1 C*· A U) I I Study on Competition between Airports and the I Appiication of State Aid Rules I I I Final Report I Volume 1 I September 2002 I European Commission I Directorate-General Energy and Transport Directorate F - Air Transport I I I Air Transport Group I School of Engineering Cranfield University Cranfield I Beds MK43 OAL United Kingdom I With: I Alan Stratford and Associates (SKM Europe) INECO Gruppo CLAS I enton Wilde Sąpte Study on Competition between Airports and the Application of State Aid Rules Final Report Volume 1 September 2002 European Commission Directorate-General Energy and Transport Directorate F-Air Transport ι ΙΛ^^"^ \ Air Transport Group Schooi of Engineering C*^^ η. ^ζ&ν„ΓΝ- '^ ^ Cranfield University Vt> V l CranfieldnranfíckIH Beds MK43 OAL cP^''" United Kingdom With: Alan Stratford and Associates (SKM Europe) INECO Gruppo CLAS Denton Wilde Sapŕe Contents - Final Report Chapter Page Executive Summary 0-1 1 Introduction 1-1 2 Legal Overview (Summary) 2-1 3 Airport Ownership 3-1 4 Airport Competition 4-1 5 Airport Finance 5-1 6 Discussion 6-1 7 Conclusions 7-1 Annex A Legal Overview Al I Air Transport Group, School of Engineering, Cranffe/d Universrty I Competition between A/rporís and (Ле Application of State Aid Rules Executive Summary Executive Summary In general terms, the principal objective of this Study is to provide the Commission with information and analysis necessary to update the approach towards the application of State Aid Rules to the public financing of airport infrastructure. The Final Report, which should be read in conjunction with the Interim Reporl, is split into two volumes. Volume 1, of which this is part, has concentrated on four main areas. The first of these (Chapter 2, supplemented by Annex A) is a legal overview of current legal legislation in the European Union including an introduction to EC law on State aids and the application of EC law on State aids to airports. Denton Wilde Sapte has prepared this overview as their contribution to the Study. Chapter 3 concentrates on airport ownership and includes an analysis of the different types of airport ownership in Europe including national government, regional / local government chambers of commerce and privatised entities. This is followed by Chapter 4 that examines airport competition including definitions of different types of competition and individual airport views on airport competition including catchment areas and competing airports. Chapter 5 deals with airport finance and includes discussion on aeronautical charges, the economic viability of airports, the financing airport capital expenditure, subvention (subsidies) and Accession countries. Volume 2 of the Final Report supplements this Volume and includes data, for each of the countries examined, collected during the course of the Study including a brief discussion on government policy, airport traffic data for the country, an overview of the airline market and detailed information about each of the airports that were interviewed. The overall conclusions of the Study are set out in Chapter 7 but the salient points are reproduced below. Airports are happy to be part of a competitive market. The only proviso is that competition is on a level playing field as general concerns have been expressed about the relative level of airport charges, taxation loop-holes and elements of state-funding that are sometimes inconsistent (new security measures, for example). There are many airport ownership models in Europe ranging from 100% privatisation to an airport network still under the control of the national Civil Aviation Authority. Most models publish financial performance data, details of accounting practices and tax regimes for Air Transport Group, School of Engineering, Cranfield University 0-1 I I Competition between Airports and the Application of State Aid Rules Executive Summary individual airports. The exceptions to this are those airport networks controlled by the I national C AAs. Airport charges are published in the public domain. In general uie charges follow the overall I recommendations of ICAO. The services for which charges are mcurred are generally consistent from one airport to another. Environmental (emissions) charges are still I uncommon. The relative level of charges can vary from one airport to another. In some cases this is because of economic regulation on a national airport network basis. In other cases, individual airports are regulated in recognition of their natural monopoly. Concerns have been I expressed about the application of discounted airport charges and route support grants. Differential charges between airports have little impact on airport competition with the I exception of the low-cost market. Funding for airport infrastructure can come from several sources including cash flow, retained I profits, government grants and loans and other sources such as the European Union TEN-T programme of the European Investment Bank. Current Commission policy is that in general the funding of airport infrastructure does not constitute State aid due to congestion at existing I airports. Similarly, the current development of the Community Trans European Transport Network would allow the construction of transport related surface infrastructure to an airport I without being classified as State aid. Depreciation periods used were fairly consistent and in line with normal industry practice. For I example, the depreciation period for runway was up to 50 years, terminal buildings 30 to 50 years, and mobile equipment 5 to 10 years and the shortest depreciation periods are normally for information technology systems. Most airports are currently paying corporation tax, the I rates varying between 28 and 40% of the taxable profits. I The transition point for an airport to become profitable appears to be in the ader of about 500,000 WLUs per annum (without cargo, this would be equivalent to about 500,000 I passengers per annum. Many airports have limited or no natural competitors, for example, remote airports will compete only with their nearest neighbour (if at all) and international hubs will tend to I compete only with other international hubs. The main area of airport competition is between the regional airports. For example, large regional airports will compete with each other and I the nearest hub airport and smaller regional airports will compete with each other. Airports will compete with each other according to the common market that both airports wish to I serve. Competition between two airports can be judged by comparing attributes. These can include I congestion, surface access and airport charges. It is suggested that a first step towards airport classification in terms of competition would be to develop a matrix system. I Air Transport Group, School of Engineering, Cranfíeld University 0-2 I I Competition between Airports and the Application of State Aid Rules Executive Summary In general, it appears that, while there may be some concems by individual airports on unfair competition due to differential airport charges and taxation, in general the airports feel that they are operating in a reasonably competitive environment and that the main threats to fair competition are those of congestion and environmental constraints both of which impact on airport operations in different ways that can vary from one countrv to another and even one neighbouring airport to another. Air Transport Group, School of Engineering, Cranfield University 0-3 Competition between Airports and the Application of State Aid Rules Introduction 1 Introduction 1.1 Background Changes in the airport industry over the last decade are such that airports are no longer just infrastructure providers but, in many cases, are now also operating in a competitive environment. The degree of competition between or at airports, or perception thereof, can take many forms. Some of these have been idertified by ACI Europe1 and may include competition: To attract new passenger and freight services Between airports with overlapping catchments Between hub airports and medium / long-haul transfer traffic Between airports within the same urban conurbation The provision of services at individual airports Between different terminals at an individual airport In addition, competition can also include the attraction of funds, subsidies (including tax alleviation), grants or other monies from central or regional government under the overall umbrella of what might be considered to be State aid. This is particularly important as a number oftest cases have been brought to the attention of the European Commission in which it has been claimed that State aid in one form or another to a particular airport has in fact resulted in unfair competition or an unwarranted level of subsidisation. At the same time, the Commission's policy on state aid for airport infrastructure has been set out in the guidelines on State aid in the aviation sector2, according to which the construction and enlargement of airport infrastructure represent general measures of economic policy that cannot be controlled by the Commission under the Treaty Rules on State aids. This traditional view is increasingly challenged by the commercial evolution and the appearance of competition. Indeed, this approach is based on the implicit assumption that competition between airports is not an issue. In the present situation, as long as the provision of airport facilities is a European-wide commercial activity open to competition, the application of State