An Oddity in the European Regulatory Space: Peripheral Flag Carriers in the Baltic States and EU Competition Law

This article examines the effects that EU state aid rules impose on the airline sectors of small peripheral Member States. By the same token, it looks at the Central and Eastern European airline sectors and examines the rationale behind the practice of states to keep alive their loss-making flag carriers. The article compares the vicissitudes of the Baltic flag carriers, Estonian Air and airBaltic. It is suggested that, behind the apparently irrational behavior, there could be found a rationale, namely the wish to offer connectivity above market level, and, with regard to poorer peripheral Member States, beyond market quality. This in turn is attributable to the wider external benefits to the domestic economy that air services bring but which cannot be internalized by the airlines. Therefore, in particular in the context of the asymmetrical integration model, which is on the rise in the EU, state aid rules are discovered to amplify the differences between the center and the periphery.