EUROPEAN COMMISSION

Brussels, 24.05.2011 C(2011)3456 final

Subject: State aid No N 491/2010 – Financing of Cardiff International Airport

Sir,

1 PROCEDURE

(1) On 26 October 2010 the Commission received an electronic notification from the United Kingdom authorities regarding the public funding of infrastructure at .

(2) By letters dated 29 November 2010 and 24 February 2011 the Commission requested additional information, which was provided by the UK authorities by letters dated 3 February 2011 and 28 March 2011.

2 DESCRIPTION OF THE MEASURE

2.1 The beneficiary – Cardiff International Airport Limited

(3) The beneficiary of the notified aid is Cardiff International Airport Limited (hereinafter “CIAL”), which owns and operates Cardiff Airport. CIAL is part of the abertis Group1, a Spanish corporation.

1 The table below provides the participation of each shareholder: Shareholders % Criteria CaixaCorp 28.48 % Trebol Holdings 15.50 % ACS 10.33 % Free-float 45.69 %

The Rt Hon William HAGUE Secretary of State for Foreign Affairs Foreign and Commonwealth Office King Charles Street London SW1A 2AH UNITED KINGDOM

Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone : (32-2) 299 11 11. (4) Cardiff Airport is located 9 miles south-west of Cardiff, the capital of Wales. It is the largest airport in Wales. The UK authorities have submitted that Cardiff Airport’s population catchment area is South and West Wales. This catchment area could be served by two other potential airports, namely and Airport.

(5) Bristol Airport is situated approximately one hour and 20 minutes (at ~65 miles) away by road from Cardiff Airport. The overlap between the two airports in terms of numbers of passengers attracted from each other’s catchment area is relatively small as only 12.8% of the passengers of Bristol Airport had their origin/destination in Wales and 84% in South West England.

(6) The only other airport currently offering commercial services in Wales is Swansea airport at approximately 50 miles west of Cardiff (i. e. 1 hour 20 minutes away by road). Since 2004 this airport does not have scheduled passenger flights.

(7) Cardiff Airport currently handles less than 2 million passengers per annum. The development of the passengers at the airport since 2005 and the expected passengers development up to 2020 are as follows:

Table 1: Passenger numbers at Cardiff Airport 2005 – 2020.

Actual passengers in 2005 – 2010:

Year 2005 2006 2007 2008 2009 2010 Passengers 1.77 2.00 2.10 1.98 1.63 1.42 (in million) Expected passenger development 2011 – 2020: Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Passengers 1.49 1.55 1.61 1.67 1.74 1.81 1.88 1.96 2.04 2.12 (in million)

(8) The expectations of Cardiff airport in passenger growth by approximately 49 % between 2010 and 2020 are also supported by the expected overall growth of 75 % (increase from 260 million passengers in 2010 to 456 million passengers in 2030) in air travelling in United Kingdom.2

2.2 The investment project and its financing (9) The investment mainly relates to enhancements of the terminal, but also includes landside and airside operational enhancements and air traffic upgrades as well as safety and security improvements. The main objective of the measure is to increase efficiency

2 UK Department of Transport (2009): UK Air Passenger Demand and CO2 Forecasts.

2 and to improve the flow of passengers which is currently restricted at peak times in the existing terminal. Therefore, it is not ready for an increase of passengers.

(10) As a result of the current situation, the Welsh Assembly Government has decided to support the improvement of the terminal and associated operational systems in order to increase the passenger numbers at the airport.

(11) The total investment costs at Cardiff Airport are estimated at GBP 26.5 million. The funding provided by the Welsh Assembly Government amounts to a maximum of GBP 5 million which represents 22 % of the investment in infrastructure and 19 % of the total project cost. The remaining GBP 21.5 million will be financed by CIAL.

(12) The construction costs of the infrastructure projects will have to be confirmed through an open and non-discriminatory tendering procedure and the funding of the Government will be based on actual costs and will be capped at GBP 5 million.

(13) The total estimated investment costs can be broken down as follows:

Table 2: The investment at Cardiff Airport.

Cost item In GBP Total in GBP ∗ Terminal enhancement investments (of […] Terminal enhancement investments […] Support systems for enhanced terminal […] Other infrastructure-related […] Safety and security enhancements […] Total costs 26.5

(14) The work is planned to be undertaken up to 2014. The aid will only be granted as a compensation of costs upon evidence of the payment to contractors.

(15) The UK authorities confirmed that the grant will not be paid out before the Commission has taken a position on the notified measure

2.3 Legal basis

(16) The legal basis for the aid grant is Section 11 of the Transport (Wales) Act 2006, which provides for the financial assistance for airport facilities in Wales by the Assembly.

∗ covered by the obligation of professional secrecy

3 3 ASSESSMENT OF THE MEASURE

3.1 Existence of aid (17) 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."

(18) The criteria laid down in Article 107(1) TFEU are cumulative. Therefore, in order to determine whether the notified measures constitute State aid within the meaning of Article 107(1) TFEU all of the following conditions need to be fulfilled. Namely, the financial support:

• is granted by the State or through State resources, • favours certain undertakings or the production of certain goods, • distorts or threatens to distort competition, and • affects trade between Member States.

State resources and imputability to the State

(19) The grant of GBP 5 million in favour of CIAL is financed out of the budget of the Welsh Assembly Government, hence it involves State resources, and it is also imputable to the State.

Economic activity and notion of undertaking

(20) According to settled case law, the Commission must first establish whether CIAL is an undertaking within the meaning of Article 107 (1) TFEU. It must first be noted that, 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 financed3 and that any activity consisting in offering goods and services on a given market is an economic activity.4

(21) 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. 5 Once an airport operator engages in economic activities, regardless

3 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. 4 Case 118/85 Commission v Italy [1987] ECR 2599, para 7; Case 35/96 Commission v Italy [1998] ECR I- 3851, para 36. 5 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, (hereafter: "Leipzig-Halle airport case"), [2011], not yet published in ECR, see also Case T-128/89

4 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.6

(22) In this regard the Commission notes that the infrastructure which is the subject of the present decision will be operated on a commercial basis by the airport manager CIAL; it is therefore commercially exploitable infrastructure. The airport operator will charge users rates for the use of this infrastructure rather than infrastructure being made available without charge to users in the common interest.

Economic advantage

(23) The before mentioned public financings from the state budgets reduce the investment costs that the airport operator would normally have to bear and therefore confer an economic advantage on the airport.

Specificity

(24) 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". The Commission notes that the advantages in question were granted to CIAL only. Thus it is a selective measure within the meaning of Article 107 (1) TFEU.

Distortion of competition and affectation of trade

(25) 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 law7, for a measure to distort competition it is sufficient that the recipient of the aid competes with other undertakings on markets open to competition.

(26) As previously explained, the operation of an airport is an economic activity8. Competition takes place between airport operators. Cardiff Airport serves currently less then 2 million passengers per year. Thus, Cardiff Airport is a “large regional airport” (so-called “category C” airport), for the purposes of the Community guidelines on financing of airports and start-up aid to airlines departing from regional airports9 (hereinafter “2005 Airport Guidelines”).

(27) However, Regional airports, even in category C, “large regional airports”, compete to attract carriers. As mentioned in paragraph 40 of the 2005 Guidelines, it is not possible to exclude airports in category C from the scope of application of Article 107 (1) TFEU. The

Aéroports de Paris v Commission [2000] ECR II-3929, confirmed 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. 6 Cases C-159/91 and C-160/91, Poucet v AGV and Pistre v Cancave [1993] ECR I-637. 7 Case T-214/95 Het Vlaamse Gewest v Commission [1998] ECR II-717. 8 See above, paragraph (14) and (15). 9 OJ C 312 of 9 December 2005, p. 1.

5 forecast in terms of traffic10 of Cardiff Airport does not allow to consider that trade between Member States is not liable to be affected.

(28) On the basis of what precedes the economic advantage which CIAL receives from the grant of GBP 5 million to finance the infrastructure enhancement projects at Cardiff Airport will strengthen 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.

Conclusion

(29) For the reasons set out above the Commission concludes that the public financing of the infrastructure measures at Cardiff Airport involves State aid within the meaning of Article 107 (1) TFEU. As the grant is subject to Commission's approval, the United Kingdom has respected the prohibition of Article 108 (3) TFEU.

3.2 Compatibility of the aid

(30) As set out above the decision of the Welsh Assembly Government to grant public financing is State aid. The Commission must therefore establish if the aid can be found compatible with the internal market. Article 107 (3) TFEU provides for certain exemptions to the general rule of incompatibility set out in Article 107 (1) TFEU.

Compliance with the 2005 Airport Guidelines

(31) The measure in question can only be assessed upon the basis of Article 107 (3) (c) 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. In this regard, the 2005 Airport Guidelines provide a framework for assessing whether aid to airports may be declared compatible pursuant to Article 107 (3) (c) TFEU. They mention a number of criteria which the Commission takes into account in this regard in its decision making practice since the "Aéroports de Paris" case-law.11

(32) The Commission must examine in particular, according to paragraph 61 of the 2005 Airport Guidelines, whether:

10 See above, paragraph (7) and Table 1. 11 See for example Commission decision of 13 March 2001 - State aid Case N 58/2000 – Italy - Promotion of the Piedmont airport system, OJ C 67, 17 March 2004; Commission decision of 19 January 2005 – State aid N 644i/2002 – Germany – Development of municipal economic infrastructure pursuant to Part II, Section 7 of the Framework plan under the joint Federal Government / Länder scheme for improving regional economic infrastructure: (i) Construction or development of regional airports, OJ C 126, 25 May 2005; Commission decision of 20 April 2005 – State aid case N 355/2004 – Belgium – Public-Private-Partnership for tunnelling the Krijgsbaan at Deurne and the development of industrial estates and the operation of Antwerp Airport (PPP – Project Antwerp Airport), OJ C 175, 16 July 2005; Commission decision of 23 July 2008 - State aid case C 48/2006 (ex N 227/2006) – Germany – DHL/Leipzig Halle, OJ L 346, 23 December 2008.

6 • the construction and operation of the infrastructure meets a clearly defined objective of general interest (regional development, accessibility, etc.);

• the infrastructure is necessary and proportional to the objective which has been set;

• the infrastructure has satisfactory medium-term prospects for use, in particular as regards the use of existing infrastructure;

• all potential users of the infrastructure have access to it in an equal and non- discriminatory manner;

• the development of trade is not affected to an extent contrary to the EU interest.

(i) construction and operation of the infrastructure meets a clearly defined objective of general interest (regional development, accessibility, etc.)

(33) Firstly, the project aims to improve accessibility and connectivity of South and West Wales which is not linked to any high-speed rail service. In addition, the infrastructure developments are aimed to increase efficiency and to improve the flow of passengers at peak times in the existing terminal, and thus to promote and to meet passenger growth at the airport. Furthermore, the measures are aimed at improving the accessibility for residents of the more remote areas of Wales, who are not served by other airports.

(34) Secondly, the development of the airport is expected to enhance regional economic development. The Master plan consistent with the Welsh Assembly Government’s Wales Transport Strategy and National Transport Plan considers the development to have a positive impact on regional development. The Welsh Assembly Government considers the development of Cardiff Airport to be an essential driver for the future economic regeneration of Wales. Wales suffers from low productivity comparison to other parts of the UK, the lowest Gross Value Added per head, serious underemployment and low standard of living. The expansion of the airport has the potential for a significant impact on employment in Wales. The new jobs are expected directly by new employment at the airport and indirectly by employment created by purchases of goods and services by the airport.

(35) The UK authorities expect that an increased number of passengers will also lead to an increase in exports and in tourism from inbound visitors to Wales and in investment from other European countries. Tourism is a key industry in Wales contributing some 3.2% towards GDP; but Wales still has only a share of 3.5% of all overseas visitors to the UK. The airport can thus contribute to attract more overseas visitors to Wales by expanding in the European short break market.

(36) The Commission can therefore conclude that the construction and operation of the infrastructure meets a clearly defined objective of general interest.

7 (ii) the infrastructure is necessary and proportional to the objective which has been set

(37) As explained above the existing terminal building at Cardiff Airport does not meet the requirements for an unhindered flow of passengers and suffers from congestions at peak times. The objective to meet the expected growth in passenger numbers can therefore not be reached without the planned infrastructure development.

(38) The UK authorities have been able to show that all of the infrastructure investments that they will undertake and finance are necessary to attain the goals that they have set and the project is not disproportionately large or elaborate.

(39) The Commission can therefore conclude that the infrastructure in question is necessary and proportional to the objectives which have been set.

(iii) the infrastructure has satisfactory medium-term prospects for use, in particular as regards the use of existing infrastructure

(40) The UK authorities expect, that the infrastructure will be utilised in the medium term due to the absence of other airports that provide direct, scheduled access to South and West Wales, and the absence of alternative high speed means of travel and the expected growth in passenger numbers12. The fact that the large amount of the investment is borne by the privately owned beneficiary shows as well that the investment is expected to have good medium-term prospects.

(41) According to the financial projection, with the aid CIAL should start receiving positive cash flows from the project as from […]. The rate of return of the investment should reach […] over the […] years.

(42) On the basis of the above mentioned forecasts for passenger numbers, in the medium term, the development project of the Cardiff Airport offers good perspectives for use, especially in relation to existing infrastructure at the airport, which the planned works will optimise.

(iv) all potential users of the infrastructure have access to it in an equal and non- discriminatory manner

(43) The UK authorities confirmed that the infrastructure in question is open to all potential users on equal and non-discriminatory manner.

(v) the development of trade is not affected to an extent contrary to the interest of the EU

(44) As regards the presence of a distortion of competition or an effect on trade, the 2005 Guidelines define four categories according to volume of passengers per annum, which

12 Table 1: Passenger numbers at Cardiff Airport 2005 – 2020.

8 "can provide an indication on the extent to which airports are competing with one another and therefore also the extent to which public funding granted to an airport may distort competition".13

(45) As previously indicated, Cardiff Airport is a “large regional airport” (so-called “category C” airport).14 Even after the development of the airport infrastructure it is expected that it will serve for approximately 1.74 million passengers in 2015 and 2.12 million passengers in 2020 and will remain a category C airport.

(46) As mentioned above the UK authorities have submitted that Cardiff Airport’s population catchment area is South and West Wales. Cardiff’s geographically nearest competitor, Bristol Airport, is approximately one hour and 20 minutes away by road.

(47) For the following reasons the development of CIAL will only have very limited impact on Bristol Airport:

(48) Firstly, the growth of passenger numbers of Cardiff Airport shall mainly be reached by realising untapped potential in the region. Its catchment area exhibits a very low propensity to fly (0.58), whereas the propensity to fly in the closest regions in England (South West and West Midlands) is 0.75. The UK authorities expect that propensity to fly in Wales could rise to 1.6 by 2030.

(49) Secondly, the great majority of the passengers terminating at Cardiff Airport have their origin/destination in Wales. Almost a third of all passengers with an origin/destination in Wales are presently using the London airports. But this only represents 1.3% of the London airports’ total passengers.

(50) Thirdly, Bristol Airport, which is at nearly four times the size of Cardiff Airport, has a larger, more affluent catchment area with a higher propensity to fly and offers a far more extensive route network (Cardiff: 48, Bristol: 190 routes) which includes major low-cost carriers. The overlap between the two airports in terms of numbers of passengers attracted from each other’s catchment area is relatively small as only 12.8% of the passengers of Bristol Airport had their origin/destination in Wales and 84% in South West England.

(51) In addition the operating models of the two airports are different as Bristol Airport can rely on a significant route network and is a significant hub for low cost airlines, while Cardiff airport has a limited route network and is heavily dependent on charter holiday traffic. In Cardiff the scheduled traffic is only 58.3% whereas in Bristol it amounts to 81.0%.

(52) On the basis of the above, the Commission can therefore conclude that the development of trade is not affected to an extent contrary to the common interest.

(53) The Commission considers that the public support in financing the enhancement of Cardiff Airport in accordance with the conditions described previously, is not prejudicial

13 See Point 38 of 2005 Guidelines. 14 See paragraph (19).

9 to the common interest and that the five criteria set out in the 2005 Airport Guidelines have been satisfied in the present case.

Aid is necessary and proportional

(54) In addition to the requirement to satisfy specific compatibility criteria specified in the 2005 Guidelines, State aid to airports, as any other State aid measure, should be necessary and proportional in relation to the aimed legitimate objective in order to be cleared as compatible aid15.

(55) The Commission must establish, whether the State aid granted to CIAL has changed the behaviour of the beneficiary undertaking in such a way that it engages in activity that contributes to the achievement of a public-interest objective that (i) it would not carry out without the aid, or (ii) which it would carry out in a restricted or different manner. In addition, the aid is considered to be proportionate, only if the same result could not be reached with less aid and less distortion. This means that the amount and intensity of the aid must be limited to the minimum needed for the aided activity to take place.

(56) Without the aid the net present value of the investment project would amount to GBP - […]. In addition, without the aid CIAL would be expected to generate because of the enhancement of the terminal an accumulated loss of approximately GBP […] in 2011 to 2015. Therefore, the Commission observes that CIAL would have no incentive to invest into the project at the planned magnitude.

(57) The amount of aid for which the project would have a neutral financial effect is at about GBP […]. With the aid of GBP 5.0 million the net present value of the project is expected to be GBP […], which provides for incentives to proceed with the investment project.

(58) With the public funding the expected Internal Rate of Return (hereafter: "IRR") for the whole investment project amounts to […] %.

(59) This level of IRR can be justified when comparing it with other UK airports, such as Stansted Airport. Stansted Airport's Weighted Average Costs of Capital in 2008 amounted to […] %. The higher figure for Cardiff Airport is due to a higher risk premium which is necessary as Cardiff is a smaller airport and therefore exposed to a greater degree of volatility and the risk then larger airports. In addition Cardiff does not benefit from a large local market like Stansted Airport, and therefore, it is more vulnerable to economic changes.

(60) The Commission further notes, that the use of competitive tender procedures for the implementation of the investment programme will contribute to keeping the aid amount

15 It is constant case law that the Commission can declare an aid compatible only if it is necessary for achieving a legitimate objective (cf. case 730/79, Philipp Morris, paragraph 17; case C-390/06, Nuova Agricast, paragraph 68; case T-162/06, Kronoply, paragraph 65).

10 to the minimum necessary and ensure that there are no distortions of competition on other relevant markets (notably the market for construction services).

(61) The Commission therefore considers that the aid is necessary and proportional in relation to the aimed objective.

Conclusion

(62) The Commission therefore concludes that the measure is compatible with the internal market on the basis of Article 107 (3) (c) TFEU.

4 DECISION

The Commission has accordingly decided to consider the aid to be compatible with 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/eu_law/state_aids/state_aids_texts_en.htm.

Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition B-1049 Brussels Fax No: +0032 (0) 2 2961242

Yours faithfully, For the Commission

Joaquín ALMUNIA Vice-President

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