Two more SGEI compesation cases for airports cleared by the European Commission

Introduction

In Bornholm Airport[1] and Sumburgh Airport [2], the European Commission has declared the PSO compensation granted, respectively, by the Danish and the Scottish authorities to the Bornholm Airport and the Sumburgh Airport to be compatible with the internal market. The Commission held that the national authorities had correctly qualified the aided airports as a genuine service of general economic interest (SGEI). And the public financial support granted to the airports met the compatibility conditions laid down by the SGEI Framework for the application of the SGEI exception in Article 106(2) TFEU.

The facts of the case

The Bornholm Airport is a small regional airport in the Danish island of Bornholm. Since 2014 an SGEI was entrusted to the airport by a contract concluded between the manager of the airport and the Danish authorities (the Entrustment Act). In 2016 the length of the entrustment was prolonged until 2020. The entrusted public tasks consisted of keeping the airport open to all potential users and ensuring a high safety level. The compensation to be paid to the airport for discharging these tasks was calculated on the basis of the estimated net costs of the airport.  

The Sumburgh Airport is located in Scotland at the southern end of the Shetland Islands archipelago. The airport is operated by Highlands and Islands Airports Ltd (HIAL) that is wholly owned by the Scottish Government. Since 2012 the Scottish authorities imposed on HIAL a number of PSO as for the running the Sumburgh Airport. More recently, the Scottish Government adopted a new entrustment act, consolidating and codifying the public tasks previously given to HIAL (the Entrustment Act). The entrusted SGEI was to keep the Sumburgh Airport open to commercial air traffic and guarantee the safe operation of it. According to the Entrustment Act, the Scottish Government determines the amount of SGEI compensation to be paid to HIAL on the basis of the costs necessary for the provision of the entrusted SGEI as estimated by HIAL. The SGEI compensation can be adjusted in case the HIAL’s commercial revenue differs from forecast.

The Commission started an Article 107 TFEU investigation into the PSO compensation paid to the airports of Bornholm and Sumburgh following the notification of the SGEI Entrustment Acts made by Denmark and the UK in 2017.

The decisions of the Commission

First, the Commission dealt with the question whether the PSO compensation paid to the airports of Sumburgh and Bornholm Airport did not constitute State aid within the meaning of Article 107 TFEU since they were covered by the Altmark doctrine. Eventually, the Commission ruled out that the Altmark doctrine applied to these cases because the national measures did not satisfy the Fourth Condition of Altmark[3]. This condition comes into relevance when the SGEI provider is not selected via a public procurement procedure. The PSO compensation must be determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means to meet the PSO, would have incurred, taking into account the relevant receipts and a reasonable profit from discharging the PSO. For the Fourth Altmark Condition to be met, national authorities have to provide an analysis showing that the costs structure of the recipient corresponds to the average cost structure of efficient and comparable undertaking operating and airport. Denmark and the UK failed to discharge this evidential burden with the consequence that aid to the Bornholm and Sumburgh airports fell outside the Altmark doctrine.

Next, the Commission dealt with the issue whether the airport aid could be declared compatible on the ground of the SGEI exception in the Article 106(2) TFEU as claimed by the national authorities. To this end, the Commission went on to ascertain whether the aided airport constituted a genuine SGEI. Point 72 of the 2014 Aviation Guidelines state that in well-justified cases the overall management of an airport can be considered as SGEI and also indicates the relevant factors to consider when such cases arise[4]. Applying these criteria, the Commission noted that the aided airport was in the Bornholm Island that, according to the 2014 Aviation Guidelines, was a remote region. It also considered that, apart from the air links operated from the aided airport, the fastest way to reach the Danish mainland was by ferry connections via certain Swedish airports, which was not an acceptable alternative.

In Sumburgh Airport the Commission considered that the nearby airports were not an acceptable alternative to the aid recipient because no scheduled flight to the UK mainland operated from them. Neither ferry links could be an alternative to flying from the Sumburgh Airport due to the much longer travelling times. The Commission also took into account the role of the airport in ensuring local inhabitants’ access to medical care and education services in the UK mainland.

Thus, absent the airports of Bornholm and Sumburgh, the area surrounding them would suffer from a lack of acceptable connections to the rest of the EU. That would significantly deteriorate the standard of living of the inhabitants of the regions in question as well as the current and prospective activities of the local businesses. The obvious consequence of those factors would be a prejudice to the social and economic development of the regions.

That said, the Commission considered that, without the public support in the form of SGEI compensation, the Bornholm and Sumburgh Airports would stop operating. The overall management of the airports is not a service that would be provided satisfactorily and at the same condition consistent with the public service by undertakings operating under normal market conditions. Indeed, the public funding covered 65% of total expenses or 81% of the non-commercial operational costs incurred by the Bornholm airport. Bearing in mind the above factors and circumstances, the Commission took the position that Denmark did not make a manifest error when qualifying the Bornholm Airport as SGEI. The scarcely populated catchment area of the Sumburgh Airport combined with its location at the EU outer border and the PSO to connect all the Shetland islands were all factors because of which the airport would be unlikely to increase the volume of passengers and generate enough revenue to cover its operating costs.

The Entrustment Acts adopted by the Danish and UK authorities complied with the compatibility conditions set out in the SGEI Framework[5], and namely the need for a formal act to entrust the SGEI and a clear specification of the imposed PSO and of the criteria for the calculation of the SGEI compensation.

Considering that the aided airports constituted a genuine SGEI and that the related Entrustment Acts satisfied all the relevant compatibility conditions, the Commission reached the conclusion that the objected national measure qualified for the Article 106 TFEU SGEI exception. As a consequence, the Commission closed its investigation with a compatibility decision.

Conclusion

Sumburgh Airport and Bornholm Airport confirm that the principle stated in the 2014 Aviation Guidelines according to which in ‘well-justified cases’ overall management of an airport can be considered as SGEI is of particular importance for small regional airports being located in remote scarcely populated areas. Applying a two-limb test, public tasks entrusted to airports qualify as SGEI if two conditions are met: i) the isolation condition (would be the regional area surrounding the aided airport isolated had the airport been closed?); and ii) the market failure condition (absent public aid, would any market operator provide the SGEI under normal market conditions?).

These conditions are more likely to be met by small regional loss-making airports that, due to their unfavourable geographical location, struggle to generate enough revenue to cover their costs[6]. In Bornholm Airport and Sumburgh Airport the aid recipient met these conditions due to:  i) the remoteness of the region where it was located; ii) the lack of acceptable alternatives for travelers; and iii) the economic unviability of the airport without public support.

Finally, it is worth noting that one of the compatibility conditions for the application of the SGEI exception is that the SGEI must be clearly entrusted by way of official act adopted by national authorities. As illustrated by Bornholm Airport, this act can also have the legal vest of a contract concluded by the airport manager with the contracting public authority.

   

---

[1] European Commission, Decision of 14 February 2018, Case SA.49331- Denmark SGEI compensation for Bornholm Airport.

[2] European Commission, Decision of 18 July 2017, Case SA.49482- United Kingdom Sumburgh Airport-entrustment of a service of general economic interest.

[3] The Fourth Altmark Condition reads that: ‘Where the undertaking which is to discharge public service obligations is not chosen in a public procurement procedure, the level of compensation needed has been determined on the basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means of transport so as to be able to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations’.

[4] Point 72 reads that ‘As far as airports are concerned, the Commission considers that it is possible for the overall management of an airport, in well-justified cases, to be considered an SGEI. In the light of the principles outlined in point 69, the Commission considers that this can only be the case if part of the area potentially served by the airport would, without the airport, be isolated from the rest of the Union to an extent that would prejudice its social and economic development. Such an assessment should take due account of other modes of transport, and in particular of high-speed rail services or maritime links served by ferries. In such cases, public authorities may impose a public service obligation on an airport to ensure that the airport remains open to commercial traffic. The Commission notes that certain airports have an important role to play in terms of regional connectivity of isolated, remote or peripheral regions of the Union. Such a situation may, in particular, occur in respect of the outermost regions, as well as islands or other areas of the Union. Subject to a case-by-case assessment and depending on the particular characteristics of each airport and the region which it serves, it may be justified to define SGEI obligations in those airports’.

[5] Having more than 200,000 passengers per annum, the airport fell within the scope of application of the SGEI Framework.

[6] On all these issues, see ‘Michele Giannino and Federich Romby, Public Aid to Airports as a Compensation for the Provision of Services of General Economic Interest (SGEI), on file with the authors.,