Ντοκουμέντα: Επιστολή της ΠΑΣΥΠΙ προς την ΕΕ αναφορικά με τις ΚΑ

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European Commission DG Competition - Unit E3 State aid: Industrial restructuring Place Madou 1

B-1049 Brussels/Belgium

3rd November 2014

Comments by the Union of Pilots of Cyprus Airways on the Commission's DG Competition and Subsidies investigation

Dear Commissioners,

We would like to thank you for giving us the opportunity to comment on the open investigation, report for the state aid which has been given to Cyprus Airways. Your technocratic analytical report is obviously based on the Commission guidelines of 2004 for restructuring and rescuing companies in difficulties. It our humble opinion that the new economic environment in the EU member states and in particular Cyprus and Greece render the 2004 guidelines outdated in view of the unprecedented economic situation faced by some EU member states.

It is believed that the exceptions specified in articles 107 – 109 TFEU should be interpreted more widely. The decision by some EU institutions to bail out the two largest banks which was imposed on Cyprus in order to save the economy, has resulted in a dramatic increase in unemployment. The same effect of the economic situation which has resulted in exceptionally high unemployment figures in most of the EU member states particularly in our region, further complicates the proper socioeconomic equation.

Our organization would like to expand on the list of factors shown below and explain the situation in more detail. Furthermore we kindly ask the Commission and the Council to consider seriously our views before applying strictly the 2004 criteria exceptions.

Taking into account the present economic environment we believe that, under the competency of your office, the guidelines of 2004 should not be strictly interpreted when considering state aid in remote areas bearing in mind the present economic situation. These guidelines, in our opinion, should even be amended in the case of Cyprus Airways as well as other cases involving other remote islands which are part of the European Union. This is becoming more important in view of the Commission’s recent decision for a policy change with the introduction of the new aviation guidelines of 2014 concerning cases of airport and airline subsidies.

1 MEMO/14/121 20/02/2014  Here below is a list of issues which will be explained in more detail further on and, according to our opinion, the Commission has to answer positively.

1. Is regional European competition distorted by the small market size of 7% which Cyprus Airways has?

2. Do the incentives given to low cost carriers by the Hermes airport company constitute state aid? Is there an abuse of lower fees offered to the low cost carriers which result in the cannibalisation of the small market of Cyprus? Is there a long term consumer benefit? Does the Hermes Airports dominant position on the island constitutes an abuse of this position?

3. Dominance of Aegean Airlines in the region. Is there an abuse of this dominant position?

4. The island of Cyprus is under severe austerity measures imposed by the IMF and the European Central Bank. These measures constitute unprecedented circumstances which have never occurred in any member state. The exceptionally high unemployment rate in Cyprus has created various social problems. Please note that the EU citizens of Cypriot nationality have lost their long term personal bank savings and also their pension and provident funds because of EU political agendas.

Is this due to the reluctance of Member State governments and/or the EU to regulate corporate governance for the banking institutions as well as for the public and private companies so that their executives and boards of directors would properly exercise corporate governance as required by the law?

5. Ercan, the illegal airport in the Turkish occupied area which is in close proximity to Nicosia, operates without EASA and/or ICAO approvals on security, insurance and safety. Various UN political resolutions have condemned the unilateral declaration of an independent state in the northern part of Cyprus. Does the Commission ‘facilitate’ Turkey to achieve their long term target for the international recognition of Ercan as a legal airport by closing Cyprus Airways and allowing European citizens to use Ercan ? Which is the primary obligation by the Commission? to assist a Member State or a non Member State i.e. Cyprus or Turkey?

6. How does the Commission feel about the safety and security of European citizens using an airport not properly supervised by the appropriate international authorities responsible for safety and security?

The main job of the Commission is to ensure the correct implementation of mainly the Treaty articles. Articles 101 and 102 are designed to protect against agreements, cartels or dominant position which may result in market abuse. None of those factors can be established or founded in the case of Cyprus Airways. Since the accession of Cyprus to the EU there have been no allegations against the Cyprus government and/or the management of Cyprus Airways for trying to distort competition.  The Commission’s report of 20142 is a technocratic analysis based on the outdated guidelines of 2004. By going through the report it can be deduced that the Commission is trying to regulate the present market failure based on an old regulation. It is increasingly becoming a necessity for the 2004 guidelines to be amended considering the present economic and social conditions in our part of the European Union region. To support this argument there is evidence which can be found in the ECJ’s decision of Lufthansa v Hahn as well as the new Aviation guidelines 2014 for airports and airlines. These decisions cry out for amendments on the guidelines for restructuring companies in difficulty. The 2004 guidelines are outdated and do not reflect the spirit of the Treaty Articles and the exemptions laid down. The long delay from 2004 to 2014 to amend the regulation is a major contributory factor towards the financial difficulties faced by some airlines in the European Union. This argument will be further explained below.

2 European Commission - IP/14/107 04/02/2014

The 2004 guidelines were initially created with the aim of regulating state aid to problematic companies bearing in mind fair competition within the single market. It is submitted that for the above reasons Cyprus Airways does not fall under those guidelines at all. It is a completely different situation which falls outside the scope of these guidelines. The guidelines were designed to prevent distortion of competition at the present time or a possible distortion in the future. The initial question that the ECJ will need to reply to is: Will completion in that market area be distorted or affected? Then the Commission should apply the old guidelines 2004. If competition is not affected through the provision of state aid for exceptional reasons then the derogation in the relevant article applies. If a case goes before the ECJ for a decision, we are certain that the Court will consider this issue. Is it reasonable under those circumstances not to exempt a company from regulation and apply all the guidelines? Or is it reasonable under the present circumstances to follow the derogation using the main primary rule of reason in order to apply the article exemption?

It is believed that the ECJ will defiantly take into account the proportionality principles of the EU to examine whether strict adherence to the 2004 guidelines is proportional under the present socioeconomic circumstances. It is submitted that Cyprus Airways has not affected competition in the past, nor will it be in a position to distort competition in the future due to the small market size of Cyprus.

The single market or any intra European trading rules will not be affected. It is also submitted that Cyprus Airways has never abused its position or used any anti competitive action in order to distort competition. On the contrary, some competitors have used predatory pricing for many years sometimes selling below cost, in order to gain a market share from Cyprus Airways. They were able to do so by abusing airport state aid as well as aid received from the Tourism Organisation which is also part of the state. These airlines promised increased numbers of passenger movements but failed to do so. This kind of state aid has not been regulated so far through Commission directives and/or guidelines. Some of those airlines have not only benefited from the Cyprus airports’ ‘incentives’ but also benefited from state aid received from other European airports.

Despite the fact that such a kind of market abuse was known to the European institutions including the Commission, companies like Cyprus Airways were not adequately protected. This is one of the main reasons why Cyprus Airways has ended up having a small share of the market. Specific operators have used predatory pricing as a result of indirectly receiving state aid. Such anti-competitive practices should not be allowed by the Commission. The Commission should protect small airlines from such abuse by certain operators particularly the so called ‘low cost carriers’.

Your office has failed for years to regulate such a kind of abuse. On the contrary, the real and undisputed need for cash from Cyprus Airways following the economic crisis has been under the microscope of the Commission. Your office has opened an investigation based on the guidelines which were designed bearing in mind the economic circumstances prevailing in 2004. At present, the main principles of the EU concerning proportionality should bear more weight than the 2004 guidelines.

It is submitted that paragraph Para 31 of the Commission’s MEMO/14/121 20/02/2014 states the following:

‘31. What about aid to companies in financial difficulty?

The conditions under which Member States may grant state aid to companies in financial difficulty are not set out in the Aviation Guidelines, but in the Commission's Rescue & Restructuring Guidelines. Such aid can only be granted under strict conditions, ensuring that the aided company will become viable without continued state support, that the company contributes to the costs of the restructuring and that the distortion of competition created by the aid is effectively off-set.’

The above should apply to state aid from now on and provided that both state airlines and low cost carriers are both regulated in the same way and at the same time. It is submitted that strict adherence to the Commission’s Rescue & restructuring Guidelines is disproportional and falls outside the principles of the European Union. On this point we reserve our rights under the Treaty Articles. Carriers like Cyprus Airways have suffered substantial losses mainly due to the absence of aviation guidelines which should have been in place in order to prevent such eventualities.

It is not our intention to claim that Cyprus Airways should be exempted from all the regulations. However the failure to regulate other indirect forms of state aid makes it obvious to a reasonable bystander that the Commission is rather discriminatory against Cyprus Airways.

The principles of non discrimination and proportionality are the major principles which govern the foundation of the European Union.

The Commission’s press release for Cyprus Airways in February 2014 indicates the intention of the Commission to apply strictly the 2004 guidelines. However, in our view, the whole picture should be carefully examined before applying strictly secondary legislation.

The Treaty articles have precedence over what the ECJ referred to in various cases as secondary legislation. Secondary legislation should be applied after considering the rule of reason before making a final decision which may adversely affect the EU citizens’ family lives. This is why the ECJ is now more often referring to the Charter of Fundamental Rights to protect family life and generally the living conditions of the EU citizens. Family life and unemployment has recently been recognised by the EU Member State leaders as having primary importance compared to a presumed distortion of competition. The question which should be answered is the following: Is the balance between protecting a potential abuse of competition by Cyprus Airways so threatening that it is imperative to disrupt 1000 family lives in contradiction with the Charter of Fundamental Rights of the EU?

Cyprus Airways is also local company which contributes to the GDP of Cyprus and should remain as a local registered company under the present economic situation. If the revenue generated by the market share of Cyprus Airways is taken up by foreign carriers then the GDP will be significantly reduced. Your office should give the opportunity to a remote region such as the island of Cyprus to increase its GDP and encourage the state to refrain from actions which will result in further reductions to the GDP.

By examining the effect of the state aid given to Cyprus Airways, it is submitted that the competitor carriers have not been adversely affected and that there will be no distortion of competition in the future. On the contrary, competitor airlines have benefited by the downsizing of Cyprus Airways by increasing the frequency of their flights and receiving incentives by the airports operator in order to fly to new destinations.

We kindly request from the Commission to consider the fundamental rights as described above. We do not wish to expand further by including cases were the ECJ has held that the citizens rights are more important than commercial interests.

Since the European Council leaders have recently declared that their primary objective is to reduce the unemployment numbers within the EU, it would not be prudent, in our view, to shut down problematic companies based on guidelines which were established 10 years ago just because a competitor carrier(s) has complained that his business maybe adversely affected in the future without substantiating such a claim. It should be noted that the guidelines were established when the economic environment was substantially different from what it is today.

Following the bankruptcy of a company with the excuse of avoiding a possible distortion of competition in the future, a new problem of unemployment will be created. This will mean that the national governments will have to pay for unemployment and other social benefits for a substantial period of time and then use EU funds to create new jobs in an effort to reduce the exceptionally high unemployment figures. It is imperative to find the correct medium and balance the two aspects for the benefit of all EU citizens.

We believe that the European Commission should concentrate on two major issues:

1. To ascertain that the politically appointed Board of Directors of Cyprus Airways has restored the company’s long term viability.

2. Make it clear and demand from the Cyprus government to comply with this rule. Make it clear that the government’s inefficient management of the company without proper corporate governance, is in line with the Commission’s observations should push for proper corporate governance. It is necessary that companies for which state aid has been approved become healthy and will not require further state aid in the future. In our opinion, this should be the correct approach for the benefit of the employees and the EU citizens in general.

In our opinion, all other major limitations laid down in the guidelines of 2004, should be viewed in a constructive manner rather than applied strictly so as to compel a company to wind down under the circumstances. Limitations like the own contribution and the 10 year limit should not be strictly applied particularly in remote regions in view of the current economic conditions.

According to the primary European Law Articles 101 and 102 of the Treaty of Functioning of the European Union (TFEU) as well as the Commission’s relevant decisions, it has been determined that companies having a market share below 30% escape any competition regulation due to the insignificant market effect. Cyprus Airways, which has less than 30% of the market share, currently operates flights only from Larnaca airport. The actual movements from Larnaca airport have decreased from 36 % to 15% during the last two years. If the movements at Paphos airport are included then this percentage is reduced even further.

In this respect the operation of flights by Cyprus Airways is not so significant to distort competition. Similarly it does not affect competition in any other Member State to which it operates. If we specifically analyse the movements to the Greek airports of Athens and Thessaloniki, it can be seen that at present the capacity of Cyprus Airways is reduced well below the competition level. The same occurs with the Russian and Israeli Airports.

It is submitted that articles 107, 108 and 109 of TFEU are intended to supplement the competition articles 101 and 102. It is further submitted that the case of Cyprus Airways should not only be examined by making reference to the state aid exemptions laid down in Articles 107-109 TFEU but also whether Cyprus Airways has the capability to infringe articles 101 and 102 of the TFEU.

It is submitted that the 30% market share limitation should be seriously considered before making a decision about Cyprus Airways. Following the drastic downsizing of the company’s fleet and route structure, it is evident that Cyprus Airways does not have the capability to distort competition.

Specific comments on the European Commission’s report issued for Cyprus Airways in February 2014:

Initially we would like to give our interpretation of Article 107 TFEU by making reference to the exemptions bearing in mind the present economic situation in Europe and the island of Cyprus in particular.

Article 107 TFEU

‘Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.’

In our opinion this Article considers that the provision of any kind of state aid in favour of an undertaking which will actually distort or threatens to distort competition as being incompatible with the internal market, in so far as it affects trade between Member States. We have explained above that evidence shows that the severe downsizing of the Cyprus Airways fleet and consequently the route structure during the last 3 years, indicates that competition has not been affected at all and will not be distorted in the future through the use of any form of state aid. An airline with 6 aircraft cannot have the correct frequency and the network to compete with an airline with 30 or 100 aircraft. The Commission has failed to indicate evidentially how the main articles 101 and 102 TFEU are entrenched. The actual data indicates that the competition carriers have captured a significant market share from Cyprus Airways. A real market analysis will indicate the exact percentage of market share reduction previously held by Cyprus Airways. It is submitted that the Commission has to show exactly in what respect there has been a distortion of competition in the Cyprus region and how Cyprus Airways has contributed to this effect.

2. The following shall be compatible with the internal market:

(a) Aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;

(c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid Is required in order to compensate for the economic disadvantages caused by that division. Five years after the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the Commission, may adopt a decision repealing this point.

Based on the article 107 (2) (b) we state and claim that the economic austerity measures which the Cyprus citizens have suffered during the last 14 months include pay cuts for all employees and bank bailouts in order to save the banking system. The banking institutions are considered exceptional occurrences which are caught under the meaning of the Article. What could be considered as exceptional other than EU citizens and undertakings loosing cash money saved in a bank account? Additionally and as a consequence, 20% of the working population in Cyprus have lost their jobs because of measures imposed by a European institution. We consider that this is the meaning of state aid having a social character as per article 107(2) (b).

‘3. The following may be considered to be compatible with the internal market:

(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic and social situation;

(b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State;

(c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest; (e) such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.

In case the European Court of Justice is called upon to interpret the above article using the teleological approach that it usually takes, in our view it can be quite certain that the court will use the exact wording and meaning of the exemptions laid down in Article 107 (3) (b) and (c). It will be more likely for the court to conclude that a number of undertakings in Cyprus are indeed in need of state aid or even European aid in order to help the citizens achieve a good standard of living following the serious disturbance of the economy of the Member State.

In any case if the Commission considers that the 2004 guidelines are too restrictive and do not allow approval of the state aid granted to Cyprus Airways then Article 107(3) (e) provides the channel for requesting specific authorisation by the Council. It is submitted that the aims which have been put forward by the European leaders during the recent meetings of the European Council, provide some guidance on how to treat cases like Cyprus and Cyprus Airways. The loss of the citizen’s deposits and the high level of unemployment have been a serious concern to all EU leaders.

It is our kind request to the Commission to go along with the aims and goals of the EU leaders by referring to the severe distraction to the Cyprus economy and its effect on the citizen’s family lives as a priority instead of protecting possible or presumed competition distortion by following the strict outdated guidelines.

After all your office has the competency to enact secondary legislation at a specific moment in time. However any new legislation should be appropriate and take into consideration the current economic circumstances. If circumstances change in the future then legislation should be amended. We fully understand that the Treaty Articles are primary law and can only be changed by the EU Council or the EU Parliament.

Article 108 TFEU provides competencies to regulate state aid when a Member State is in breach of article 107. This is derived from Article 108 (2). It provides the competency to the Commission to intervene and take corrective action against breaches of Article 107 or in cases where state aid has been misused. It can be understood that the Commission has to prove that the state aid given to Cyprus Airways is caught under article 107 and actually competition has been distorted or will be distorted in the future or that the given state aid has been misused by Cyprus Airways in order to gain a competition advantage.

It is submitted that this is the correct interpretation of the aforementioned two Articles. It can be argued that under the circumstances both of the limitation provisions laid down in the two Treaty Articles have not been infringed by the Cyprus State and Cyprus Airways. In our opinion that the primary law i.e. the Treaty Articles, should applied under the present circumstances. If the current economic circumstances were similar to those prevailing 4 years ago then obviously the 2004 guidelines would have been applicable. However we believe that under the exceptional economic distortion prevailing today, such guidelines should not be applied.

Nevertheless, in our opinion, the 2004 guidelines cannot be discarded altogether. Certain provisions must be fully complied by the State of Cyprus and Cyprus Airways. The fact that the State of Cyprus and the government are facing an unprecedented situation with regards to the economy, the banking system, unemployment as well as lack of liquidity and growth have tremendously affected the lives of the Cypriot citizens. This has been recognised in the Commission’s report C (2014) 470 final Para 15. In addition, your decision under the Treaty Articles to include Cyprus as a remote island makes our points more prominent.

It is our opinion that the Commission must insist on the following conditions to be fulfilled by the State and Cyprus Airways before approving the given state aid:

1. Viability

The business plan for Cyprus Airways should be viable so that no more state aid will be required in the future. This will eventually lead the government to privatise the company.

2. Correct structure and cost.

3. Less government control on Cyprus Airways.

4. The present fleet size and route structure is not enlarged using the state aid. Expansion will only be possible if and when new private money is invested in the airline.

The market share of Cyprus Airways is currently below 15% and possibly even lower than 10% for the year 2014. It is broadly defined by the Commission Regulation EU No 330/2010 that undertakings which have a market share below 30% are not capable of affecting competition. It is submitted that this principle may apply to the Cyprus Airways case. If in the future Cyprus Airways makes an agreement or any concerted practice to abuse competition, then this agreement will not infringe article 101 of the TFEU.

Similarly and in accordance with the proportionality principles which have been developed through the years by the ECJ, it can be argued that Cyprus Airways will not be able to distort competition if its market share is below 7% in most destinations and below 15% in others. Even if the state aid already given had been used for that purpose, then no significant distortion of competition could be achieved. It is submitted that the Commission should prove the degree of distortion, if any, by using a proper market analysis.

The two state airlines Cyprus Airways and Eurocypria Airlines have helped Cyprus to develop its tourist industry during the last 30 years. Both airlines together had a capacity of up to 18 aircraft in the 90’s. The revenue generated by the two airlines was more than 5% of the Cyprus gross domestic product. That was a substantial boost to the economy, the employees working for the two airlines, as well as the local associated companies related to the industry. The revenue generated by Cyprus Airways in 2004 when Cyprus joined the EU was 310 million euro which amounted to 3.9 % of the Cyprus GDP. The number of employees for both airlines at the time was in excess of 2000. The failure of the politically appointed Board of Directors to move fast enough in order to make the airline financially compatible with the bigger and more efficient European airlines resulted in continuous losses for Cyprus Airways. During the following 5 years Cyprus Airways employment numbers went down to 1100.  The Hermes Airports company commenced operation of the two airports of Cyprus in 2009. The introduction of the incentive scheme of reduced airport fees for low cost carriers, in fact killed any prospect for Cyprus Airways or Eurocypria to return to profitability.

The revenue generated by Cyprus Airways is down to less than 90 million and the number of employees will be reduced to 400. Looking at the big picture it can be argued that 50% of such a failure is contributed to the inability of the Cyprus Airways Board and the management to adapt fast enough to changes in the market so as to face competition and 50% due to the inability of the Commission or the local government to regulate the advantage of reduced fees provided by the airports operator to low cost airlines.

The final result has been devastating for the Cypriot employees working in the airline industry. The revenue generated by passenger traffic to and from Cyprus is now distributed mostly to non Cypriot carriers. For example Cyprus Airways stopped flights to Birmingham and Manchester in the UK. The revenue generated by operating to these two destinations is currently earned by UK companies. One could argue that this is the basis of the creation of the single market. Our view is that free competition is not a level playing field for every player. The size of an airline matters. Larger airlines have the power to push smaller players out of the market in the long term.

The 2004 guidelines are favouring larger undertakings in such situations. A striking example is Cyprus Airways which, through the years has achieved revenue of 310 million euro in one particular year. Such revenue has reduced to less than a third mainly due to inefficiencies in the regulation for airport state aid and the inability of the management to adapt fast enough to changes in the market. If there is an analysis of specific routes it can be observed that larger airlines have benefited as a result of the withdrawal of the Cyprus Airways flights. We do not claim to be against the single market. However we believe that better protection can be offered to small companies like Cyprus Airways under the present economic climate through a revised set of rules and by focusing on the idiosyncrasies of Member States which are remote islands.

It is worth mentioning that the state aid which was approved by the Commission in 2007 was not a real help to the capital base of Cyprus Airways. It was wrongly conceived and in fact created more problems in the cash flow of the airline. The Cyprus Government has put Cyprus Airways in a more difficult position by providing just a loan guarantee instead of a cash injection to restructure the airline. As a consequence, and following the economic crisis of 2013, Cyprus Airways has not been able to fully repay the loan of 70 million euro which was provided by Hellenic Bank. In our view the correct move at the time should have been to increase the capital base of Cyprus Airways by 70 million euro. It was a wrong political move which was authorised by the Commission and deepened the cash flow problems faced by Cyprus Airways. That specific loan balance should have been excluded from the present equation if we want to be fair and proportional to the relevant facts.

In paragraph 50 of the Commission’s press release it is mentioned that the Cyprus Government recognises that state aid may distort competition. Please allow us to comment on the fact that the state aid which is indirectly provided by Hermes Airports Ltd to low cost carriers has created a major deficit for Cyprus Airways. Hermes Airports can be considered as an emanation of the State providing a public service (see the case Foster v British Gas). The Hermes Airports subsidies plan was designed in such a way as to exclude Cyprus Airways from receiving a benefit similar to its competitors. The Cyprus Government has given millions of Euros to low cost airlines in order to attract tourism and maintain the revenue coming from the tourist industry during these difficult years. However this kind of subsidy resulted in the distortion of competition against Cyprus Airways.

The question to be asked is whether the provision of specific incentives to low cost carriers was compatible with competition in the market segment of Cyprus Airways. Based on the decision of Lufthansa v Frankfurt Hahn airport and other similar cases against Ryanair, we submit that the state aid given by Hermes Airports in association with the Cyprus Government was incomparable with competition law. It is also submitted that these low cost airlines which receive state aid from Hermes Airports, have used predatory pricing and have abused the lower cost benefit through lower airport fees. This is a real breach of the primary law laid down in Articles 101-102 of TFEU. A large percentage of the passengers using the low cost carriers are local Cypriots. The low cost airlines have cannibalized the Cyprus market in contradiction to their contract with Hermes Airports. That was probably the biggest blow on the revenue of Cyprus Airways.

It is well known that the same practice occurred in a number of regional European airports placing certain low cost carriers in an advantageous position. It was quite clear that such practice constitutes state aid in an indirect way. Despite this the Commission or the local Cypriot Competition Committee did not open an investigation to stop the airport subsidies in order to protect Cyprus Airways or other carriers from unfair competition. As a consequence the revenue of Cyprus Airways has been declining from 310 million to 100 in a period of a few years. We fail to see any kind of protection for Cyprus Airways from unfair competition practices carried out by the Hermes Airports company. It is submitted if a question is referred to the ECJ, the court will take into consideration the full picture before making a decision. The Cyprus Airways employees were the only party to suffer due to the losses incurred as a result of such a practice.

It is submitted that the Commission has the obligation to examine the case of rescue aid given to Cyprus Airways in conjunction with the guidelines for aviation of 2014. The following question has to be answered: ‘’what is the degree of distortion of intra-community trade? Is Cyprus Airways capable of distorting competition at present or in the future using the state aid provided? Will intra- community competition and trade between Member States be affected in a manner which might harm the attainment of the objective of the single market? Has Cyprus Airways used any techniques prohibited by Article 101 of the TFEU in order to abuse the competition?

It is our position that the incentives given by the Hermes Airports to low cost carriers should not be viewed as grandfather rights. Such rights have evidently distorted competition against Cyprus Airways and therefore the Commission should make every effort to restore the damage caused to the company. We strongly believe that in case Cyprus Airways proceeds with ligation on this issue to the ECJ, the court will most probably restore such damage.

In the case of Lufthansa v Frankfurt Hahn airport, the ECJ confirmed that preferential treatment in the form of low airport fees and other incentives with a financial benefit to low cost carriers constitutes state aid and was an infringement of the EU competition law. Low cost airlines have used predatory pricing thus distorting competition.

Most airports in Europe offer public services on behalf of the state. According to case law, (see Foster v British Gas plc (1990)), these airports are emanations of the state. Therefore, the EU legislation and the Commission directives, as well as the European Court of Justice (ECJ) decisions, are directly applicable on the airports’ management. It has been held in various cases that any reduction in fees or service charges, by those airports to any airline constitute state aid3. Selling below cost can be a selling arrangement caught by Article 34 TFEU. See the case of Keck.

3 Ryanair Ltd v Commission, Deutsche Lufthansa AG. v. Flughafen Frankfurt-Hahn GmbH

In the case of Cyprus, the low cost airlines which compete against Cyprus Airways have used practices which hinder competition. The Commission or the local competition office failed to regulate the provision of indirect state aid so as to offer protection against unfair competition practices.

We believe that now is the time to take into consideration all these anti completive and abusive actions. How much of the total revenue of Cyprus Airways was lost due to the poor management abilities and misfeasands of Cyprus Airways managers and how much was lost due to the unregulated competition from low cost carriers?

Here is an extract from the Commission’s guidelines of 2004 ‘’ In particular, this could be the case where the aid is necessary to correct disparities caused by market failures or to ensure economic and social cohesion. ‘’

Furthermore consideration should be given to the fact that Cyprus Airways has increased its share capital in order to keep the airline’s cash flow at sustainable levels during the economic crisis. The response from private shareholders or from the general public was negligible for the obvious reasons of the economic situation at the time. In addition, Cyprus Airways has sold all its assets so as to meet the EU guidelines of 2004.

Aid limited to the minimum: real contribution, free of aid

43. The amount and intensity of the aid must be limited to the strict minimum of the restructuring costs necessary to enable restructuring to be undertaken in the light of the existing financial resources of the company, its shareholders or the business group to which it belongs. Such assessment will take account of any rescue aid granted beforehand. Aid beneficiaries will be expected to make a significant contribution to the restructuring plan from their own resources, including the sale of assets that are not essential to the firm's survival, or from external financing at market conditions. Such contribution is a sign that the markets believe in the feasibility of the return to viability. Such contribution must be real, i.e., actual, excluding all future expected profits such as cash flow, and must be as high as possible.

Cyprus Airways has even sold the only one valuable and essential slots at London Heathrow. It is well established that the last remaining slot was essential to the survival of Cyprus Airways. This indicates the willingness of Cyprus Airways to follow strictly the guidelines with regards to the own contribution. However, the company needs time to establish its viability. Following this slot sale there is a monopoly on the LCA-LHR – LCA route by British Airways. This is the only airline that flies to LHR from Larnaca. The question to be raised is whether the Commission will regulate this kind of situation at some stage in the future or whether such a situation falls outside the guidelines. We believe that articles 101 and 102 TFEU will be infringed in the future and competition will be distorted. On the other hand, Cyprus Airways will become bankrupt if it is asked to repay the state aid received. Certain routes currently operated by Cyprus Airways to Greece, Bulgaria, France and Russia will also have monopolistic status in such an eventuality. In paragraphs 15 and 16 of the Commission’s report Feb 2014 there is an accurate description of the Cyprus economy. The implications on the Cyprus citizens are much more prominent than their European counterparts living in other countries of mainland Europe. As an isolated island in the Eastern Mediterranean it is difficult for families to move to neighboring European countries to work. An employee in Cyprus who lost his job will need to relocate or he will have to use a plane daily in order to go to work. This is a completely different situation compared to an EU citizen that leaves in Vienna for example. He can drive to work in a different country and be able to go home for the night or for the weekend. These are factors need to be taken into consideration when the Commission will draft a plan to reduce unemployment in Europe.

It is understandable that large airlines have the financial power and stamina to face the abuse of competition by the low cost airlines for longer periods of time. They also have the capacity to do this. On the contrary smaller airlines like Cyprus Airways and Air Malta do not have the financial strength to lower prices below cost in order to oppose the predatory pricing practices by the low cost airlines which have the support of the regional airports through illegal subsidies. If the Commission fails to correct such anti competitive practices, then the smaller airlines will become insolvent in a very short period of time. This is what happened in Cyprus during the last few years. Cyprus Airways should not be penalized to that extend as a result of the Commission’s failure to limit such a kind of distortion of the internal market.

Furthermore we attach numerous letters from the IATA Head Office demanding lower airport fees by Hermes Airports. Hermes Airports, using its dominant position as the operator of both airports in Cyprus, has been charging all airlines certain fees without having the right to do so. One such example is the fuel throughput fee. That was done in concert or through a tacit agreement with the Cyprus government which receives 30% of the airport taxes according to the BOT agreement. Cyprus Airways has been penalized more than any other company which uses the airports since its base is in Cyprus.

Specific comments on competitive airlines in the region.

By examining the balance between the competitive airlines in the region, we submit that companies like Ryanair and other low cost have carriers have abused the Commission’s inability to regulate airport subsidies and similar practices. A careful analysis into the decline of Cyprus Airways market share and consequent revenue indicates that the major reason as to why Cyprus Airways lost 70% of the market share was due to unfair competition and predatory pricing by certain low cost airlines. For the last 6 years, the inability of the Commission to regulate state aid in the form of airport subsidies to those airlines has adversely affected the ability of Cyprus Airways to maintain its market share.

This is a clear distortion of competition as described in the articles 101 and 102 of the TFEU. At the same time your office receives complains by airlines such as Ryanair which claim that the Cyprus government is providing state aid to Cyprus Airways. A possible positive response to such complaints would result in the bankruptcy of the local carrier, leaving Ryanair and/or Aegean to secure a dominant position in the region. We believe that such practice is contrary to competition justice and the basic principles that the EU is founded upon. By considering the 2014 aviation guidelines and the recent decision against Ryanair for receiving illegal subsidies from the French airports of Pau Pyrénées, Nîmes and Angoulême, we are certain that a careful analysis of the incentives provided by Hermes Airports to the low cost carriers will reveal that these incentives constitute state aid which is incompatible with the EU 2014 aviation rules. We therefore kindly ask you to reconsider the reasons for the market failure in the region by balancing out the adverse effect of the absence of regulation for airport subsidies.

It is our view that the approval of the state aid granted to Cyprus Airways will be a justified remedy for the failure of the government and the Commission to regulate airport subsidies provided by Hermes Airports and the government to low cost airlines and such as Ryanair. We believe that a reasonable bystander such as the ECJ will decide that this is a fair and reasonable remedy under the prevailing circumstances in the region.

Furthermore by examining the reasoning of the Commission’s decision to allow the merger of Olympic Air and Aegean is presumed to be outside the scope of article 102 TFEU. Following the takeover of Olympic, Aegean airlines now occupies a dominant position in the Greek region. A possible winding down of Cyprus Airways will strengthen even further the dominance of Aegean Airlines in the area for a certain time period until other players join the market. Consequently, Aegean Airlines will grab the opportunity to abuse the market by increasing fare prices to the detriment of the consumers.

The following is a quote from the press release European Commission - IP/13/927 09/10/2013):

‘Aegean would become the only significant domestic service provider and would capture Olympic's current market shares. Therefore, with or without the merger, Olympic would soon disappear as a competitor to Aegean. Thus the merger causes no harm to competition that would not have occurred anyway.

The Commission's Vice-President in charge of competition policy, Mr. Joaquín Almunia, stated: "It is clear that, due to the on-going Greek crisis and given Olympic's own very difficult financial situation, Olympic would be forced to leave the market soon in any event. Therefore we approved the merger because it has no additional negative effect on competition."

Furthermore, the market investigation has confirmed that there is no other credible purchaser other than Aegean interested in acquiring Olympic. There has also been no expression of any credible interest in the acquisition of Olympic's assets including its brand. Consequently, the most likely scenario is that absent the transaction, Olympic's assets would leave the market completely.

The Commission has therefore concluded that any competitive harm caused by Olympic's disappearance as an independent competitor is not caused by the merger. As a consequence, the merger is compatible with the internal market and must be authorized.’

The Commission’s reasoning was simple: The merger will be allowed to go through because in any case Olympic Air will leave the market and Aegean will take the business anyway. And due to the financial crisis in Greece it would be better to allow Aegean to dominate.

In the case of Cyprus Airways your reasoning is completely the opposite and could be characterized as discriminatory. A possible justification of disapproving the state aid provided to Cyprus Airways would be to strictly adhere to the old guidelines of 2004 without considering the fact that the financial situation of the Cyprus State is even worse than that of Greece. In Cyprus the bail out of the two major banks resulted in deposit losses for a large number of citizens as well as pension and provident funds. It is well known that the biggest blow to the Cyprus economy was  the exposure of the Cypriot banks as well as other local companies and semi government organizations in the Greek market. In case the Commission decides that it is not prepared to exempt Cyprus and Cyprus Airways from some of the old guidelines of 2004 the consequences for Cyprus Airways will be devastating.

However, in such a case, we can come to the conclusion that the Commission’s decision on two different cases but quite similar will differ. In the case of Aegean Airlines the merger with Olympic was allowed by circumventing certain provisions of the 2004 guidelines. In the case of Cyprus Airways however, a possible decision to disallow the given state aid will mean strict adherence to the guidelines. It is submitted that a negative decision for Cyprus Airways will be incompatible with relevant ECJ decisions and the principles of proportionality and non discrimination which are safeguarded by the EU Treaty and the Charter of Fundamental Rights.

In his own words, the Commission's Vice-President in charge of competition policy, Joaquín Almunia stated that due to the financial crisis the merger of Aegean and Olympic will have no additional effect on competition. We therefore pose the following questions:

 Will the approval of state aid for Cyprus Airways under the present circumstances have an adverse effect on competition?

 Or is the Commission favoring only private and low cost airlines?

 Does the Commission believe that the interests of the EU citizens are better served by the current muddle regarding competition or through the protection of their human rights and welfare?

It is not our intention to be too critical towards your office or the Cyprus government. We always endeavor to suggest reasonable solutions which are in the best interest of all the EU citizens. It is our firm position that Cyprus Airways should become a viable business so that it will not require any additional state aid from the Cyprus government. The government should be forced to complete the ongoing restructuring of Cyprus Airways. The government should be given time to complete the restructuring, and then proceed with the privatization of the company through the use of open and transparent procedures.

These steps should be monitored by the Commission. The subsidies provide by Hermes Airports should become compatible with the 2014 Airport and Airline guidelines. We strongly believe that uniform airport changes should apply to all airlines thus abolishing the current incentive schemes which are in favor of Ryanair and other low cost carriers.

In the light of the above reasoning and analysis, our Union members are directly concerned and have a legitimate interest in the nature of the Commission’s future decision on Cyprus Airways.

We would like to point out that our members are determined to use their rights under Article 263 of the TFEU and other Treaty Articles in order to seek a judicial review in the case of a possible negative decision for Cyprus Airways.

By looking at the case Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission of the European Economic Community the way by which the ECJ interprets the distortion of competition can be observed. The relevant competition Articles of the Treaty are 101 and 102 TFEU. In the  above decision it can be seen that the ECJ may balance the benefit to the consumer with a possible distortion of competition. This is also clearly laid down in the Treaty Articles.

Therefore, through the interpretation of the cases on what constitutes distortion of competition laid down in Articles 101 and 102 TFEU, it can be seen that it is related and relevant by applying article 107 TFEU. The ECJ in these decisions has used the two stage test in Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission of the European Economic Community in order to decide whether an action taken by a company or the provision of state aid is anti competitive. We have seen that the aim of ECJ is to check and evaluate if an anti competitive action is relative to its usefulness for the general purpose affecting the EU citizens. It is imperative, in our opinion, to examine whether, the given state aid was a useful measure to keep Cyprus Airways in business and compare the detriment to the EU citizens if the company had become bankrupt.

Was the state aid provided used for purpose of distorting competition or was it compatible with the Treaty aims and in line with the interpretation by ECJ in certain related cases? Was the intention of the government of Cyprus to distort competition? Was it useful to the society?

It is submitted that if the Commission carefully evaluates the facts through a wider interpretation of the 2004 Commission guidelines, then real evidence can obtained concerning the usefulness of the state aid. We also submit that it was useful for the employees of this company who have contributed more than 40% of their emoluments during the last 9 years in order to save this company.

We believe that the aims of EU and the Commission cannot be served through a strict application of the 2004 guidelines under the present circumstances. We believe that it is not the intention of the Commission to act in the way described below:

 To ‘force’ the winding down of companies in the name of competition.

 To deregulate markets at the expense of citizens jobs.

 To assist in further expansion of low cost airlines with the result of increasing unemployment rates.

 To create monopolies through the dissolution of companies in financial difficulty

We strongly believe that under the present circumstances the EU should work in such a way so as to develop a better society for its citizens. Severe austerity measures, unemployment, forceful acquisition of property, less enjoyment of family life are certainly not in line with the principles which form the foundations of the European Union.

In conclusion we would like to stress again the importance of the inclusion of fundamental rights into the EU Treaties. Our member’s human rights are not different to the rights of all the EU citizens. Such rights should have precedence over a possible distortion of competition in the future. We consider that strict adherence by the Commission to the guidelines of 2004 is now outdated because of the reasons explained above.

In the case of a possible negative decision by the Commission, our Union is considered a privileged claimant under article 263 TFEU. Our members are directly concerned under this Article. In such an eventuality most of our members will lose their jobs and will be deprived of their normal family life by having to move abroad seeking for a job. If it becomes apparent that the implications of a negative decision have not been considered, it is our intention to seek justice at the European Court of justice.

Captain Petros Souppouris

Chairman of Cyprus Airways Pilots Union (PASYPI)

Nicosia, Cyprus