FARE ANALYSYS ON THE

1. FARE ANALYSYS ON THE “MEMORANDUM TO THE COMMISSION: COMMUNITY GUIDELINES ON FINANCING OF AIRPORTS AND START UP AID TO AIRLINES DEPARTING FROM REGIONAL AIRPORTS”

2. GENERAL CONSIDERATIONS

3. General Considerations No natural Monopoly (and no dominant position) for Regional Airports FARE points out that the traditional assumption of airports being natural monopolies has to be urgently rectified under the changed circumstances. The lower traffic volumes, the widely overlapping catchment areas, the higher difficulties in attracting airlines to operate services to/from regional markets have lead to such a high level of competition that no regional airport is allowed to act as a monopoly, if it wants to survive.

4. General Considerations The risk of rigid guidelines FARE strongly recommend the Commission to adopt highly flexible guidelines on the subject of “start up aid to airlines departing from regional airports”, in order to enable the many EU Regions and their Airports to develop the maximum level of air service for their communities, with those very few airlines that are willing to accept the high risk to develop new routes and new markets, in most cases underserved, if not altogether abandoned, by legacy air carriers.

5. General Considerations The application of the Market Economy Private Investor Principle (MEIP) FARE generally welcomes the application of the Market Economy Private Investor Principle (MEIP) in determining whether there is state aid or not. If MEIP is successfully passed, this excludes by definition any kind of state aid and therefore any need for a regulation being imposed by the Commission relating to Art. 87. The focus has to be on whether, taking into consideration all circumstances as the case may be, the airport had acted like a private entrepreneur including its long term strategic reasoning and risk taking. FARE points out that a narrow treatment of the Private Investor Principle (MEIP) would be misplaced, as the MEIP has to involve an appropriate level of entrepreneurship and risk taking.

6. General Considerations “Aid” or “marketing tool”? With reference to points 1.1 (Background) and 1.2. (Low cost companies) of the draft Guidelines, FARE welcomes the acknowledgement that low cost carriers and regional airports over the last years have generated “two major developments on the European Air Transport market in recent years” (1.1.5). However (1.2.7) the Draft Guidelines state “The negotiating methods used by low cost airlines to obtain aid from public authorities, whether directly of through the airport manager, have raised a number of questions regarding the application of competition rules, under the EC Treaty and have been the subject of several complaints made to the Commission.”. The Draft Guidelinesdo not acknowledge the partnership between regional airports and/or Regions, with airlines willing to undertake service commitments to regional markets and still use the term “aid” to define an innovative marketing tool, i.e. the effective promotion of the airport and of the community it serves by means of service agreements with airlines, based on the achievement of target passenger traffic levels.

7. ANALYSIS OF THE DRAFT MEMORANDUM

8. Analysis of the Draft Memorandum 3 – Types of Airports “FARE wishes to draw the attention of the Commission on the fact that the airports in cat. C (1-5 million passengers) can have a significantly different weight, in terms of “market value” for the airline. In a deregulated market, an airline flies to an a certain airport only because this infrastructure gives access to a certain market, in terms of demand for air transportation to a destination, at a certain level of price, and the airline estimates it can make a profit out of the operation of that route from that market. Therefore, the characteristics of its specific market (potential travel demand and expected yields) determine the level of attractiveness of a certain airport to airlines. In this sense, a consolidated “market” of five million passengers per year is perceived by the airlines as significantly more attractive then a 1 million passenger one. Therefore, also the leverage in the negotiating process with airlines of the managements of the two airports may vary significantly”.

9. Analysis of the Draft Memorandum 4. Scope of Application and Common Compatibility rules - MEIP • 33. As already stated in this document, and with reference to (33) of the Guidelines, FARE generally welcomes the application of the Private Investor Principle (MEIP). If the Private Investor (MEIP) Test is successfully passed, this excludes by definition any kind of state aid and therefore any need for a regulation being imposed by the Commission concerning Art. 87. • The MEIP principle is the key standard in determining whether there is State aid or not, and the Guidelines should avoid its narrow treatment and take into due consideration the role of entrepreneurship. • Airports are long term business undertakings, with return on financial investments as long as 20 years or more. An investor may not have any return on investments for up a medium-long period. • It must be made clear in the Guidelines that publicly owned but self-financing airports are free to conduct business under the same conditions as for a private entity in a competitive market. In their current form, the Draft Guidelines may not provide enough guidance and legal certainty to avoid a flood of legal challenges from competing airports and airlines

10. Analysis of the Draft Memorandum 6. Start up aid

11. Analysis of the Draft Memorandum 6.1. Objectives 84. FARE agrees on the following Guidelines statement “Like the traditional companies, which generally resort to well known airports, low cost companies are not always prepared, without appropriate incentives, to run the risk of opening routes from unknown or untested airports”. In fact, the number of air carriers willing to serve type C-D regional airports is very limited, because they perceive a much higher risk in opening a new route from a small airports than in competing with other carriers on an existing one, from/to a large (cat . AB) airport. Therefore the level of risk sharing sustained by the airport and/or of its region for such new scheduled flights, and that will be considered acceptable by the airline to start up the new air service cannot be fixed by rigid parameters. Each airport and the market it serves is different and the airline/airport negotiation on the extent of the risk sharing is actually carried out on a case-by-case basis. The Committee of the Regions recommends: “The Guidelines should not contain strict or rigidly applied thresholds, instead allowing regional and local authorities to consider the merits of public-sector investment on a case-by-case basis. (…)”(1) In this sense, should fixed, rigid parameters be introduced, all those regional markets whose start up “risk level” is perceived by the airlines ( the airport customers) as higher will simply lose their services. So they’ll be back to the pre low cost era, and again, the weakest components of the Trans European Airport Network – together with their communities – will be those who will suffer more. (1) C.d.R. own initiative opinion: 7thJuly 2004

12. Analysis of the Draft Memorandum 6.2 Conditions to be met 89.In our view, this “aid” does not distort the market, it only partially counterbalances the very strong traffic concentration in hub airports (acknowledged in par. 85 of the Guidelines), where large amounts of public money were invested on services and infrastructure. This “aid” should in fact be considered a “marketing tool” by which the Regions and their airports pursue the integration with the rest of the Community, while at the same time making good use of the existing airport capacity provided by regional airports. In the US this is a common practice → yearly “Network” Conference. To introduce regulations in the EU aimed at limiting the possibility to develop this kind of risk sharing agreements would really mean to go against successful practices that have been developed in the market, by private and public investors alike, just because of de-regulation. In other words, it would be a rear guard battle.

13. Analysis of the Draft Memorandum 92 (a-c) Aid Notification The obligation to notify the aid will increase the administrative burden generated by having three parties in a deal: the airport (or the Region), the airline and the EU Commission. As the notification procedure involves Cat. C-D airports, i.e. small airport companies, with small management teams and limited budgets. The increased administrative burden might become an obstacle, considering the decision making process in commercial aviation (aircraft availability, slot conferences, schedule changes etc.), and might constitute in many cases a real barrier of entry. In FARE’s view aid schemes pertaining to airports in cat C D should be exempted from notification, and, if this is not possible, FARE asks for a simplified and fast notification procedure, based on silent approval after 30 days from the notification of such aid scheme by the Member State of the Region involved.

14. Analysis of the Draft Memorandum 92 (d) • FARE considers the limitation of aid to new routes and new frequency too rigid. • Particularly at CD airports, where competition among carriers is null or very low, quality of service needs also to be taken into account, i.e.: • to support the upgrading of a certain route from high fares/low capacity/low comfort propeller (turbo-prop) service to low fares/high capacity/high comfort jet aircraft service; • to improve the regularity of service (especially on regional routes considered “secondary” or “not strategic”, some carriers often operate their services erratically, reducing the frequency, canceling the service all together in low season, canceling the flight often for “technical reasons”, while substituting the flight with coach service, etc.); Besides, limitation of aid to new routes would imply that a carrier might enter a new route with the minimum capacity (i.e. 30 seats aircraft) and thus close the market and the further development of that route, thanks to this “first mover’s advantage”.

15. Analysis of the Draft Memorandum 92 (d) “Routes operated from another airport located in the same attraction zone or population centre” In par. 92 d we read “Lastly, aid cannot be granted to help a new entrant to open links that already exist and to enter into competition with an existing operator already working on that route from the airport (as for our comments on this, the considerations on the paragraph above apply ) or another airport located in the same economic attraction zone or population centre”. FARE strongly recommends the Commission to eliminate the underlined sentence from paragraph 92.d. because:  Due to the fact that within the EU most regional airport catchment areas overlap to some extent with one or more airports, almost no airport ( maybe only the case of the only airport in an island) could be sure that it would not be infringing the above.  The term “economic attraction zone” has nota legal definition, and can lead to serious misunderstandings. In other words, the attribution of two airports to the same “economic attraction zone” is too highly debatable and would lead to endless debates and complaints.

16. Analysis of the Draft Memorandum 92.e “Aid must act as incentive” FARE underlines the need for flexibility and considers fixed time limits as a danger to the development of regional air services, particularly in cat. C D airports. A 5 years’ duration of the aid can be a correct start up time in some cases, but there must be much more flexibility built in the system. The same applies to the following statement “In any event , the period during which the start up aid is granted to an airline must be less than the period during which the airline undertake to operate the service.” Although logically sound, this statement does not take into consideration that in reality it is a negotiation process that is being regulated. Lack of flexibility will simply leave those regional airports with less bargaining power without air service. In accordance with the consideration in art. 49 (“small regional airports … are not likely to pose any substantial threat to competition”.) FARE recommends the Commission that cat. D airports are exempted by such time limitation.

17. Analysis of the Draft Memorandum 92 (h) “The intensity of the aid will be limited to an absolute maximum of 50% for 5 years for the smallest airports” FARE needs to repeat the same considerations as above. The limitation to 3 years (par. 92 h) with a maximum extension to 5 years for the outermost regions is really a very short risk sharing period, considering what is normally negotiated in the industry. The situation of Islands is never mentioned in the Guidelines. FARE recommends that such limits (3-5 years time limit and “absolute maximum of 50%) be cancelled, because over regulating the risk scheme will only damage the smaller, weaker airports. Besides, no time limit should be applied in the case of to islands or isolated regions, according to the law of the Member State, even if they are not included in Objective One Regions.

18. Analysis of the Draft Memorandum 92.k “An airport (…) must therefore develop objective criteria (…) to ensure that all airlines are treated equally” FARE agrees that no discrimination has to be made with airlines, ant that the principle of “similar conditions for equivalent performance” must be followed. Airlines who are willing to sign service contracts and undertake to operate a scheduled service to a specific destination for a number of years will not be considered “equal” to those airline operating a similar route, using the airport as a “toll station”, i.e. confirming or cancelling the flight, at the beginning of each IATA season, with a simple notice to the airport, with no service guarantee for the airport and its community.

19. Analysis of the Draft Memorandum 92.n “Specific attention should therefore be paid to limiting eligible costs when an airline links a regional airport with a major airport in Cat A and/or with a coordinated airport (…)” In the largest majority of cases, the potential traffic between two airports in cat. CD, is too low for the economic viability of a direct air service, even when it is performed at very low fares. The situation is quite different when a type CD airport is connected with a large population centre (normally a cat. AB airport). This type of air services have proved to be successful at developing new traffic flows, and becoming economically viable, thanks to the low fares carriers. The above par. 92.n could really limit the possibility of regional communities to be linked with the largest EU metropolitan areas, which is in fact what they need most, both in terms of their right to mobility, and in terms of developing incoming traffic flows for the benefit of their economy.

20. FARE ANALYSYS ON THE “MEMORANDUM TO THE COMMISSION: COMMUNITY GUIDELINES ON FINANCING OF AIRPORTS AND START UP AID TO AIRLINES DEPARTING FROM REGIONAL AIRPORTS”