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Can EU Member States Protect Vital Air Routes After the Bankruptcy of National Air Carriers by Subsidizing Those Routes?

Can EU Member States Protect Vital Air Routes After the Bankruptcy of National Air Carriers by Subsidizing Those Routes?

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Slovenian national air-carrier Adria Airways is one of many European airlines that filed for bankruptcy in 2019. While passengers with planned trips and prepaid tickets were left to their own ingenuity, the Slovenian Government worried about the effects of Adria Airways’ bankruptcy on Slovenia’s air traffic and important airline connections from Ljubljana Airport to other important cities and regions.

Two possible solutions have been suggested should the airline market fail to replace the lost routes. The more expensive and least likely option involves the founding of a new “national” airline. The second and more likely option involves the imposition of the Public Service Obligations routes (PSOs) under Regulation (EC) No 1008/2008 of the European Parliament and of the Council of the September 24th 2008 on common rules for the operation of air services in the Community (the “Regulation”).

While the Regulation clearly states the general principle of the freedom to provide air services within the EU, Articles 16–18 enable the Member States to impose PSOs connecting an airport in the Community and an airport serving peripheral or development region in its territory or on a thin route to any airport on its territory, if such routes are considered vital to the economic and social development of the region which the airport serves. Although the Regulation does not define “thinness,” it appears, based on the existing PSOs, that routes with more than 100,000 passengers a year will not qualify.

Currently, 179 PSOs have been established in the EU, with only seven routes linking airports located in two different Member States. All the other PSOs are domestic routes, ensuring the connectivity of a remote region to one or more main cities in a Member State.

Since the territory of Slovenia is relatively small, the Slovenian government would only be interested in establishing PSOs that would connect the airport in Ljubljana to airports in other countries. Adria Airways’ routes were particularly adapted to the needs of business people and ensured great connectivity to their key destinations. And while some airlines quickly took over some of Adria Airways’ previous connections to Ljubljana, the newly-established connections are often less useful for business people than Adria Airways’ connections had been. Furthermore, several connections previously flown by Adria Airways have still not been established (especially some important connections to other destinations in CEE). Several other internationally well-connected airports are available in relative proximity of the state border (i.e., a 3-to-5-hour drive from Ljubljana), but since Ljubljana is the heart of the business and governmental activity in Slovenia, which remains a heavily centralized country, the importance of having its central region well connected by air cannot be overlooked.

The Regulation emphasizes the importance of a free market, and as an exception, the PSOs should be subject to strict requirements and limitations. However, where the free market does not ensure an appropriate level of air transportation where needed, the Member States are provided with a certain margin of discretion to judge the vital importance of a route for the economic and social development of the region the airport serves. Nevertheless, according to InterVISTAS’ 2015 Economic Impact of European Airports study, a 10% increase in connectivity stimulates the GDP (per capita) by an additional 0.5% and the GDP growth rate by 1%, and it leads to an overall increase in labor productivity. Better connectivity, therefore, also strengthens the “four freedoms” within the EU (i.e.,  the free movement of goods, capital, services, and labor).

A coherent analysis of the consequences of Adria Airways’ bankruptcy to Slovenia’s economic and social development has not yet been made, so no factual assessment regarding the justification for establishing PSO routes according to the Regulation can be made at this point. Also, although the Regulation only applies to intra-EU airline routes, the Member States still have to follow State aid rules and EU competition law when subsidizing either intra- or extra-EU airline routes, so this aspect would have to be considered as well.

What can be generally concluded is that each Member State has a mechanism to protect its vital air routes (and national interests) by establishing PSOs when the market itself does not deliver an appropriate level of air transport services. However, there would have to be a well-reasoned justification for such a decision that would comply with EU law. A bankruptcy of a national air carrier that provided its services based on the needs of the domestic market, without any other objectives, is therefore not sufficient.

By Petra Plevnik, Partner, and Masa Kramar, Associate, Miro Senica & Attorneys

This Article was originally published in Issue 6.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.