State aid for airports and airlines: can small airports stand alone?

This week the EC adopted new guidelines for state aid to airports and airlines. Alongside the implementation of the new rules it also issued a press release, to clarify how these rules will be interpreted.

The background to this legislation is the rapid rise of low-cost airlines into small regional airports across the EU. Occasionally airlines fly these routes with heavy discounting of airport charges, with the airport in question sometimes even paying an airline a net positive start-up incentive to secure the route.

For a small airport in an isolated region, this is perfectly rational from an economic point of view. It makes sense for the local tourism agency, chamber of commerce and other stakeholders to work together to subsidise a new air service if the net benefit is positive to the region as a whole. A single route can bring thousands of inbound tourists, each of whom spend vital cash in local hotels, restaurants and tourist attractions.

However, at the aggregate level subsidies can become problematic, as regional airports across Europe engage in a race to the bottom, with greater and greater levels of ongoing state subsidy transferred to low-cost airlines. In some cases the level of subsidy has become wildly disconnected from any real regional economic benefit, particularly where airports are in close proximity and in competition with each other. The ‘start-up’ incentive has instead become an ongoing rolling subsidy.

The new EC rules aim to prevent operating subsidies using two criteria: the size of the airport, and a time-limited period to phase out existing subsidies.

  • Airports below a threshold of 700,000 passengers a year are able to benefit from ongoing operating aid without phase-out.
  • Airports in the range 700k-3M passengers have ten years to phase out operating aid and are also allowed to offer start-up route support for three years.
  • Airports above 3M passengers a year are not able to benefit from operating aid.

According to the recent press release the implementation will be more flexible for airports in remote regions, and public service obligation (PSO) support is not affected.

Our fare data enables us to look at each these airport categories in more detail, and assess whether routes from these smaller airports will ever achieve viability without support.

This chart shows the average fares for a leading European low-cost airline across all airports in each size category for 2013.

There is a clear relationship between the size of the airport and the fare that the airline is able to achieve. The range of this variation is nearly €8 between the smaller airports (<700k annual passengers) and the larger category (over 3M passengers). This might not seem much, but airlines operate on thin margins: in this case the airline’s total annual profit margin was only €8.17.

Airports below 3M passengers per year have similar fixed costs to larger airports, combined with high seasonality and a lack of significant opportunities for commercial revenue. This category of airport will therefore often struggle to cover its operating costs. If all operating costs are passed on to a relatively small volume of annual passengers via airline charges, the routes are simply not viable.

Based on our data, the phase-out of support for airports between 700k and 3M passengers does not reflect the marginal levels of airline profitability on routes from these smaller airports. In the absence of some level of ongoing state subsidy many thinner routes and smaller regional airports are unlikely to survive.

by Mark Scourse