Case T-196/04 Ryanair v Commission, ECLI:EU:T:2008:585. 5 that the measure will be granted to the operator of Lappeenranta airport only. Hence, the measure is selective within the meaning of Article 107(1) TFEU.

3.1.5. Distortion of competition and effect on trade

(33) 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 law10, for a measure to distort competition it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition.

(34) Competition takes place between airports and between airport operators, which may compete between themselves to be entrusted with the management of a given airport. Also relatively small airports compete to attract airlines. The measure will strengthen the position of the beneficiary vis-à-vis other airports, in particular Helsinki Vantaa and Savonlinna, and airport operators.

(35) In view of the above, a potential effect on competition and trade as a result of the measure cannot be excluded.

3.1.6. Conclusion on the existence of State aid and the lawfulness of the aid

(36) For the reasons set out above the Commission concludes that the measure involves State aid within the meaning of Article 107(1) TFEU.

(37) The Commission notes that Finland has respected the standstill obligation laid down in Article 108(3) TFEU and has not granted the aid prior to the Commission’s approval.

3.2. Compatibility of the aid

(38) Article 107(3)(c) TFEU 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.

(39) The Aviation Guidelines provide principles to assess the compatibility of operating aid to airports with the internal market.

(40) Point 79 of the Aviation Guidelines sets out cumulative common principles that a State aid measure has to respect in order to be compatible with the Internal Market:

(a) contribution to a well-defined objective of common interest; (b) need for State intervention; (c) appropriateness of the aid measure; (d) incentive effect; (e) proportionality of the aid (aid limited to the minimum);

10 Case T-214/95 Het Vlaamse Gewest v Commission [1998] ECR II-717. 6 (f) avoidance of undue negative effects on competition and trade between Member States; (g) transparency of aid.

a) Contribution to a well-defined objective of common interest (41) Point 113 of the Aviation Guidelines stipulates that, in order to avoid any disruptions in the air traffic and connectivity of the regions, operating aid to airports will be considered to contribute to the achievement of an objective of common interest, if it: a) increases the mobility of European Union citizens and connectivity of regions by establishing access points for intra-European Union flights; or b) combats air traffic congestion at major European Union hub airports; or c) facilitates regional development.

(42) According to the Finnish authorities, the main aim of contributing to the operating costs is to ensure the continued operation of Lappeenranta airport and thereby improve the accessibility of region, and consequently to stimulate regional development and the creation of new jobs. The region of South-Karelia has a remote location on the northern outskirts of EU – Russia border.

(43) The continued operation of Lappeenranta airport will in particular increase the mobility of European Union citizens and the connectivity of the region by establishing an access point for intra-European Union flights in the South-East of Finland.

(44) Residents will have the possibility to fly directly from the region instead of having to use other airports located further away. Flights from the region will therefore have direct benefits for the citizens concerned. Without the operating aid there would be the risk that the airport would be closed down, and thus the region would be underserved.

(45) Hence, in line with point 113 a) and c) of the Aviation Guidelines the aid contributes to improving the mobility of European Union citizens and connectivity of regions and facilitating regional development.

(46) In line with point 114 of the Aviation Guidelines the Commission has also to assess whether the aid would contribute to the duplication of unprofitable airports and what the effect would be on traffic of other airports located in the same catchment area.

(47) Catchment area is defined in point 25 (11) of the Aviation Guidelines as 'a geographic market boundary that is normally set at around 100 kilometres or around 60 minutes travelling time by car, bus, train or high-speed train; however, the catchment area of a given airport may be different and needs to take into account the specificities of each particular airport. The size and shape of the catchment area varies from airport to airport, and depends on various characteristics of the airport, including its business model, location and the destinations it serves.''

(48) As set out in recital (9) there is no other airport situated within the same catchment area.

7 (49) The Commission therefore concludes that the operational aid meets a clearly defined objective of common interest.

b) Need for State intervention (50) Points 116 to 118 of the Aviation Guidelines provide that the aid should be targeted towards situations where the market itself cannot deliver. They specify that under present market conditions, smaller airports may have difficulties ensuring the financing of their operation without public funding

(51) Lappeenranta airport is of a size that makes it difficult to ensure covering of operating costs without public funding.11

(52) The business plan of Lappeenranta airport shows that the airport will not be able to cover its operating costs until 31 March 2019. The decrease in traffic volume in 2014 resulted in the part-time layoff of the whole personnel. The airport personnel is reduced to an absolute minimum and personnel cuts are not feasible if the operation of the airport is to be ensured. Moreover, the airport is a transitional phase after the change of ownership and operator in 2016.

(53) For 2016 to 03/2019, Finland expects the funding gaps as described in recital (17) above. In this period, revenues will not be sufficient to cover costs and thus there is a need for State intervention.

c) Appropriateness of the aid measure (54) Given the delicate financial situation of the Lappeenranta airport, it is not likely that it could obtain and reimburse loans to cover the operating funding gap, especially as the business plan does not foresee that the airport will be profitable until 2021. No other more appropriate policy or aid instrument seems to exist.

(55) In accordance with points 121 and 122 of the Aviation Guidelines, the aid amount is, in principle, to be established ex ante as a fixed sum covering the expected operating funding gap. In exceptional circumstances, where future costs and revenue developments are surrounded by a particularly high degree of uncertainty and the public authority faces important information asymmetries, the public authority may calculate the maximum amount of compatible operating aid according to a model based on the initial operating funding gap at the beginning of the transitional period. The initial operating funding gap is the average of the operating funding gaps (that is to say the amount of operating costs not covered by revenues) during the five years preceding the beginning of the transitional period (2009 to 2013).

(56) Recital (18) above describes why the future costs and revenue developments at the airport of Lappeenranta are surrounded by a high degree of uncertainty. This is why the Finnish authorities did not notify a fixed sum covering the expected operating funding gap, but a maximum aid amount of EUR 2 469 713 based on the initial operating funding gap for a period 2016 – 03/2019, even though they intend to only compensate the actual operating funding gap in the years 2016 to 03/2019.

11 See point 118 (a) of the Aviation Guidelines. 8 (57) In view of the above, the Commission considers that the measure is appropriate to reach the desired objective of common interest.

d) Incentive effect (58) The Finnish authorities submit that, without the aid, the operations at Lappeenranta airport would have close down, as the airport will not able to cover the operating losses in 2016 to 2019. The ex-ante business plan demonstrates that even with efforts to increase efficiencies the airport will only be able to lower its operating funding gap, but it will not be able to cover its costs and maintain operations at current level without the aid.

(59) In view of the above, the Commission considers that the measure has an incentive effect.

e) Proportionality of the aid (aid limited to the minimum) (60) Point 125 of the Aviation Guidelines stipulates that, in order to be proportionate, operating aid to airports must be limited to the minimum necessary for the aided activity to take place. For airports with less than 700 000 passengers, point 130 of the Aviation Guidelines goes on to specify that they may face increased difficulties in achieving the full cost coverage during the 10-year period. For this reason, the Aviation Guidelines allow the maximum permissible aid amount for these airports to be 80% of the initial operating funding gap for a period of five years after the beginning of the transitional period. The Commission will reassess the need for continued specific treatment and the future prospects for full operating cost coverage for this airport category, in particular with regard to the change of market conditions and profitability prospects.

(61) The Commission takes note of the commitment by the Finnish authorities to cover the airport's operating funding gap during the years from 2016 to 03/2019 up to EUR 2 469 713 taking into account only operating costs as defined in point 25 (22) of the Aviation Guidelines. The Finnish authorities assure that the airport will not receive more funding than necessary.

(62) In view of the above, the Commission considers that the amount of operating aid is proportional and limited to the minimum necessary for the aided activity to take place.

f) Avoidance of undue negative effects on competition and trade between Member States (63) Points 131 to 134 of the Aviation Guidelines provide that account will be taken of the distortions of competition and the effects on trade when assessing operating aid. Where an airport is located in the same catchment area as another airport with spare capacity, the business plan, based on sound passenger and freight traffic forecasts, must identify the likely effect on the traffic of the other airports located in the catchment area. In addition, it must be demonstrated that all airports in the same catchment area will be able to achieve full operating cost coverage at the end of the transitional period. And finally, the airport must be open to all potential users and not be dedicated to one specific user.

(64) In the present case the Commission observes that there are no other airports located in Lappeenranta's catchment area (see recital (9)).

9 (65) In order to further limit the negative effects on competition and trade, the Finnish authorities submit that Lappeenranta's infrastructure is and will remain open to all potential users and is and will not be dedicated to one specific user.

(66) In view of the above, the Commission considers that the undue negative effects on competition and trade between Member States are limited to the minimum.

g) Transparency of aid (67) As described in recital (22), the Finnish authorities have committed to respect the transparency rules in respect of the measure.

Conclusion

(68) In view of the above assessment, the Commission considers that the notified operating aid to the operator of the Lappeenranta airport is in accordance with the compatibility conditions set out in the Aviation Guidelines.

(69) Hence, the operating aid is compatible with the internal market on the basis of Article 107(3)(c) TFEU.

4. CONCLUSION

The Commission has accordingly decided not to raise objections to the aid on the grounds that it is compatible with the internal market pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union.

If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/competition/elojade/isef/index.cfm.

Your request should be sent electronically to the following address:

European Commission, Directorate-General Competition State Aid Greffe B-1049 Brussels [email protected]

Yours faithfully, For the Commission

Margrethe VESTAGER Member of the Commission

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