The European Commission ("Commission") announced on 28 November that it has launched a formal investigation into possible state aid involving the Dublin-based low fares airline Ryanair. The investigation focuses on two contracts surrounding Ryanair's presence at the French airport of Pau. The contract between Ryanair and the Chambre de Commerce et d'Industrie de Pau-Béarn (CCIPB) sets out the conditions for Ryanair's use of the infrastructure at the airport while the agreement between the CCIPB and Airport Marketing Services Ltd (a subsidiary of Ryanair) concerns the marketing services provided to CCIPB to promote the air route.

Following a notification by the French authorities, the Commission has decided that it currently has insufficient evidence to determine whether the contracts are compatible with the common market. The Commission's concern is that the two contracts appear to function as one agreement and that the financing by CCIPB may constitute start-up aid to the budget airline. The Commission does, however, stress that the opening of an investigation is a procedural step to allow it to gather information and does not predetermine the outcome of the investigation.

The investigation will look at whether the contracts constitute state aid and if so, whether they are in line with the Community Guidelines on Financing of Airports and Start-up Aid to Airlines Departing from Regional Airports (2005/C312/01). The guidelines set out the criteria that the Commission looks at when deciding whether to approve airline start-up incentives offered by public bodies. Considerations include:-

  • whether the new route leads to an increase in the net volume of passengers or simply to a switch between carriers or airports;
  • whether the route is viable in the long-term - it must eventually be able to at least cover its costs;
  • whether the aid is strictly linked to additional start-up costs which the air operator will not have to bear once the route is up and running e.g. advertising the new link; and
  • whether the aid complies with the guidelines in terms of intensity (i.e. amount of aid as a percentage of eligible costs) and duration (in most cases a maximum of three years).

The guidelines also contain conditions relating to the requirement for a public body to publicise its plans to provide start-up aid so that all interested airlines have the opportunity to offer their services.

The opening of this investigation will represent a further blow to Ryanair, following on from the Commission's decision to block the airline's proposed hostile takeover of Aer Lingus in June this year. (The full text of the Commission's decision to prohibit the merger following a Phase II investigation was published on 15 November 2007.) The prohibition was based on the premise that the merger would have created a monopoly or dominant position on 35 routes, significantly impeding effective competition within the EEA or a substantial part of it. Interestingly, in making the decision to prohibit the merger, the Commission noted Ryanair's reputation for "aggressive retaliation" against potential competitors who attempt to break into its markets.

The current investigation is also not the first time that Ryanair have faced difficulties in relation to state aid. In 2004, the Commission decided that certain aspects of Ryanair's relationship with the Walloon authorities and the Brussels South Charleroi Airport constituted unlawful state aid. Given that in that case the Commission requested the recovery of some of the aid granted, Ryanair will surely be watching this new investigation carefully.