The vast majority of airports in Europe and the airlines that operate from these facilities are facing fundamental changes due to stricter regulation on state aid. The European Commission (EC) laid out plans to overhaul current guidelines on how public—national, regional or local—authorities subsidize airports and streamline rules on the support for airlines adding routes or services.

The EC argues that the revised rules are necessary to limit distortions of competition within the European Union (EU), and avoid airport overcapacity. But these new rules are “disconnected from reality” Airports Council International Europe claims while the European Regions Airline Association (ERA) describes them as “detrimental” to its members.

Introducing limitations on public financing of airport developments “flies in the face of the airport capacity crunch brewing here in Europe—a move that would probably be considered foolhardy in the rest of the world,” says ACI Europe Director General Olivier Jankovec. The new economic powerhouses in Asia and the Persian Gulf area are funding and using airport infrastructure projects as instruments of economic strategy, and “Europe is cutting its wings. We feel the commission is more guided by fiscal austerity than competition concerns,” he adds.

Furthermore, the new policy will introduce discrimination in favor of the competing rail sector, making air transport the only transportation mode in Europe having to pay for its infrastructure. “The rail sector in Europe has always been hugely subsidized and yet this seems to be accepted as the norm. Where is the level playing field?,” ERA Director General Simon McNamara pointedly notes. Rail receives €32 billion ($41 bililon) in public aid every year.

The EC deems a revision of the 1994 and 2005 community guidelines on airport financing and start-up aid to airlines departing from regional airports is necessary because the aviation industry has changed considerably in the past two decades, with low-cost carriers (LCCs) now accounting for a larger share of intra-European traffic than incumbent legacy airlines. The airport sector has also transformed, with regional and local authorities investing in terminals and runways to attract the likes of Ryanair, Norwegian, Wizz Air, Volotea and Jet2.com.

The mushrooming of subsidized regional airports across the EU and the often generous handouts and ingenious support packages to—primarily—LCCs bedevil Europe's once-dominant flag carriers.

The most prominent dispute is Brussels Airlines' irritation over regional government subsidies for Brussels South Charleroi Airport and its agreement with Ryanair, but there are many similar complaints in other EU member states. There are 61 cases pending with the EU's antitrust services regarding alleged illegal public support for or by regional airports; 30 of these are under formal investigation. The EU is also investigating alleged illegal state aid to nine airlines.

EU Competition Commissioner Joaquin Almunia notes that smaller airports are key for “the accessibility needs of some of Europe's regions, [but] they are sometimes within a short distance from other airports.” France has more than 100 commercial airports, with the 10 largest (excluding the large Paris airports) handling 80% of the traffic.

As a result, infrastructure sometimes remains unused or underused and “we should avoid that airport overcapacity provides airlines an opportunity to shop around for subsidies at taxpayers' expense,” Almunia said at a briefing in Brussels outlining his new proposals. He said his department and the EC are not questioning the business model of the LCCs, which have “brought extremely important benefits to passengers, enabling millions of Europeans to travel cheaply.”

The new regulatory framework includes changes for state aid for investment in airport infrastructure, for day-to-day operating aid to airports and start-up aid to airlines to launch a new route or add frequencies.

Under the proposed new guidelines airports handling more than five million passengers a year will not be allowed to receive public aid to support infrastructure investments “because investments in infrastructure of this size can be privately funded,” Almunia asserts. For smaller facilities the principle of proportionality and transparency will apply. The aid cannot exceed 75% of eligible costs for airports with fewer than 1 million passengers annually and not more than 25% for airports with 3-5-million passengers per year. Investment costs relating to non-aeronautical activities (in particular parking, hotels, restaurants and offices) and investment costs relating to the provision of ground-handling services by the airport itself are ineligible.

Operating aid to airports is not allowed under the current guidelines and the EC's competition directorate general believes that airports should recover their operating costs from those that use them: airlines and passengers. However, the practice of subsidizing operating costs of airports via public money has become widespread over the last few years and “it would not be realistic to apply this principle today,” Almunia admits. The EC therefore proposes to allow such aid for a transitional period of up to 10 years in order to give airports time to adjust their business models. Operating aid in the transitional 10-year period is only allowed if the airport's annual traffic does not exceed three million passengers.

Simply banning this kind of support does not address the problem, ERA's McNamara contends. He cautions that the new rules will impact the launch of new routes and the viability of some existing routes to, from and between the regions of Europe.

ACI Europe's Jankovec goes a step further, warning that abolishing operating aid to small regional airports risks condemning them “to limit their development or to close down.” The problem is structural, he points out: Full-cost recovery through user charges is simply unachievable due to extremely high capital intensity and fixed costs. As a rule of thumb, airports handling fewer than 300,000-400,000 passengers struggle to recover their operating costs in Europe, and ACI estimates that 300 airports will be impacted by the new rules. Of the 460 airports in the EU, 71 handle more than five million passengers, 33 airports process 3-5 million passengers annually and the majority (338 airports) have a yearly throughput of fewer than 3 million passengers. In the latter category, 275 facilities handle fewer than 1 million passengers and 185 of these handle fewer than 200,000 yearly.

The revised draft rules allow the possibility for public authorities to give start-up aid to airlines, albeit under strict and more streamlined conditions. Only airports with fewer than 3 million passengers per year will be allowed to give start-up aid to operators for launching a new route or schedule with increased frequencies. Such support may only last for 24 months and cannot exceed 50% of start-up costs. Support will not be allowed when the city pair already is served by a high-speed rail service or another airport in the vicinity.

The proposal sanctions the specific airport/airline arrangements including marketing support, rebate and incentive plans because “a commercially justified price differentiation is a standard practice in the aviation industry”. These arrangements will only be permitted if they also would have been accepted by a private investor operating under normal market conditions.

The new rules are expected to come into force in 2014. The EC has exclusive competence in matters of state aid and the proposed regulation does not have to be endorsed by the European Parliament. Stakeholders can comment on the draft guidelines until Sept. 25.