Cypriot Air Route Development Support Scheme to benefit Larnaca and Paphos airports
Cyprus is the latest country to take advantage of the EU scheme that permits public money to be employed in the support of new European air routes. A EUR18 million plan will see airline start-up activities and marketing costs partially funded on new routes between the Larnaca and Paphos airports and airports in Ireland, Germany and Italy. Such funds have become popular but there can be a fine dividing line between what is and is not permissible.
The Cyprus Tourism Organisation (CTO) has announced details of its Air Route Development Support Scheme (ARDSS), which will see up to EUR18 million committed over three years to part-fund start-up and marketing costs for new or expanded scheduled air passenger services to Larnaca or Paphos International Airports. The scheme is being managed by TTC International, an Irish tourism consultant.
Both airports have been extensively refurbished by the Hermes Airports Ltd consortium of nine shareholding members (see Background Information, below) that manages and operates them since May-06, effectively becoming new airports. The new Paphos Airport opened on schedule in Nov-08 and within the expenditure limits established at the outset of the project. The new Larnaca Airport is to be operational by Nov-09. This new 100,000 sq m airport will have the capacity to handle 7.5 million passengers per annum. Hermes Airports Ltd has a 25-year Build Operate Transfer (BOT) concession agreement with the Republic of Cyprus for the new EUR622 million airports that involved construction of a new passenger terminal building at each site and other associated infrastructure, including aprons and runway extensions.
Biggest ever construction contract in Cyprus and the first BOT privatisation
The construction contract is the biggest ever undertaken in the Republic Cyprus, with the BOT project also being the first privatisation of its kind in Cyprus.
ARDSS aims to facilitate the island’s economic development through increased scheduled air transport services with a particular focus on generating sustainable growth for Cyprus’ tourism industry. Launching the Scheme, Ms. Phoebe Katsouris, CTO’s Director General, stated: “Competitively priced increased capacity on a regular, reliable basis between key European markets and Cyprus is central to our strategy for the industry in the medium term. This Scheme offers substantial financial support in the critical first three years of a new or expanded operation.”
Both the construction of the airports and the advent of the ARDSS have come at a time when Cyprus seeks to re-establish itself in the face of growing competition that in some cases was brought about by circumstances beyond its control. For example, in the key UK market, the most recent colonial power, the collapse of the Pound Sterling (GBP) against the Euro (EUR) has redirected British sun-seeking vacationers towards countries such as Egypt and Turkey, outside the Euro zone, where they can get a much better currency exchange rate as well as cheaper accommodation and tours. To add insult to injury some British vacationers this year will undoubtedly have chosen Turkish Northern Cyprus, where the Turkish Lira is the official currency, over (Greek) Cyprus for that very reason.
As there is no knowing if or when the British Pound will rally the CTO cannot be blamed for seeking to encourage vacationers from other European countries where the currency is at least on a par with that in Cyprus. In the most recent month for which statistics were available at the time of writing, Apr-09, UK visitors totalled 84,526 out of a total of 181,395 (46.6%) with Germany in second place on just 8.75%.
In 2008 the figures were as follows:
..so the impact of the collapsing GBP is already being felt.
Economy dominated by the service sector
The Republic of Cyprus’ market economy is dominated by the service sector, which accounts for 78% of GDP. Tourism, financial services, and real estate are the most important sectors. Erratic growth rates over the past decade reflect the economy's reliance on tourism, which often fluctuates with political instability in the region (e.g. nearby Lebanon) and economic conditions in Western Europe. Nevertheless, the economy in the area under government control has grown at a rate well above the EU average since 2000. But this prosperity will come under pressure in 2009, as construction and tourism slow in the face of reduced foreign demand triggered by the ongoing global financial crisis. Growth is expected to slow to less than 2%, which would be its lowest level since 2003.
Approved under EC guidelines
In the first stage of the ARDSS, carriers from the Republic of Ireland, Germany and Italy are being invited to submit proposals for services to commence in the summer of 2010. Further target countries are expected to be announced.
The Scheme has been approved by the European Commission under the European Union’s Community Guidelines on Financing of Airports and Start-up Support to Airlines Departing from Regional Airports (2005/C 312/01). The Guidelines are too complex to be replicated in full here, but may be found at:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2005:312:0001:0014:EN:PDF
Briefly, the Commission considers that there is a broad overlap between previous airport classification schemes (the Trans-European Network scheme, the Committee of the Regions Categorisation etc), and for the purposes of its guidelines has defined the following four categories: — category A, ‘large Community airports’, with more than 10 million passengers a year, — category B comprises ‘national airports’, with an annual passenger volume of between 5 and 10 million, — category C comprises ‘large regional airports’, with an annual passenger volume of between 1 and 5 million, — category D, ‘small regional airports’, with an annual passenger volume of less than 1 million.
The Treaty adopts a neutral stance on the question of whether a State opts for public orprivate ownership of airports. As regards the existence of State aid, the essential point is whether the beneficiary is engaged in an economic activity. There can be no doubt that airlines are engaged in an economic activity. Likewise, once an airport engages in economic activities, regardless of its legal status or the way in which it is financed, it constitutes an undertaking within the meaning of Article 87(1) of the EC Treaty, and the Treaty rules on State aid therefore apply.
In the case of the Larnaca and Paphos airports they are privately operated facilities handling over 5 million ppa (‘national airports’ category B) at Larnaca and Category C (‘large regional airports’) at Paphos, which handles around 1.8 million ppa. Generally speaking the EU tends to support category C airports over category B but all categories can potentially benefit from state aid.
Outermost region
The particular rules on state aid that apply here are those pertaining to Start-Up aid (for new airline routes), section 5 of the Guidelines. Cyprus benefits from it being considered an ‘outermost region’ of the EU, one that is more likely to need assistance with ‘accessibility’. There are no complicating factors like existing high-speed train lines in competition (which would debar the provision of aid) or lack of disclosure.
These schemes are popular throughout Europe. There have been four in the UK for example: in Scotland, Wales, Northern Ireland and in the Northwest region (Manchester/Liverpool) and usually operating within a fixed timeframe of three years. They enjoyed various degrees of success. In all cases they were to be of economic benefit to the region and predominantly of long-term benefit to business travellers rather than merely to offer more flight options to vacationers on outbound trips. The Northwest region scheme never got started but in 2008 it was suddenly re-introduced by the Northwest Regional Development Agency (a government QANGO or Quasi-Autonomous Non-Governmental Organisation that will probably be axed if there is a change of government) with a fresh emphasis altogether, that of retaining existing transatlantic services during the period of the recession. Inevitably this has raised questions of legitimacy – public money being used to ‘prop up’ failing private foreign airline services which is expressly what the EC scheme was not introduced for, as is made clear in section 5 of the guidelines.
(The NWDA is also under pressure momentarily for having appointed as its new Chairman Robert Hough, currently the Non-Executive Deputy Chairman of Peel Holdings, the ultimate owner of Liverpool, Durham Tees Valley and Doncaster-Sheffield airports and the bizjet/general aviation City Airport Manchester).
There are other potential pitfalls for airport operators. For example, start up aid to support the reduction of charges is not allowed if the airport is failing to make a profit, which appears a little contradictory, and it must not be seen to underwrite airline advertising directly.
But through this miasma of rules it does appear that the CTO, in conjunction with the consultant/advisor, has thought through the issue, especially the ‘tourism’ ones, and developed a cogent scheme that will benefit the country and its two main airports.
Background information:
- Hermes is a company registered in Cyprus - an international consortium of 9 shareholders, representing a mix of Cypriot and international partners. The consortium is made up of Bouygues Batiment International (22%) Egis Projects (20%), the Cyprus Trading Corporation (a local retail group-10%), Iacovou Brothers (a local contractor-10%), Hellenic Mining (10%), Vancouver Airport Services (10%), Aer Rianta International (Ireland) (10%), Charilaos Apostolides (a local construction company-5%) and Aeroport de Nice, France (3%);
- The EU scheme’s big brother is the Essential Service and Tourism Development Route scheme (ESTDR); the result of a study conducted by the World Trade Organisation (WTO) and the International Civil Aviation Organisation (ICAO) in 2005. Primarily, the study concentrates on the development potential of non-viable routes linking the tourism-generating countries with those that are less developed. The ESTDR is becoming recognised by the WTO as a vital element of the Sustainable Tourism - Eliminating Poverty (ST-EP) programme. The scheme is based on two main concepts; the Essential Air Service (EAS) scheme to develop passenger air service, together with the Essential Tourism Development Route concept (ETDR), which focuses on the international routes between specified tourism-generating markets and tourism-receiving markets. According to the ICAO study, states considered to be in most need of such schemes are a group of 50 classed as Least Developing Countries (LCDs) and Small Island Developing States (SIDS) or Land-Locked Developing Countries (LLDCs).