Saturday, August 23, 2014

Why Shoot Down Ryanair?

Competition policy is the European Union's biggest success. The reason is simple: decisions in this area have been removed from the jurisdiction of individual nations, thus making them more difficult to influence. The result is that the many lobbies that oppose increased competition, or fight to protect state aid, have been hugely weakened. But has the anti-trust fight gone too far?

The executive powers that the European Commission enjoys over competition policy allow it to circumvent the national vetoes and compromises that are common in other areas. For example, implementation of rules governing the single market are subject to a unanimity rule, or at the very least a qualified majority of member states, with the result that progress is usually slow.

The European Commission recently lost much of its standing in the eyes of ordinary Europeans with the vitriolic fights between the Council and the Commission over the defunct Stability Pact and the failure to approve the draft constitution. So it is vital that the Commission's reputation in the area of competition policy shine because this reputation is the Union's most precious capital; this is no time to waste it.

However, excessive zeal and pursuit of cases with dubious economic justification, as has sometimes happened in merger cases, can do serious damage. Those who argue for the protection of state aid, for instance, immediately use an unfortunate decision in the merger area: see, they say, how stupid the Commission is at economics! Examples of this include the decisions to veto the merger between Airtours and First Choice, and also between Tetra Laval and Sidel - decisions that where based on dubious arguments and were eventually reversed by the European Court of Justice, with serious damage to the Commission's credibility.

The recent decision to fine Ryanair, Europe's main budget airline, for its arrangement with local officials in using Charleroi as its main airport in Belgium, is another example of an unfortunate decision that could undermine the Commission's reputation.

Here are the facts: Charleroi was a small dusty airport with less than 200,000 passengers per year. Ryanair proposed a deal: the airport forgoes its landing fees, and in exchange Ryanair flies in two million people per year.

The deal was signed and almost everybody was happy: passengers who fly cheaply; the airport, where the number of shops increased along with the number of passengers; the local community, where new jobs were created. The unhappy exceptions, of course, were the big airlines that charge ten times as much as Ryanair and were losing business.

But Charleroi is state-owned. State-owned, said Brussels? Then foregoing landing fees is tantamount to giving Ryanair state aid - the presumption being that the lost revenue must be coming at the expense of Belgian taxpayers. So the Commission asked Ryanair to pay back most of the forgone fees, and announced that it will review the airline's terms of operation at other European airports as well. The outcome may well be the demise of Ryanair.

Michael O'Leary, the CEO of Ryanair, is a visionary. In an interview last summer, he depicted a world in which people would fly free and airlines would charge airports in exchange for the millions of passengers they deliver to their shops. This is the best possible world for passengers, since nobody forces anyone to spend money in an airport; people do it only because it is convenient.

Even leaving aside this vision, Ryanair succeeded in providing cheap fares in a European travel market that not long ago was prohibitively expensive. Ryanair has been a champion of increasing competition in the airline industry, forcing other carriers to reduce fares. Punishing this airline will only reduce competition in the airline industry, an outcome that, Mario Monti, the EU competition commissioner, and Loyola de Palacio, the EU transport commissioner, cannot possibly want.

Obviously, one may object that if the Commission lowers its guard on state aid once, then "everything may go." So how can the Commission distinguish between cases? Our answer is that there should be a presumption that state aid to any industry or specific company must be subject to prohibition. This simple principle should guide Commission competition decisions. Only in exceptional cases can this presumption be overturned.

Ryanair is probably one of these exceptional cases. After all, there was a far better solution than punishing the airline: force Belgium to privatise the airport. Once private, Charleroi airport could sign any agreement it wishes, with Ryanair or any other airline.

Here, however, we hit a soft spot: European treaties protect competition, but are neutral vis-à-vis state ownership of companies. Brussels cannot force a member country to privatize: it can only force it to run a state-owned company as if it were a private corporation. This is difficult, because getting rid of the implicit guarantee enjoyed by a state-owned company is virtually impossible. Drafters of the next rendition of the European Constitution should take notice.

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