Ryanair ordered to pay back subsidies

EU ruling sparks controversy about potential effect on low-cost fares

Ryanair was ordered to pay back millions of pounds in illegal subsidies today in a landmark European Commission decision which could mean an end to bargain basement airfares.

The Commission said cut–priced rates offered exclusively to Ryanair for using Charleroi Airport in southern Belgium were illegal.. The airline will not have to repay all its subsidies from the Belgian regional government. Some of the rebates for Ryanair were permissible as part of regional development support for the airport.

But about £3 million will have to be returned, the Commission said, because it was "incompatible with the proper functioning of the internal market".

Ryanair chief Michael O'Leary said the ruling undermined his competitive edge and will force up fares. But the Commission insisted that it had taken a major "decision of significance" for the future of air transport by ensuring full competition between carriers using regional airports.

"The Commission is committing itself firmly to promoting increased competition which will enable low–cost carriers to establish themselves throughout the EU, subject to compliance with uniform rules on competition between carriers and for the maximum benefit of consumers," said Transport Commissioner, Loyola De Palacio.

"This legal decision is well-balanced. It brings greater transparency into contractual relations between airlines and airports, especially regional airports.

"It will also help the development of low-cost operations, which are very clearly what consumers want, whilst also ensuring equitable conditions of competition for all airlines. All players in the same arena must be able to play by the same ground rules. All airlines must be aware of the possibilities offered, and only genuine competition is truly capable of safeguarding consumers' rights," she explained.

Today's decision gives the go-ahead for Ryanair to benefit from forms of aid granted by the Belgian regional government which "permits genuine development of new routes under clearly defined conditions".

But other direct aid, designed as an incentive to Ryanair to operate in to and out of Charleroi, is outlawed.

Ryanair has been operating services from London to Charlesroi since 1997, but reached a new comprehensive deal in 2001. Under its terms, Ryanair alone was given a 50-per-cent reduction in landing taxes and only had to pay a one euro (70p) landing charge per person carried. The normal rate is up to 13 euros.

Ryanair also benefited from about £350,000 a year towards the cost of accommodation for crews between flights, and about £500,000 towards Ryanair's pilot training programme.

Ms De Palacio told a press conference in Brussels that it was clear that part of the cash advantages accorded to Ryanair were state aids, outlawed under strict EU rules on fair competition in all industrial sectors.

Other parts of the arrangement for using Charleroi were genuine development aid, which was fully compatible with EU rules.

But the confirmation that the airline must repay millions of pounds will come as a blow, following last week's announcement of Ryanair's first fall in profits since flotation.

Yesterday the Irish President of the European Parliament, Pat Cox, warned that the decision could have serious affects on other regional airports and also on consumer choice.

He said the European Commission had the right and duty to act against illegal state aid, but it also had to consider the "knock-on effect" for cut-price carriers and the public.

The Commission's decision was denounced as "a disaster" for air passengers by the leader of Britain's Conservative Euro MPs, Jonathan Evans.

"This will drive up air fares by forcing low cost airlines to pay higher charges. This cannot be in the interests of consumers," he said.

"This gives the green light to expensive national carriers to hike up their prices even further."

Mr Evans warned that, if low cost airlines pull out of small, regional airports because of the implications of today's decision, local economies and tourism will be hit hard.

The fear was that all state owned regional airports offering effective discounts to budget carriers will have to rethink their deals on landing rights and charges - affecting about 17 million EU citizens currently taking advantage of the era of low cost flying.

There will be limits on consumer choice of routes and carriers, according to Mr Evans. He pointed out that, since Ryanair flights from Stansted to Strasbourg were suspended late last year in a similar clash over subsidies, the only carrier on the route was charging £290 one way, compared to Ryanair's £70 fare.

The Commission flatly rejected claims that today's decision damages development of low cost airlines in Europe and that it will hit cheap fares. A statement anticipating a major backlash declared that the Commission had always encouraged opening up the air transport market to competition.

Today's decision gave a clear signal in favour of low cost airlines, by ensuring "fair competition for everyone" in the European single market for air transport. The decision does not prevent agreement being reached between regional airports and low-cost airlines, the statement insisted.

"Quite the contrary, because the Commission encourages any initiative which enables better use to be made of airport infrastructure which is under-used, and welcomes any arrangement which would help solve the problems of air transport congestion, and gives Europe's citizens greater choice when it comes to flying."

The ruling against Ryanair helped clarify the framework within which low cost airlines and regional airports can collaborate - and therefore should lead to many more agreements opening up low cost routes in Europe.

On the risk of increased fares, the statement said: "A low cost airline which is in good financial heath must be able to offer cheap fares without using state aid. The Commission is convinced that Ryanair is, and will continue to be, following this decision, quite capable of offering its services at low cost, just as other low cost carriers do and will continue to do. Today's decision does not have an impact on market offerings or prospects for lower fares.

"By authorising start-up aid under certain conditions, the Commission is paving the way for agreements which make new routes serving regional airports viable."