Ryanair faces de Palacio over alleged subsidies

Date: 12/06/03

By Karen Carstens

RYANAIR, the Irish budget airline that has bucked the trend by continuing to reap profits in a period of aviation-market malaise, is coming under increasing scrutiny from the European Commission following a slew of complaints about unfair subsidies from regional airports.

Transport Commissioner Loyola de Palacio, replying to a question put to her by an MEP, last week confirmed that the Commission "is currently investigating a complaint about advantages granted by Strasbourg airport [to Ryanair]".

Air France spin-off Brit Air last month suspended its London Gatwick to Strasbourg service, claiming it could no longer compete with Ryanair because the latter receives financial aid from both the Strasbourg airport and the Lower Rhine Chamber of Commerce, enabling it to charge lower fares on the Strasbourg-London route.

This means fewer choices for British and Irish MEPs trying to make it to Strasbourg in a timely fashion.

European Parliament President Pat Cox, a compatriot of Ryanair CEO Michael O'Leary, reportedly said after the Brit Air debacle that he must rise at 4am at his home in Cork to get to Strasbourg in time to open a 5pm Monday session.

But the Commission has indicated it will not launch formal investigations into the Brit Air claim or other new ones until it has looked into a separate complaint lodged last December about Ryanair receiving subsidies from Charleroi airport (also known as Brussels South).

A decision is not expected until September, but O'Leary has said he is "confident Ryanair will be vindicated".

He stresses that such deals are available to any airline, as long as it generates the traffic.

A negative ruling, however, could set the stage for a full-blown EU investigation of Ryanair's 'sweetheart deals' with a host of other airports.

"If the inquiry results in higher charges, it would have a very negative effect on Ryanair's margins," said BNP Paribas European airline analyst Nick van den Brul.

Ryanair's 31 operating margin dwarfs British Airways' 3.8, easyJet's 8.7 and the 8.6 of the granddaddy of all discount carriers, Dallas-based Southwest Airlines.

The Irish carrier, which only flies within western Europe, last week posted a 59 rise in profit after tax to €239.4 million for the year ended 31 March, on revenue that grew 35 to €842.5 million.

It has profited from the deregulation of Europe's airlines that began in 1997 by offering rock-bottom fares on short-haul flights, with revenues likely to grow by 30 a year through to 2006, according to London-based van den Brul.

The biggest savings come from flying to small, secondary airports outside major European cities. These airports, many of them former military bases, are eager to boost tourism. But Ryanair is increasingly coming under fire for the deals it has struck with many of them.

De Palacio's spokesman Gilles Gantelet last month said that several new complaints had been lodged against Ryanair with the Commission. "During the investigation we have received information on other airports besides Charleroi," he said. But he refused to divulge further details.

Industry sources, however, have said that complaints had been brought in France, Germany and Sweden. Besides the Brit Air complaint against Strasbourg, the French town of Pau has also been targeted by both a nearby chamber of commerce and by charter airline Air Mediterranée.

In the Charleroi case, the Commission launched a consultation process that ended in May, which indicated the direction the case was taking.

Under the terms of an agreement between Ryanair and the Walloon Region, which owns Charleroi airport, Ryanair pays a landing fee some 50 less than that set by the Belgian government for other airlines. The airport also contributed to the expenses of opening Ryanair's base at Charleroi.

Ryanair is also charged only 1 euro per passenger for ground handling services, or roughly one tenth of the standard price and below the actual cost of providing the service.

The airport has also set up a joint promotion and advertising service to finance the advertising and marketing of Ryanair's services to and from Charleroi.

"Regional airlines have always done deals with the regions and airports they serve in terms of introducing new services, getting some sort of contribution toward the cost of mounting a new service," said Andrew Clarke, director of air transport policy at the European Regions Airlines Association.

"What is new about the Ryanair approach is the extent and value of the deals [it] negotiates. Whether Ryanair is acting illegally, however, depends on whether this amounts to state aid," he said.

O'Leary, who has met de Palacio to discuss the investigation, has said that Ryanair could provide documentary evidence that the arrangements it enjoyed at Charleroi had also been open to other airlines.

It has claimed that it did not receive illegal state aid when establishing its hub there, adding that it was a rival airport, the national hub, Zaventem, just outside Brussels, which made the initial complaint.

The Commission, however, in its invitation for comments prior to a final ruling, said that it considers that the granting of a reduction in airport taxes to a single airline for a period of 15 years in a bilateral agreement "for which no publicity was made and which derogates from legal provisions, constitutes a fiscal derogation granted to a company" that puts Ryanair "in a more advantageous situation" than its competition.

The Commission also stated that the commitments to Ryanair by the airport and the Walloon Region therefore do "constitute state aid".