Public funds managed by private airport operators can be classified as state resources. Prices charged by airport operators can be used as a benchmark for market prices only if their activities and size are comparable and their costs are not subsidised by State aid. Before a private investor enters into any commercial arrangement, it takes into account all relevant information, considers the revenue and costs of all related obligations and does not accept any obligation that generates less revenue than the costs it incurs. Individually negotiated agreements are selective.
Introduction
On 13 December 2018, the General Court ruled in three cases involving Ryanair. They concerned agreements that Ryanair had concluded with three different airports. The main issues were:
- whether a private investor would have accepted the terms of the agreements concluded by the airports;
- whether the resources granted via airport operators could be attributed to the state; and
- whether the agreements in question were selective.
However, there were also interesting arguments on procedures, the rights of aid recipients and the possible application of the Charter of Fundamental Rights. These issues are not examined in this article.
The private investor test or the private operator principle or, more broadly, the market economy investor principle requires a comparison between the agreement or arrangement in question and the terms that would be acceptable to a hypothetical private investor who is solely motivated by the prospect of profit in the medium term. There are several methods for establishing what would be acceptable to a private investor. At minimum, they must show that extra costs are adequately covered by extra revenue or that the expected return sufficiently compensates for the risk that is assumed.
In case T‑165/16, Ryanair v European Commission, Ryanair requested the partial annulment of Commission decision 2016/287 that had found incompatible State aid in some of the arrangements between Ryanair and Germany’s Flugplatz Altenburg-Nobitz. The General Court dismissed the appeal.1
In case T‑77/16, Ryanair v European Commission, Ryanair applied for partial annulment of Commission decision 2016/152 that had also found incompatible State aid in agreements between Ryanair and Germany’s Zweibrücken airport. The General Court upheld the appeal and annulled the relevant part of the decision. 2
In case T‑53/16, Ryanair v European Commission, Ryanair sought the partial annulment of Commission decision 2016/633 on incompatible State aid in agreements between Ryanair and France’s Aéroport de Nîmes. The General Court dismissed the appeal. 3
Because of the length and complexity of the three judgments, the article is divided into two parts. Part I examines the application of the private investor principle in each of the three cases to determine the presence of an advantage in favour of Ryanair. Part II examines the remaining significant issues and in particular the classification of resources as state resources and whether the measures in question were selective.
Part I: Advantage and private investor test
In case T‑165/16, Ryanair v European Commission, in order to determine the economic rationality of the various agreements between Ryanair and Altenburg-Nobitz, the Commission had chosen not to apply the method consisting of making a comparison with a suitable market price (the comparative method) and to use instead the ex-ante incremental profitability analysis (the incremental profitability method). Given that the prices charged by different airports vary widely because they are affected by such things as local demand, the size of the airlines using the airport, the frequency of their landings, capacity utilisation, location, quality of services offered or State aid received by airports, the Commission was perfectly justified not to attempt any comparative analysis.
It found that from an ex ante perspective, certain marketing services and airport services agreements were not profitable for Altenburg-Nobitz airport. Consequently, the Commission took the view that Ryanair received unlawful and incompatible aid.
Most of the pleas of Ryanair concerned the alleged absence of any undue advantage. The General Court recalled that an undertaking receives no advantage in the meaning of Article 107(1) TFEU if it could, “(105) in circumstances which correspond to normal market conditions, have obtained the same advantage as that which has been made available to it through State resources”.
Then the Court clarified that in determining whether a market economy operator would have made an arrangement such as that between Altenburg-Nobitz and Ryanair the Commission is not obliged to use the comparative analysis. The reason being that “(107) that method is merely one analytical tool amongst others to determine if the recipient undertaking receives an economic advantage which it would not have obtained under normal market conditions”. “(108) The selection of the appropriate tool is a matter for the Commission within the framework of its obligation to conduct a complete analysis of all factors that are relevant to the transaction at issue and its context, including the situation of the recipient undertaking and of the relevant market, to determine whether the recipient undertaking receives an economic advantage which it would not have obtained under normal market conditions”. “(109) Taking into account the difficulty of identifying comparator airports in the present case, the Commission was entitled to use the incremental profitability analysis while departing from the comparative analysis.”
The Court agreed with the Commission that the comparative analysis was not possible for the reasons already mentioned in the introduction of this article.
With respect to the profitability analysis, the Court observed that “(173) the Commission did not find, during its investigation, any business plan or ex ante profitability analysis, or forecast of costs and revenues drawn up by the operators of Altenburg-Nobitz airport before the agreements in question were concluded. Consequently, the Commission had to reconstruct, using material produced by the German authorities in response to its requests for information, the ex-ante profitability analysis on which a market economy operator, acting in place of Altenburg-Nobitz airport, would have had to rely in order to assess the value in concluding the agreements in question.”
The Court noted, without disagreeing, that “(174) in that incremental profitability analysis, the Commission assessed, first, the incremental costs, namely the cost of the marketing services and the operating costs directly incurred by the agreements in question […] and, second, the incremental revenues arising from aeronautical activities and non-aeronautical activities […] It noted negative cash flow during the period concerned, with the result that the marketing services agreement of 25 January 2010, in combination with the airport services agreement of 3 March 2003 and the marketing services agreement of 7 April 2003, was therefore not profitable for Altenburg-Nobitz airport from an ex ante perspective. It inferred that the combination of those agreements provided a selective economic advantage for Ryanair and AMS […].”
“(182) In order to assess incremental revenues, the Commission took into account, in its ex ante profitability analysis, revenues from aeronautical and non-aeronautical activities and that it relied on the number of passengers that AOC should have expected from the signature of the marketing services agreement of 25 January 2010. In order to make that calculation, it determined the number of passengers relating to three destinations provided for in that agreement and applied an 80% load factor for an aircraft with 189 seats, which represents the capacity referred to in the marketing services agreement.”
“(183) In that regard, […] the marketing services agreements were likely to stimulate traffic on the routes in question with corresponding benefits for AOC in terms of increased aeronautical and non-aeronautical charges and that, in the contested decision, it reflected that effect in the load factor in question, which was assessed at 80%, which it applied for the whole duration of the marketing services agreement.”
“(186) As regards the long-term effects of the market services and as regards the economic reports produced in that regard, in must be noted, inter alia, that the Commission maintained, without committing any manifest error of assessment, that the promotion of the region of Altenburg-Nobitz airport on the home page of the Ryanair website amounted to mere links to a website, which were hardly likely to lead to long-lasting effects on the memory of a significant number of people visiting that page. In that regard, it submitted that the applicants did not attempt to analyse or quantify the alleged effects of the marketing services under the marketing services agreements on the conduct of consumers and the long-term effect on traffic at Altenburg-Nobitz airport.”
Then the General Court turned its attention to the argument of Ryanair that the Commission did not take into account the grounds underlying the decision of the manager of Altenburg-Nobitz airport to purchase marketing services from Ryanair.
The Commission counter-argued that a market economy operator motivated by the prospect of profits would not be prepared to purchase marketing services if it were predicted that, despite the positive effect of such services on passenger traffic on the air routes concerned, the incremental costs incurred by the agreements would exceed the incremental revenues in discounted value terms.
Indeed the General Court held that “(213) the applicants’ line of argument does not succeed in demonstrating that the marketing services provided by [Ryanair] were reasonably intended to attract airlines other than Ryanair to Altenburg-Nobitz airport. It is apparent […] that, by concluding the marketing services agreement […] and paying a specified amount under that agreement, the regional authorities and the airport’s main concern was rather to maintain Ryanair’s air activities at Altenburg-Nobitz airport”.
Ryanair also alleged that the Commission refused to take into consideration the possibility that part of the marketing services could have been purchased for general interest purposes. The General Court noted that “(229) the applicability of the private investor test in a market economy ultimately depends on the Member State concerned having conferred, in its capacity as an economic operator, and not in its capacity as a public authority, an economic advantage on an undertaking”. “(230) In the present case, the Commission examined, […], the question whether a market economy operator in the situation of Altenburg-Nobitz airport would have concluded the [agreements in question]. It must be noted that the Commission did not consider the possibility that the purchase of marketing services could, at least partly, have served the general interest purposes pursued by the regional and local authorities.”
“(231) However, it must be recalled that the Commission was entitled to assume, without committing any manifest error of assessment, that the marketing services agreement […] was linked to Ryanair’s operation of routes to Altenburg-Nobitz airport, as covered by the airport services agreement.” “(232) Consequently, in so far as the remuneration for marketing services […] did not constitute compensation for the provision of services to local or regional authorities, but was associated with the operation of Ryanair’s air services at Altenburg-Nobitz airport, it was the responsibility of AOC in its capacity as the economic operator of an airport. Accordingly, the applicants’ argument concerning the purchase of marketing services for general interest purposes must be rejected.”
The last main plea of Ryanair was that the Commission made mistakes in the calculation of the profitability for the airport of the various agreements. In particular, it examined the profitability of the agreements only for their period of their validity, which was less than a year. In this respect, the General Court, first, recalled that “(249) the conduct of a prudent operator in a market economy is guided by prospects of profitability in the longer term […]. Such an operator wishing to maximise profits is prepared to take calculated risks in determining the appropriate return to be expected for its investment.” “(251) It is also common ground that, as the Commission maintained, without being contradicted by the applicants, before the conclusion of the agreements in question, the operator of Altenburg-Nobitz airport had not prepared a business plan in respect of the operation of routes to London, Girona and Alicante airports.” “(252) In that context, the Commission was entitled to consider, without erring, that a market economy operator would assess the incremental profitability of the combination of the three agreements in question in relation to the costs and revenues during the operating period of the air route in question, namely seven months.”
Ryanair also claimed that the Commission failed to take into account network externalities. According to the General Court, “(266) as regards the applicants’ argument concerning the failure to take into account the network externalities in calculating the non-aeronautical revenues for 2010, it must be noted that, in the absence of relevant ex ante information, the Commission proceeded from the assumption that, in January 2010, when the marketing services agreement was signed, Altenburg-Nobitz airport took into consideration, in the calculation of the non-aeronautical revenues, its actual revenues from the preceding years, which had risen significantly in comparison with 2006 and 2007. Thus, the Commission assumed that in 2010 Altenburg-Nobitz airport had based its forecasts of non-aeronautical revenues on the two preceding years, with an average amount of EUR 1.80 to 2.30 per passenger for 2008 and 2009”. “(267) It must be held that that calculation of non-aeronautical revenues for 2010 is not vitiated by any manifest error of assessment on the part of the Commission.” “(268) It follows from the evidence in the case file that the applicants had provided very similar services in previous years under the agreement of 28 August 2008, in combination with the airport services agreement of 3 March 2003 and the marketing services agreement of 7 April 2003, with the result that there was no reason for a market economy operator to suppose that there would be a sudden increase in non-aeronautical revenues per passenger on account of network externalities.”
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In case T‑77/16, Ryanair v European Commission, the General Court upheld the argument of Ryanair that the Commission’s calculations on incremental revenue used the wrong passenger figures that were supplied to it by Germany. The Court considered that the Commission should have used the figures set in the agreement between Ryanair and Zweibrücken airport or at least that it should have noted the significant discrepancies in the data before it.
In addition, the General Court upheld a related plea that the Commission used incorrect staff numbers to calculated incremental costs. The numbers provided by Germany referred to several years while the methodology of the Commission’s calculations considered incremental revenue and costs only for the duration of the agreement between Ryanair and Zweibrücken airport.
Because of these errors and, mostly, because the Commission had failed to prove that the arrangements between Ryanair and the airport were selective, the General Court annulled the main part of the Commission decision finding that Ryanair benefitted from incompatible State aid.
In case T‑53/16, Ryanair v European Commission, the General Court also examined Ryanair’s argument that the Commission failed to apply the comparative analysis in order to determine the existence of advantage. Like in the other two cases, the General Court rejected that argument on the grounds that the Commission is not obliged to use the comparative analysis, (that method being merely one analytical tool amongst others), and that, at that time, no appropriate benchmark could be identified to establish a true market price for the services provided by airports (because of the divergence of costs and revenues between airports and the low comparability of the transactions between airports and airlines due to the individually negotiated prices and variety of services). [Paragraphs 181-184]
Then the Court made an important clarification in response to the contention that the airport was inefficient and therefore the incremental profitability approach used by the Commission was not appropriate. “(189) The application of the market economy operator test is not designed to require minimum efficiency in the operation of a given activity, but to determine whether, in similar circumstances, a comparable private investor could have been prompted to take the measure at issue. In that regard, it is necessary to take into account the structure of the costs and revenues of the public entity whose conduct is being compared to that of a market economy operator. The applicants’ argument must therefore be rejected.”
In relation to the application of the private investor test, Ryanair made several pleas and argued, first, that the Commission was wrong to consider all of the various agreements with the airport as a single measure.
The General Court, first, noted that “(207) when the Commission reviews whether a specific transaction contains State aid elements, it is required to take into account the context in which that transaction takes place […]. The examination of a transaction outside its context could lead to purely formal results which do not correspond to economic reality”.
“(208) When applying the private investor test, it is necessary to envisage the commercial transaction as a whole in order to determine whether the public entity has acted as a rational operator in a market economy. When assessing the measures at issue, the Commission must examine all the relevant features of the measures and their context”.
“(209) In the present case, the Commission held in the contested decision that each marketing services agreement was closely linked to the underlying airport services agreement and that it was therefore appropriate, for each marketing services agreement, to analyse that agreement and the corresponding airport services agreement as a single measure […] In order to reach that conclusion, the Commission found, inter alia, that each marketing services agreement and the corresponding airport services agreement had been signed at the same time and by the same parties, forming a single economic entity.”
Application of the incremental profitability analysis
Ryanair also argued that the Commission in fact found that its agreements with the airport generated higher incremental costs than incremental revenues in the context of the comparative analysis.
The General Court noted at the outset that according to the Commission, “(218) a market economy operator would not be prepared to purchase marketing services, even at a price at or below market price, if it were predicted that, despite the positive effect of such services, the incremental costs which they would generate would exceed the incremental revenues at present value. The Commission made that statement in order to reject the arguments put forward by Ryanair and the operators of Nîmes airport that the fact that the price of the marketing services paid by those operators is equivalent to, or less than, the market price was not relevant to the incremental profitability analysis.”
The Court also pointed out that “(219) the use of the comparative analysis does not relieve the Commission of its obligation to make a complete analysis of all factors that are relevant to the transaction at issue and its context. The Commission was therefore entitled to take into account the fact that a negative return was foreseeable in a given transaction”.
The Court concluded that “(220) the Commission did not err in referring to the possible negative return on the agreements at issue when it examined the adequacy of the comparative analysis.”
Errors in the incremental profitability analysis
Ryanair alleged that the Commission made manifest errors of assessment in the incremental profitability analysis.
The General Court noted that “(280) the Commission carried out the incremental profitability analysis by reconstructing the incremental costs and revenues of the agreements at issue, as a market economy operator would have calculated them at the time of their conclusion”. “(281) Thus, the Commission assessed, […], the incremental profitability of the agreements at issue for their duration, taking into account:
- the incremental traffic (number of additional passengers) expected from the implementation of those agreements, taking into account the effects of the marketing services on the load factors of the air routes covered by those agreements;
- the future incremental revenues expected from the implementation of the agreements, including revenues from airport charges and ground handling services generated by the air routes in question as well as non-aeronautical revenue from the additional traffic generated by the implementation of the same agreements;
- the future incremental costs expected from the implementation of those agreements, including the costs of marketing services, financial incentives and the incremental operating costs”.
The Commission “(282) found that, for several of the agreements, the annual incremental flows (revenues minus costs) were negative. Therefore, it considered that those agreements conferred an economic advantage on the applicants.”
The Court also observed that “(316) the applicants do not show that a market economy operator acting in the place of the operators of Nîmes airport would have been prepared [to purchase marketing services while suffering an incremental loss in net present value]”. “(317) The applicants confine themselves in their arguments to stating generally that private companies often invest large sums in developing their brands while suffering initial incremental losses, without obtaining an immediate return on investment, in order, however, to achieve long-term benefits. They do not show that the Commission committed a manifest error of assessment in finding […] that the benefits of the marketing services agreements going beyond the routes covered by the agreements at issue and the term of operation of those routes were extremely uncertain and could not be quantified with a degree of reliability that would be considered sufficient by a market economy operator.”
In other words, branding, the corporate image and general promotional activities are issues that private investors do consider, but their value must be quantified, if it is to be taken into account.
“(327) In the light of all the foregoing, it must be concluded that, without committing a manifest error of assessment, the Commission was entitled to take into account, in the incremental profitability analysis, only revenue generated by the routes covered by the agreements at issue during the duration of those agreements, even though it included the costs associated with the marketing services agreements, which are generated in their entirety during that period.”
Ryanair contended that the Commission failed to take into account in the incremental profitability analysis the numerous qualitative and strategic benefits which Nîmes airport could expect from the marketing services agreements, namely the enhancing of the image of that airport, an increase in its market value, the diversification of airlines and an increase in the proportion of inbound traffic.
The General Court, first, noted that “(337) the Commission found, […], that a market economy operator motivated by the prospect of profits would not be prepared to purchase marketing services if it were predicted that, despite the positive effect of such services on passenger traffic on the air routes concerned, the incremental costs incurred by the agreements would exceed the incremental revenues in discounted value terms.”
Then the Court pointed out that “(340) the Commission did not dispute the value or the necessity for regional airports to develop a marketing strategy.” “(341) On the other hand, the Commission considered, […], that AMS’s marketing services were not likely to enhance the image of Nîmes airport in the long term. The applicants have not adduced any evidence showing that the Commission’s analysis was vitiated by a manifest error of assessment in this respect”. “(342) Furthermore, […], (Ryanair did) not specify which type of AMS’s publicity could result in long-lasting effects or specifically indicate whether the marketing services bought by the operators of Nîmes airport were likely to influence the conduct of customers and improve the image of that airport sustainably beyond the time span of the marketing services agreements or on routes other than those operated by Ryanair from Nîmes airport.”
Moreover, “(345) the operators of Nîmes airport were only concessionaires and that the management of that airport was to revert, after the end of the relevant concession period, either to the State or to the SMAN depending on the moment in time when the marketing services agreement concerned had been concluded. Accordingly, the Commission did not err in taking the view that the asset value should not constitute a direct goal of those operators.”
The General Court concluded that “(361) the Commission did not err in stating that a market economy operator placed in the situation of operator of Nîmes airport would have expected the agreements at issue to be unprofitable. Therefore, as the Commission correctly states, the refusal to sign the agreements at issue would have been a better alternative for such an operator, given that those agreements had a negative incremental profitability and that their conclusion would have therefore resulted in a deterioration of the financial situation of that airport.”
Public interest
Ryanair argued that the Commission did not take into account the possibility that part of the marketing services could have been purchased for general interest purposes.
“(366) It should be noted first of all that the Commission examined, […], the marketing services from the point of view of the operators of Nîmes airport acting as entities entrusted with a mission of general interest. The Commission considered the question of whether, accepting that the conduct of those operators had to be assessed in the light of their role as a public entity entrusted with a mission of general interest, in this instance the development of Nîmes and its region, and not as airport managers, the specific marketing services at issue could be seen as fulfilling effective needs of a public buyer”.
The General Court recalled that “(367) the Commission considered, […], that, although it could not be ruled out that, in fulfilling their economic development mission for the region, entities such as the CCI of Nîmes-Uzès-Le Vigan or VTAN may feel the need to resort to commercial providers in order to promote the area, AMS’s marketing services did however concern a promotional activity targeting the commercial activities of two clearly defined undertakings, namely Ryanair and the operators of Nîmes airport. The Commission added, […], that to enable an entity responsible for local economic development to purchase marketing services that mainly promote the products or services of certain locally established undertakings, on the ground that those services encouraged local economic development, without such measures constituting State aid, would circumvent Article 107(1) TFEU. […], the Commission concluded from this that the marketing services purchased by those operators could not be regarded as meeting an actual need.”
It then considered that “(368) the applicants’ criticism that the marketing services were intended to promote the region and not Ryanair’s air transport services cannot be accepted. […] the various marketing services agreements were closely linked to the air transport services offered by Ryanair and that, far from being designed to generally and equally increase travel to Nîmes and its region by tourists and business travellers, the marketing services specifically targeted those persons likely to use Ryanair’s air transport services, and had the primary objective of promoting those services”.
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1 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=209005&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=5301532.
2 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=209002&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=5301532.
3 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=209020&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=5301532.
