The Federal Administrative Court recently handed down a decision on the determination of charges at Zurich airport.(1) The court partly allowed the appeal brought by the Board of Airline Representatives in Switzerland, Swiss International Air Lines AG, Deutsche Lufthansa AG and other airlines, and remanded the matter to the Federal Office of Civil Aviation (FOCA) for a reassessment of the airport charges. The court set out a number of key considerations on the economic regulation of airports in Switzerland.

Facts

The Ordinance on Airport Charges entered into force on June 1 2012. The ordinance implemented Directive 2009/12/EC, which Switzerland adopted by virtue of the 1999 EU-Switzerland Agreement on Air Transport. The ordinance provides for a compulsory procedure of consultation between the airport managing body and its users. If no agreement is reached, the airport managing body may submit a proposal to FOCA to set airport charges.

After the negotiations between Flughafen Zurich AG and the airlines failed in Summer 2013, Flughafen submitted a proposal to set airport charges (operational charges, including landing and passenger charges) between 2014 and 2017. On November 14 2013 FOCA directed that these charges be levied as proposed. The airlines challenged FOCA's decision and requested the court to reduce airport charges by 26%.

Decision

EU Directive 2009/12/EC does not specify whether a single or dual till principle applies to determine the level of charges. Under the single till principle, all airport activities (including aeronautical and commercial) are taken into account. This contrasts with the dual till principle, where only aeronautical activities are taken into consideration when setting charges.

The airlines argued that airport charges are more likely to lead to more economically efficient outcomes under a single till approach, because it enables the sharing of profits generated by complementary commercial activities. Single till is an acknowledgment of the essential business partner relationship between airports and airline users. Since dual till leads to higher charges, it is not in the best interest of airlines and passengers.

The court stated that the Ordinance on Airport Charges provides for an adjusted dual till approach in the sense that the dual till principle applies. However, transfer payments of 0% to 30% of revenues can be made from the commercial (eg, car parking and duty-free shops) to the aeronautical side. While the court did not accept that the pricing mechanism provided by the ordinance is unbalanced and excessively expensive, it did state that transfer payments must amount to no less than 30% of revenues. The court was satisfied that this was the case in respect of FOCA's decision.

Regardless of the transfer payments, the dual till mechanism makes a difficult and detailed cost and asset allocation between the commercial and aeronautical tills necessary. To that end, several expert reports were produced in the proceedings. The court accepted the appeal to the extent that several cost and asset allocations provided for in FOCA's decision must be reassessed by FOCA.

Further, the court was mindful that due to a high proportion of fixed-cost driven infrastructure, the cost of capital of Zurich airport has a significant impact on the level of airport charges. It is generally understood that the return on assets to secure efficient financing in capital markets should be reasonable. While many models can be used to determine the rate of return, one of the most frequently applied models is the capital asset pricing model, which is used to calculate the weighted average cost of capital (WACC).

The ordinance defines a formula to calculate the after-tax WACC. However, in the proceedings before the court, the determination of the individual values for each parameter of the WACC was still in dispute.

While FOCA was of the opinion that – in respect of the aeronautical side of Zurich airport – the WACC should amount to between 5.8% and 6.8%, the airlines argued that a value of 3.3% as of June 30 2014 and of 3.62% as of June 30 2013 would have been correct. The court considered various expert reports and determined that the relevant WACC for the aeronautical side is between 5.8% and 5.9%.

With respect to the non-aeronautical side, the court requested FOCA to reconsider itsmethod to calculate the WACC.

Comment

As there is no final decision in respect of FOCA's decision, Flughafen cannot implement its new airport charges for the time being. It is expected that it will continue to collect the existing charges.

Some media outlets have portrayed the judgment as a victory for the airlines operating at Zurich airport, but this is not necessarily true. The court confirmed the adjusted dual till pricing mechanism. The airport's commercial activities are taken into account only to a limited extent to offset the charges cost base. Most airlines strongly support the single till principle, but it will not apply at Zurich airport or Geneva airport.

It remains to be seen whether the various reassessments which FOCA has yet to undertake will result in substantially lower airport charges.

For further information on this topic please contact Andreas Fankhauser at Baumgartner Mächler by telephone (+41 44 215 4477) or email (afa@bmlaw.ch). The Baumgartner Mächler website can be accessed at www.bmlaw.ch.

Endnotes

(1) Board of Airlines Representatives in Switzerland v Flughafen Zürich AG (June 25 2015, A-7097/2013).

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