EUROPEAN COMMISSION Brussels, 25.4.2018 C(2018) 2400 final PUBLIC VERSION This document is made available for information purposes only. Subject: State Aid SA.49482 (2017/N) – United Kingdom Sumburgh Airport – entrustment of a service of general economic interest Sir, 1. PROCEDURE (1) By letter dated 6 November 2017, the United Kingdom notified to the Commission the entrustment to Sumburgh Airport of a service of general economic interest ("SGEI") by the Scottish government. By letter of 12 December 2017, the Commission requested further information, which was provided by the United Kingdom on 7 February 2018. This decision covers the SGEI entrustment to Sumburgh Aiport during the period 2012-2022. 2. DETAILED DESCRIPTION OF THE MEASURE 2.1. Sumburgh Airport (2) This section summarizes the information and arguments put forward by the United Kingdom in the notification regarding Sumburgh Airport ("Sumburgh Airport" or the "Airport") and the SGEI. (3) Sumburgh Airport is located at the southern end of the Shetland Mainland within the Shetland Islands archipelago in the United Kingdom. The United Kingdom states that it is the only airport within the Shetland Islands to provide scheduled passenger services to destinations outside the Shetland Islands. The Rt Hon Boris Johnson MP The Foreign and Commonwealth Office King Charles Street London SW1A 2AH Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111 (4) The Airport is operated by Highlands and Islands Airports Limited (the "HIAL").1 HIAL was incorporated in Edinburgh on 4 March 1986 under the Companies Act 1985 and is wholly owned by the Scottish government. The Scottish government as the owner delegates the daily operations of HIAL to its Board. The Scottish government appoints the chair of the Board and four of its seven directors. (5) The Board has corporate responsibility, inter alia, for establishing the overall strategic direction of HIAL within the policy, planning and resources framework determined by the Scottish Ministers.2 (6) The Shetland Islands are made up of around 100 islands of which 16 are inhabited. The Shetland Islands cover 1,467 square kilometres with a population of 23,230, giving a population density of 16 persons per square kilometre.3 The Shetland Islands are geographically remote. The direct distance from its main population centre, Lerwick, to the nearest major urban area, Aberdeen, is 400 kilometres and includes a sea crossing. (7) Scheduled air passenger services are operated by Loganair4 between Sumburgh Airport and Inverness Airport (1 direct service per day and 1 via Orkney/12,5895 passengers in 2016), Orkney Airport (up to 2 services per day/8,509 passengers in 2016), Aberdeen Airport (4 services per day/72,111 passengers in 2016), Edinburgh Airport (3 services per day/42,594 passengers in 2016) and Glasgow Airport (2 services per day/28,381 passengers in 2016). (8) The air services from Sumburgh Airport carry also freight. The total general freight carried in 2016 was 41 169 kg. Sumburgh Airport enables the quick transport of high priority, low weight freight. (9) Sumburgh Airport also enables residents from the Shetland Islands to access services that cannot be provided in their areas. For example, the National Health Service (the "NHS") Shetland has a service level agreement with NHS Grampian for patients in the Shetland Islands to be treated at Aberdeen Royal Infirmary Hospital in cases where treatment is not available in the Shetland Islands. (10) In addition, there is a daily mail flight between Aberdeen Airport and Sumburgh Airport which enables residents of the Shetland Islands to receive the same delivery times as the rest of the United Kingdom. 1 In addition to the Sumburgh Airport, the company also operates and manages ten other airports at Barra, Benbecula, Campbeltown, Dundee, Inverness, Islay, Kirkwall, Stornoway, Tiree and Wick as services of general economic interest. The present notification concerns only the Sumburgh Airport. 2 Scottish Ministers have delegated operational decision making to a Board of Directors. This delegation of authority is limited and its scope is set out in HIAL’s Framework Document. Even in areas where the Board does have delegated authority, however, Scottish Ministers may direct the Board to a particular course of action if they deem it appropriate. 3 Population figure from Table 9, National Records of Scotland: Mid-2014 Population Estimates Scotland http://www.nrscotland.gov.uk/statistics-and-data/statistics/statistics-by- theme/population/population-estimates/mid-year-population-estimates/mid-2014/list-of-tables 4 All services are operated on a commercial basis by Loganair. Loganair’s commercial code share agreements enable onward travel from all destinations using through ticketing. Flybe also have code share agreements enabling onward travel using through ticketing. 5 All passenger numbers from Loganair Limited. 2 (11) The Shetland Islands’ geographic location limits alternative transport options. Travelling from the Shetland Islands to the United Kingdom mainland, the only alternative to air travel is ferry travel. There are daily return ferry services from Lerwick in the Shetland Islands to Aberdeen on the United Kingdom mainland. On four days a week, these services operate via Kirkwall in the Orkney Islands. The ferry travels overnight with a direct journey time of 12 hours and 30 minutes. This compares to a journey time by air from Sumburgh Airport to Aberdeen Airport of 1 hour. Ferry services are subject to disruption in adverse weather, particularly in the winter. Air services, overall, are less impacted by bad weather. (12) The table below shows passenger numbers for Sumburgh Airport over the last five years: Year 2012-13 2013-14 2014-15 2015-16 2016-17 Passengers 217,502 287,525 311,429 312,061 355,667 (13) The nearest airports to Sumburgh Airport are: • Tingwall Airport: around 45.9 kilometres, 38 minutes by car; and • Scatsta Airport: around 79.3 kilometres, 1 hour 4 minutes by car. (14) Tingwall Airport is a small airport linking the Shetland Islands. The airport's operator, Airtask Group Limited, provides inter-island services from Tingwall to Foula, Papa Stour, Skerries and Fair Isle. The runway length at Tingwall Airport is 764 m. This limits the type and size of aircraft that can use the airport and makes scheduled passenger services out of the Shetland Islands impractical. (15) Scatsta Airport is a private airport which is contracted by Enquest (operator of Sullom Voe oil terminal) for commercial transport of offshore oil workers and staff to the nearby Sullom Voe oil and gas terminal. No scheduled passenger services operate to or from Scatsta Airport. (16) London Heathrow Airport is the United Kingdom’s main hub airport. A flight from Aberdeen Airport to Heathrow Airport takes around 1 hour 45 minutes. Through ticketing options are available when travelling from Sumburgh Airport to Heathrow Airport via Aberdeen Airport. (17) Furthermore, the United Kingdom considers that, if air services were to cease, there is not sufficient capacity on the ferry services to offset that lost air service capacity. Such a drop in overall capacity would have a detrimental impact on community sustainability. (18) The United Kingdom is of the view that the existence of Sumburgh Airport is necessary for the region for socio-economic reasons. However, it is not possible, due to economic reasons, to operate the Airport without systematic public support. (19) The United Kingdom stresses that Sumburgh's services to Aberdeen, Edinburgh, Glasgow and Inverness are essential for the economy of the Shetland Islands. It has also highlighted the importance of tourism to the economy of the region, having created 1300 new jobs in 2014 in the Shetland Islands, equivalent to 0.7% 3 of all jobs in the region in 2014.6 Tourism is one of the largest economic sectors for the Highlands and Islands. In 2016, it generated over 20 million pounds in Gross Value Added in the Shetland Islands.7 (20) According to the United Kingdom, without the airport, the Shetland Islands would be less attractive for businesses with the resulting impact on employment levels. The Airport also helps to retain and attract young people to live and work in the Shetland Islands through the provision/availability of improved transport linkages for work and leisure. The United Kingdom believes that the presence of Sumburgh Airport has contributed to the population of the Shetland Islands increasing from 22,000 in 2002 to 23,230 in 2014.8 (21) The United Kingdom considers that the low population in the Shetland Islands is insufficient to generate the passenger numbers necessary to enable the Airport to operate profitably. Without public funding, the airport charges necessary to cover the costs of operating the Airport would be so high as to mean that it would not be economic to operate services. Thus, without public funding, Sumburgh Airport would close to scheduled passenger services. HIAL does not make a profit overall, public funding serves only to allow the company to break even each year. The United Kingdom considers that direct subsidy limits the market intervention to the minimum necessary. (22) Sumburgh Airport has received the following in terms of public funding in previous years: Year 2012-13 2013-14 2014-15 2015-16 2016-17 Amount (£) 3,613,571 11,811,376 7,287,249 7,512,687 5,159,178 2.2. Entrustment of Service of General Economic Interest (23) HIAL was created in 1986 and has operated Sumburgh Airport since then on behalf of the Scottish ministers. (24) The United Kingdom submitted that the Airport has always been loss making and has required public funding to offset the difference between its commercial income and its operating costs. (25) Since 2012, the SGEI was entrusted to HIAL through a series of entrustment acts adopted by the Scottish government.