New developments in European state aid for aviation and the impact on Cyprus

The European aviation sector is undergoing significant regulatory scrutiny, particularly concerning state aid provided to airlines and airport operators. Recent decision by the European Commission has brought to light the complexities that EU member states face when balancing support for their aviation sectors with the stringent competition rules established by the European Union (EU). These developments have implications for Cyprus, which has been providing incentives to airlines and airport operators to support its aviation industry.

?Background

?In a recent landmark judgment,[1] the European Commission (the Commission) upheld a decision pertaining to state aid granted to certain airlines and regional airports, particularly focusing on cases involving Ryanair and various airport operators. The decision reaffirmed that any public support provided to airlines or airports must adhere to the EU State Aid rules to avoid distorting competition within the internal market. This decision reinforces the interpretation of Article 107(1) of the Treaty on the Functioning of the European Union (the TFEU), which prohibits aid that distorts or threatens to distort competition by favouring certain undertakings, unless justified by broader economic reasons.

Key aspects of the decision

1. Interpretation of Selectivity and Advantage

The Commission reiterated that the selectivity criterion under Article 107(1) TFEU is met when a state measure confers an economic advantage on certain undertakings. In the cases reviewed, the financial arrangements between regional airports and low-cost carriers like Ryanair were deemed selective, as they provided advantages not available to all operators under the same conditions.

2. Market Economy Operator Principle (MEOP)

A critical test applied is the "Market Economy Operator Principle." This test assesses whether agreements between public airport operators and airlines would have been made under normal market conditions by a private investor. The decision confirmed that several agreements failed to meet the MEOP criteria, suggesting that the support was not provided on market terms, thereby constituting state aid.

3. Impact on competition and trade between Member States

The decision emphasised that aid affecting competition and trade between Member States is incompatible with the internal market. Agreements providing financial benefits to specific airlines could affect trade and distort competition within the EU aviation sector.

4. The “One Time, Last Time” Rule

The Commission decision reinforced the EU’s "one time, last time" principle, which restricts state aid for restructuring purposes to a single occurrence within a ten-year period. This principle is vital to prevent companies from becoming dependent on state support and to minimise market distortions.

Implications of the decision for Cyprus

This decision has potential implications for Cyprus, where Hermes Airports Ltd, the operator of Larnaca and Paphos International Airports, has implemented various incentive schemes to attract and retain airlines. The strict interpretation of state aid rules by the Commission suggests that similar support measures could face scrutiny from the European Commission.

Cyprus’ current incentive schemes: Potential considerations under EU rules

Hermes Airports Ltd, operating under an agreement with the Cypriot government, has implemented a series of incentive schemes effective from 1 November 2022 to 31 July 2027. These schemes are designed to attract airlines and increase passenger traffic, and they include several key offerings such as below-mentioned incentives.

New routes incentive scheme: This scheme provides financial incentives to airlines that introduce new routes to or from Larnaca or Paphos airports. The incentives vary based on the number of weekly frequencies, with amounts ranging from €10 to €14 per departing passenger, depending on the level of service.

Volume of traffic incentives: This scheme incentivises airlines that carry significant passenger volumes annually. The amount provided per departing passenger increases based on the percentage of new routes relative to the total routes operated by an airline.

Landing fees discount for incremental flights: This scheme offers discounts on landing fees for additional flights on existing routes, classified based on the average number of weekly frequencies. The discounts range from 25% to 100%, depending on the classification of the route (thin, medium, mature) and the season (summer or winter).

Winter growth incentives for incremental passengers: Designed to stimulate traffic during the winter season, this scheme offers incentives ranging from €6 to €8 for every incremental departing passenger compared to the previous winter period.

Marketing support: This scheme aims to share the financial risk with airlines by supporting marketing activities that promote Cyprus as a destination and increase passenger traffic.

While these incentives aim to foster growth in Cyprus’s aviation sector by attracting new airlines and encouraging existing ones to expand their services, the recent Commission decision indicates that all financial support must be carefully evaluated to ensure it aligns with EU state aid rules. This includes assessing whether the incentives could be perceived as providing an economic advantage to specific entities or distorting competition within the market.

Analysis of the potential issues for Cyprus

The incentive schemes offered by Hermes Airports are designed to support air connectivity and tourism in Cyprus. However, the structure and implementation of these incentives must be examined within the context of EU state aid regulations. The recent Commission decision sheds light on several areas that require careful consideration:

Selectivity and fair competition: EU state aid rules mandate that any financial support must not selectively favour certain companies. The current incentive schemes by Hermes Airports, while framed as fair and non-discriminatory, could be viewed as selectively advantageous, particularly when they are tied to the performance of specific airlines or routes.

Potential market distortion: Incentives aimed at reducing landing fees or providing direct financial support for marketing could be seen as influencing competition within the aviation market. The recent Commission decision highlighted concerns that such aids might create competitive imbalances if they allow beneficiary airlines to offer lower prices or additional services not sustainable without state support.

Compliance with the “One Time, Last Time” Rule: The requirement that state aid must not be provided repeatedly to the same beneficiary within a short period is another factor to consider. Cyprus needs to ensure that its incentive schemes align with this principle to avoid potential conflicts with EU regulations.

The Case of Cyprus Airways: a relevant precedent

The recent Commission decision brings back memories of the Cyprus Airways case, where the EU Commission found that the aid granted by the Cypriot government was illegal and incompatible with EU State aid rules. Between 2007 and 2013, Cyprus Airways received several state aid packages in an attempt to restructure. However, the European Commission determined that these aids were based on unrealistic restructuring plans that did not adequately address the airline's underlying issues.

The repeated financial support provided to Cyprus Airways breached the "one time, last time" principle under EU rules, which allows struggling companies to receive aid only once within a 10-year period to support restructuring. Consequently, Cyprus Airways was ordered to repay over €65 million in illegal state aid, leading to its cessation of operations in 2015. This case illustrates the complexities involved in providing state aid to the aviation sector and serves as a point of reference for Cyprus as it continues to offer incentives to airlines through Hermes Airports.

Navigating the regulatory landscape: considerations for Cyprus

To navigate the complex regulatory landscape surrounding state aid, Cyprus may need to assess its current incentive schemes in light of recent developments:

Conducting detailed impact assessments: Hermes Airports and the Cypriot government could consider undertaking comprehensive assessments to ensure that the incentives do not distort competition or provide selective advantages. This may involve dialogue with the European Commission to address any potential concerns pre-emptively.

Ensuring transparency and proportionality: Clear criteria for eligibility and transparent processes for applying and receiving incentives can help mitigate the risk of being perceived as providing unfair advantages. Ensuring that incentives are proportionate to the benefits provided can also be a key factor in demonstrating compliance.

Aligning with broader EU policy objectives: Aligning the incentives with broader EU goals, such as sustainability, innovation, and regional development, could provide a framework for justifying the support under specific EU provisions.

Avoiding over-reliance on state support: Structuring incentives to encourage airlines to become self-sufficient and reduce dependency on continuous financial support aligns with the EU’s emphasis on avoiding market distortions.

Final thoughts

The recent Commission decision underscores the complexities surrounding state aid in the aviation sector. For Cyprus, this development highlights the importance of aligning its incentive schemes with EU rules and regulations. By carefully evaluating the structure and impact of its support measures, Cyprus can continue to promote growth in its aviation sector while maintaining compliance with EU State aid rules. As the regulatory environment evolves, staying informed and proactive will be key for Cyprus to ensure a competitive and sustainable aviation market.

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For more information please visit our website microsite on?Competition & State Aid?or send your queries to?[email protected]">[email protected]?

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[1] Public version of the decision is not available yet.