Commission’s Ryanair ruling opens Pandora’s box, claim critics

Date: 05/02/04

BY TRYING to be all things to all people, the European Commission's landmark Ryanair ruling could be written off as too waffly - and too open to interpretation.

At least that is how some industry insiders see it.

"It's a bit of a fudge, really," said one aviation sector analyst, speaking on condition of anonymity.

"This is incredibly badly thought out; it's a hotch-potch of lots of different things on a very specific issue."

Even more worrisome, he warned, is that "it opens up a Pandora's box" of possibilities for legal action, from which "only lawyers" will profit in the end - to the detriment of airlines, airports and consumers.

As widely expected, Transport Commissioner Loyola de Palacio on Tuesday (3 February) handed down a negative verdict in a decision that had been postponed for months.

The Spanish commissioner proclaimed that Ryanair would be asked to repay around €4 million of an estimated total of €15m in subsidies it had received from Belgian regional authorities since setting up its European hub in Charleroi, some 40km south of Brussels, in 2001.

Although an exact figure has yet to be determined, this was a softer blow than many had expected.

"From Ryanair's perspective it's not all that bad, but from a purist's point of view of something that could have been far more clearly presented I was appalled," the analyst lamented.

"It provides a very narrow definition of state aid. . . otherwise what would be next? Are they going to say to Lufthansa, British Airways and Air France that their subsidies on fuel tax are illegal?" he added, stressing that a "broader" definition would have to encompass all the different kinds of "subsidies" in play throughout the aviation sector.

These include a lack of value-added tax (VAT) on tickets and public funds for the construction of state-owned airports or for massive expansion projects such as London Heathrow Airport's planned new Terminal 5. "The whole industry is subsidized - we all know that," he said.

But the Commission hailed the ruling as "a major decision of significance for the future of air transport by ensuring full competition between carriers".

Part of a 15-year deal, the discounts granted to the Irish low-cost carrier by the Walloon Region and the Brussels South Charleroi Airport it owns include a 50% reduction in landing charges, cut-price ground-handling fees and subsidies for the training and recruitment of staff, including pilots.

"It's the taxpayer who's paying for this," said de Palacio. "Not all carriers have been given the same treatment. I can't say they cheated, but it was hushed up. Saying we need cheap tickets is not an argument in favour of state aid."

Michael O'Leary, Ryanair's chief executive, has slammed the decision as "a bizarre ruling that interferes with the free market".

He pledged to challenge it in the European Court of Justice, and assumed he would not be alone in doing so: "We will appeal straight away. We expect to be joined by a number of other airlines and airports."

The Walloon government, to whom Ryanair must "repay" the subsidies, also hinted that they would appeal. But several other airlines, including budget carriers such as easyJet, have downplayed the ruling's impact on them, because Ryanair is by far the most reliant on deals it has struck with regional authorities across Europe.

De Palacio said the decision would lead to a €6 to €8 increase per return ticket on Ryanair's Charleroi flights. "I expect if politicians think fares will rise by €six to eight, it will be twice that," O'Leary retorted.

Still, Ryanair's business model will surely remain intact, with some analysts predicting it will clip only 2% off operating margins.

Meanwhile, opinions were reportedly divided among the College of commissioners, with Mario Monti, competition, Neil Kinnock, administrative reform, Chris Patten, external affairs, Frits Bolkestein, internal market and David Byrne, health and consumer protection, allegedly voicing strong concerns over several points in the ruling.

But de Palacio flatly denied that there had been any clashes with Monti's competition directorate, which had given the ruling the "green light".

And a Commission spokesman said any rumours to the contrary were overblown. "If there had been so much dissent, then the issue would have been put to a vote [in the College of Commissioners], but it wasn't," he said.

Still, a concerned tone crept into a statement made by Byrne after the verdict, and was also evident in an open letter that fellow Irishman and European Parliament President Pat Cox sent to the Commission on Monday (2 February).

Airports and EU regions also expressed reservations, particularly in light of the fact that the Commission has yet to deliver its promised new set of guidelines setting out what "sweeteners" airports can use to attract carriers.

In line with the ruling, these will stipulate that commercial incentives and benefits must be linked to the opening of new routes, and should not exceed 50% of the start-up costs, or run for longer than five years, after a new route is launched.

Philippe Hamon, director-general of Airports Council International Europe, said the decision "will have an impact on all airports, whether publicly or privately owned, that benefit from publicly-funded incentives to attract airlines".

He warned that "legal uncertainty will continue and the consumer will suffer" until the Commission produces its promised guidelines.

But Onno Haes, chairman of the Assembly of European Regions' (AER) regional aviation group, questioned the necessity for developing such guidelines in the first place.

"The decision should have been based on an in-depth analysis of the complexity of the issue and the diverse regional situations in Europe," he said.

"The small airport of Knock in Ireland cannot be compared to Frankfurt-Hahn in Germany and these two cannot be subjected to the same rules".

The AER, he added, "therefore questions the wisdom of the Commission's intention to establish common rules and principles for this sector-within a constantly fluctuating market, there is no room for applying a European- wide definition of 'normal operating conditions'."

Our anonymous analyst could not agree more wholeheartedly. The real problem with the ruling, he claimed, is that it fails to address the "real problem": "The Commission has watered down some of the impact. But it's a bit of a waste of time because it's not the main issue."

Instead of acting on complaints received by competitors whingeing about Ryanair's "sweetheart" deals, he suggested, the Commission should be looking into how to promote jobs, competition and travel between EU countries.

"They would have been better off just stating that state aid is illegal, full stop; what this states now is that "you can do this, but on our terms". It doesn't address the real issue [of competition]."

Moreover, he added, "there are really two issues here" that prompted the decision.

One was "competitive pressure from other airlines". But another was "pressure from French authorities" - Ryanair has also run into trouble over deals with airports in Strasbourg, where it was forced to close a route to London, and in the southern French town of Pau.

"They [the French regions] don't like private sector initiatives competing with their regional development policies," the analyst claimed.

"And Ryanair has done that by setting up a competitive framework. So they have attacked Ryanair via the EU in a kind of rearguard advance."

But there could be one upside to the decision, he added: "The only positive thing is that it may accelerate the privatization of airports - by default, not by design."

Unsurprisingly, the Walloon region has already indicated it may sell its Charleroi airport to private investors to try to keep Ryanair.

Article argues that the European Commission's ruling in the Ryanair state aid case will benefit only lawyers in the long run.