EN Official Journal of the European Union L 201/1

COMMISSION DECISION (EU) 2015/1225

of 19 December 2012

regarding injections of capital by SEA SpA into SEA Handling SpA (Case SA.21420 (C 14/10) (ex NN 25/10) (ex CP 175/06))

(notified under document C(2012) 9448)

(Only the Italian text is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and particularly Article 62(1)(a) thereof (1),

Having called on interested parties to submit their comments under to the provisions cited above (2) and having regard to the comments submitted,

Whereas:

1. PROCEDURE

(1) In a letter dated 13 July 2006, the Commission received a complaint concerning the alleged aid paid to the company SEA Handling SpA (‘SEA Handling’), which provides ground handling services at Milan Malpensa and Milan Linate airports. The complaint was initially filed under the number CP 175/06.

(2) By letter dated 6 October 2006, the Commission asked the Italian authorities for clarification regarding the complaint. By letter dated 21 December 2006, the Italian authorities asked for an extension of the time allowed for an answer.

(3) By letter dated 11 January 2007 the Commission allowed that extension. By letter dated 9 February 2007, the Italian authorities provided the requested clarification.

(4) By letter dated 30 May 2007, the Commission informed the complainant that there was insufficient information to show that the state resources criterion in Article 107(1) of the Treaty on the Functioning of the European Union (‘TFEU’) was met in the case. Consequently, in accordance with Article 20(2) of Council Regulation (EC) No 659/1999 (3), there were insufficient grounds for taking a view of the case. By letter dated 2 July 2007, the complainant provided additional information. In the light of that information the Commission decided to review the complaint.

(5) By letter dated 3 March 2008, the Commission asked the Italian authorities to provide a copy of the trade union agreement concluded on 26 March 2002. By letter dated 10 April 2008, the Italian authorities provided the requested document.

(6) By letter dated 20 November 2008, the Italian authorities sent the Commission the union agreement concluded on 13 June 2008.

(7) By letter dated 23 June 2010, the Commission notified the Italian authorities that it had decided to initiate the procedure provided for in Article 108(2) of the TFEU, and asked the Italian authorities to provide within one month all data and information necessary to evaluate the compatibility of the measures in question.

(8) By letter dated 19 July 2010, the Italian authorities requested an extension of the time-limit for an answer until 20 September 2010; the Commission replied, allowing the extension, on 23 July 2010.

(9) On 20 September 2010, the Italian authorities submitted the comments of the Municipality of Milan regarding the Commission’s decision to initiate the formal investigation procedure.

(10) The Commission’s decision to initiate the formal investigation procedure (‘the opening decision’) was published in the Official Journal of the European Union (4). The Commission called on interested parties to submit their comments concerning the measures in question within one month of the date of publication.

(11) By letter dated 11 February 2011, SEA Handling requested that the deadline for submission of its comments on the opening decision be extended until 21 March 2011. By letter dated 23 February 2011 the Commission allowed that extension.

(12) By letter dated 25 February 2011, […] (5) requested that the deadline for submission of its comments on the opening decision be extended until 25 March 2011.

(13) By letter dated 21 March 2011, SEA Handling and SEA SpA (‘SEA’) sent the Commission joint comments on the opening decision.

(14) By letter likewise dated 21 March 2011, […] sent the Commission its comments on the opening decision.

(15) By letter dated 7 April 2011, the Commission forwarded the comments of the interested parties to the Italian authorities, and asked the Italian authorities to submit their observations by 16 May 2011.

(16) By letter dated 18 April 2011, the Italian authorities asked the Commission to extend the deadline for their observations on the interested parties’ comments until 2 June 2011. By letter dated 28 April 2011, the Commission allowed the Italian authorities that extension.

(17) By letter dated 1 June 2011, the Italian authorities submitted their observations. They also submitted new arguments based on a study carried out by a consultant.

(18) By letter dated 11 July 2011, the Commission urged the Italian authorities to submit the information requested in paragraph 5 of the opening decision, which had not yet been provided either by the Italian authorities or by SEA.

(19) By letter dated 28 July 2011, the Italian authorities asked the Commission to extend the deadline for submission of the requested information until 15 October 2011. By letter dated 8 August 2011, the Commission allowed an extension of the deadline until 15 September 2011.

(20) By letter dated 26 August 2011, the Italian authorities informed the Commission that they considered that the extension of the deadline allowed in response to their initial request was insufficient.

(21) By letter dated 15 September 2011, the Italian authorities submitted their reply to the Commission’s request for information. By letter dated 18 October 2011, the Italian authorities submitted a translation into English of the document contained in Annex 5 to the previous submission.

(22) By letter dated 21 October 2011, the Italian authorities supplemented Annex 12 to the previous submission by supplying information provided by the Municipality of Milan. By letter dated 7 November 2011, the Italian authorities submitted a translation of those observations into English.

(23) On 19 June 2012 a meeting was held between Commission staff and the Italian authorities. After the meeting, in letters dated 2 July 2012 and 10 July 2012, the Italian authorities submitted fresh arguments in support of their view of the measures under examination. At the request of the Italian authorities, a further meeting with Commission staff took place on 23 November 2012. The Italian authorities there submitted substantially the same arguments as at the previous meeting.

2. SUMMARY OF THE MEASURES

(24) This decision concerns injections of capital by SEA into its subsidiary SEA Handling, from 2001 to 2010, which were intended essentially to cover operating losses suffered by SEA Handling.

2.1. ALLEGED RECIPIENT OF THE AID

(25) The beneficiary of the measures in question is SEA Holding, which is wholly owned by SEA. SEA is a company that manages the Milan airport system, which comprises Linate and Malpensa airports. It is a limited company (SpA) established under private law, which during the relevant period was owned almost entirely by two public bodies, the Municipality of Milan (84,56 %) and the Province of Milan (14,56 %), along with some other small public and private shareholders (0,88 %). In December 2011, 29,75 % of SEA’s capital was sold to the private fund F2i (Fondi italiani per le infrastrutture).

(26) The activities of SEA are divided as follows: (a) general airport management: implementation and management of air transport infrastructures; (b) ground handling: ground handling services for passengers, aircraft, baggage and freight; (c) related activities: commercial activities in airports, including sale to the public of various services, duty-free goods, management of newspaper kiosks, restaurants, advertising, parking, vehicle rental, and management and maintenance of infrastructures intended for non-air activities, such as tourist accommodation and logistics services. These activities are carried out directly by SEA or by other parties under specific contracts with SEA.

(27) SEA Handling was established following the entry into force of Legislative Decree No 18/99 of 13 January 1999 (6), which transposed into Italian law Council Directive 96/67/EC (7): that Directive imposed the requirement to keep separate accounts for activities related to the provision of the services referred to above (8). With the formation of SEA Handling, SEA proceeded to separate this set of activities in accounting and legal terms (9). In addition to managing Malpensa and Linate airports, SEA provides various services which are secondary and complementary to air transport.

(28) SEA Handling went into operation on 1 June 2002. Until 1 June 2002 ground handling services at Linate and Malpensa airports were provided directly by SEA (10).

2.2. THE MEASURES UNDER EXAMINATION

(29) According to the information supplied to the Commission, SEA Handling received subsidies from SEA from 2002 onward, in the form of capital injections intended essentially to cover its operating losses.

(30) The amounts of SEA Handling’s losses were as follows (11): — in 2002, SEA Handling recorded a total loss of EUR 4 3 6 39 040,39 (1 June 2002-31 December 2002), — in 2003, SEA Handling recorded a total loss of EUR 4 9 4 89 577,23 (1 January 2003-31 December 2003), — in 2004, SEA Handling recorded a total loss of EUR 4 7 9 62 810 (1 January 2004-31 December 2004), — in 2005, SEA Handling recorded a total loss of EUR 4 2 4 30 169,31 (1 January 2005-31 December 2005), — in 2006, SEA Handling recorded a total loss of EUR 4 4 1 50 435 (1 January 2006-31 December 2006), — in 2007, SEA Handling recorded a total loss of EUR 5 9 7 24 727 (1 January 2007-31 December 2007), — in 2008, SEA Handling recorded a total loss of EUR 5 2 3 87 811 (1 January 2008-31 December 2008), — in 2009, SEA Handling recorded a total loss of EUR 29,7 million (1 January 2009-31 December 2009), — in 2010, SEA Handling recorded a total loss of EUR 13,4 million (1 January 2010-31 December 2010).

(31) Between 2002 and 2010 SEA Handling’s total losses amounted to EUR 339,784 million; in response, SEA transferred a total of EUR 359,644 million to SEA Handling in the form of capital increases made in various instalments each year. The distribution and the amounts shown in the table are taken from information submitted by the Italian authorities. (EUR thousand) Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 Amounts injected (12) 18 765 24 879 25 236 6 111 30 000 11 559 25 271 13 481 0 21 200 24 252 30 000 30 000 439 2 663 34 328 4 118 30 000 3 527 23 808 Annual total 39 965 49 132 55 236 40 229 60 439 41 559 25 271 47 810 0 Grand total 3 59 664

2.3. ROLE OF THE PUBLIC AUTHORITIES IN THE MANAGEMENT OF SEA AND SEA HANDLING

(32) According to the information provided to the Commission, the administration of the Municipality of Milan, SEA and trade union organisations reached an agreement on 26 March 2002 which states:

(33) The abovementioned commitments were confirmed by subsequent agreements which specifically reaffirmed the content of the agreement. The Commission makes particular reference to the records of the union agreements between SEA and the union organisations dated 4 April 2002, 15 May 2002 and 9 June 2003, copies of which were sent to the Commission.

(34) The Municipal Council minutes also list among the commitments entered into by the Municipality ‘protection of rights’ and ‘guaranteed employment for the next five years’ (13). Those commitments were reaffirmed at the Municipal Council meeting held on 16 June 2003, a copy of the minutes of which was sent to the Commission.

(35) Moreover, on 7 November 2006, the municipal councillors expressed concern regarding the crisis situation, emphasising the need to guarantee the economic survival of SEA Handling at all costs: The difficulties faced by SEA Handling SpA … cannot fall entirely on the backs of the workers … In light of this situation, the airport company chairman and mayor Moratti must appear before the Committee on Transport [of the Municipality of Milan] as soon as possible to explain how they intend to relaunch the role of SEA Handling SpA on the air support services market (14).

2.4. ECONOMIC PERFORMANCE OF SEA HANDLING (15)

(36) The following graph shows the progression of operating costs and gross operating margin for the period 2002-2010. The same data are shown in table 1 below, with the progression of the turnover of SEA Handling, along with the progression of gross operating margin/turnover and labour cost/turnover ratios. Graph 1 Economic progression of the company […]. Table 1 Progression of turnover and operating costs 2002 2003 2004 2005 2006 2007 2008 2009 2010 Turnover (EUR million) […]. […]. […]. […]. […]. […]. […]. […]. […]. Turnover progression (YoY) […]. […]. […]. […]. […]. […]. […]. […]. Labour costs […]. […]. […]. […]. […]. […]. […]. […]. […]. Cost of labour progression (YoY) […]. […]. […]. […]. […]. […]. […]. […]. Other costs […]. […]. […]. […]. […]. […]. […]. […]. […]. Other costs progression (YoY) […]. […]. […]. […]. […]. […]. […]. […]. Gross operating margin (EBITDA) […]. […]. […]. […]. […]. […]. […]. […]. […]. EBITDA progression (YoY) […]. […]. […]. […]. […]. […]. […]. […]. EBITDA/turnover ratio […]. […]. […]. […]. […]. […]. […]. […]. […]. Labour costs/turnover ratio […]. […]. […]. […]. […]. […]. […]. […]. […].

(37) The table shows that labour costs remained stable between 2002 and 2007, with slight variations, at around EUR 160 million, but then dropped sharply to just under EUR 100 million in 2010, a fall of nearly 38 % in three years. The progression of other costs follows a similar trend, with a 37 % fall in the same period.

(38) Turnover rose 10 % between 2002 and 2006. The marked decline in activity of Alitalia at Malpensa had a significant impact as of 2008, since the number of trips booked through Alitalia fell 87 % between 2007 and 2010, and the revenues generated by the presence of Alitalia consequently fell 72 %. Total turnover fell 27 % in the same period, a reduction which was offset with a rise in revenues earned from other airlines.

(39) The efforts made to reduce operating costs and limit losses after Alitalia’s de-hubbing in 2008 led to a gradual improvement in the (negative) gross operating margin, which climbed from – EUR 42,5 million in 2007 to – EUR 8,5 million in 2010.

(40) The following table shows the progression of worker numbers expressed in full time equivalents (FTE). Table 2 Progression of worker numbers 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total FTEs 3 842 3 976 3 820 3 562 3 476 3 310 2 969 2 460 2 221 of which: permanent 3 692 3 804 3 457 3 223 3 011 2 795 2 760 2 419 2 181 of which: temporary 150 172 363 338 465 515 208 40 40 operative FTEs (total FTEs + hours of overtime — layoff fund) 3 964 4 125 3 979 3 706 3 642 3 461 2 852 2 227 2 050

(41) The table shows a constant decline in the number of full-time equivalents from 2003 onward (– 44 % between 2003 and 2010), particularly among permanent FTEs.

(42) Temporary staff numbers rose considerably between 2002 and 2007, from 150 to 515 FTEs. The number of temporary staff then fell, alongside a dip in turnover resulting from the loss of Alitalia traffic and greater efforts by SEA Handling to reduce its wage bill. This effort also led, in the period in question, to a reduction of overtime hours and an increase in the layoff fund (cassa integrazione), causing an even sharper fall in the number of operative FTEs.

(43) The table below shows improvements in staff productivity in terms of movements handled by the work unit and the progression of labour costs. Table 3 Progression of staff productivity […] Table 4 Labour costs […]

3. REASONS FOR THE INITIATION OF THE FORMAL INVESTIGATION PROCEDURE

(44) In the opening decision the Commission judged, on the basis of information provided by the complainant and by the Italian authorities, that the measures for the period 2002-2005 might have constituted State aid, and expressed doubts regarding the compatibility of such aid with the internal market. In the opening decision the Commission therefore asked Italy to provide the necessary documents, information and data up to the most recent period to enable it to evaluate the compatibility of the measures. It also indicated the need to examine the period after 2005, in which the scale of the losses had not initially been communicated to the Commission, and the period 2002-2010 as a whole, in order to determine whether SEA Handling had received unlawful State aid during that period in the form of compensation for losses (16).

(45) The Commission reached the conclusion that there was indeed State aid, as it considered that the conditions in Article 107(1) of the TFEU were satisfied.

(46) The Commission took the preliminary view that, in consideration of the majority share of the Municipality and of the Province of Milan in SEA’s capital, the funds used to cover the losses were of public origin. The Commission also observed that there was considerable evidence of the kind referred to in the Stardust Marine judgment (17) indicating an involvement of the public authorities in measures adopted by SEA with regard to its subsidiary SEA Handling.

(47) The Commission considered that the measures were selective, since they concerned only SEA Handling, giving the company an economic advantage which it would not have had under normal market conditions.

(48) To determine whether, in covering SEA Handling’s losses, SEA had acted as a prudent investor operating in normal market conditions, the Commission took various factors into consideration.

(49) In a preliminary phase, the Commission found that the business plan approved in 2001 envisaged that SEA Handling would see its profits grow by 2005 (18). It had been said that the decision to continue operating in the ground handling sector after 2002, and not to sell SEA Handling immediately after the break-up of the two companies, was justified by the predicted upturn in profits within a three-year period. However, the 2001 business plan did not contain a detailed strategy that would allow SEA to guarantee that SEA Handling would be profitable, and that plan covered all of SEA’s activities. No other detailed business plan relating specifically to SEA Handling was submitted to the Commission.

(50) The Commission also found that between 2003 and 2005, SEA Handling saw limited progress or even negative results, with annual losses exceeding EUR 40 million, while labour costs remained stable, total costs fell by around 3 %, turnover dropped 4,5 % and costs per unit of labour rose 7,6 %.

(51) The Italian authorities had argued that the coverage of SEA Handling’s losses had to be looked at from a group perspective; the Commission took the view that this did not explain why, at the group level, it should have been regarded as more advantageous to cover the losses of SEA Handling rather than to sell or restructure it. The Commission considered that the deficit situation of SEA Handling was too protracted to fall within the meaning of the term ‘a limited period’ in the judgment of the Court of Justice in Case C-303/88 Italy v Commission (19) and that the recurrent nature of the coverage of losses since 2002 confirmed that SEA was not operating as a prudent investor.

(52) The Commission found that […] or other operators would have been able to enter the market; that the loss of image that the Italian authorities had invoked to justify SEA’s withdrawal from ground handling was not quantified, and was presented in terms that were too vague; and that the obligation to provide ground handling services did not require SEA to provide such services direct, given that the presence of other providers constituted a practical and valid alternative.

(53) Finally, the Commission judged that the measures undoubtedly had an impact on trade between Member States and on competition. The effect on trade was clear, given the objectives of Directive 96/67/EC, which regulated access to the ground handling market at Community airports that reached the levels of traffic that the Directive specified. There was also a presumed impact on competition, since the measures significantly strengthened the position of SEA Handling to the detriment of its competitors.

(54) The Commission considered for the time being that the coverage of losses constituted State aid, and expressed doubts regarding the compatibility of the aid in question with the internal market. The Commission communication ‘Community guidelines on financing of airports and start-up aid to airlines departing from regional airports’ (‘the Aviation Sector Guidelines’) (20), referring to Directive 96/67/EC, states that Above the threshold of two million passengers, ground-handling services must be self-financing and must not be cross-subsidised by the airport’s other commercial revenue or by public resources granted to it as airport authority or operator of a service of general economic interest (21). The Commission found that the subsidising of such activities by public authorities was contrary to the objectives established by Directive 96/67/EC and could therefore have a negative effect on the liberalisation of the market.

(55) Consequently, the Commission decided to initiate the formal investigation procedure to remove all doubts as to the classification of the measures as State aid up to the most recent period, and as to their compatibility with the internal market.

4. OBSERVATIONS OF THE ITALIAN AUTHORITIES

The period under investigation

(56) The Italian authorities were puzzled by the decision primarily because of the chronology of the claims made by the Commission. The Italian authorities argued that the observations of the Commission referred to the period 2006-2008, which was later than the period that formed the basis of the preliminary investigation and, therefore, of the requests for clarification that they had received regarding the period 2002-2005. The Municipality therefore asked the Commission to amend the timeframe covered by the proceedings, and to send the Italian authorities a regular request for information for the later period (from 2006 onwards) (22).

The imputability to the public authorities of the measures for the coverage of losses

(57) The first indication of imputability identified by the Commission consisted of excerpts from the agreement of 26 March 2002 signed by the Municipality of Milan, SEA and union representatives, excerpts from the record of the union agreement of 4 April 2002, subsequently confirmed on 15 May 2002, between SEA and the industrial and confederated union organisations, and excerpts from the minutes of the union agreement concluded by SEA, SEA Handling and the industrial and confederated union organisations of 9 June 2003; the Italian authorities asked the Commission to reconsider the probative value of these documents.

(58) In this regard, the Italian authorities argued that the measures could be imputed to the State only on the basis of objective findings showing that the Member State had intervened in SEA’s decision in such a way as to determine or influence it, in the sense that SEA would have adopted different behaviour had it been able to make an independent decision (23); they contended that this was not the case for the Municipality of Milan.

(59) The Municipality argued that it had had no involvement whatsoever in the signing of the union agreements, and had had nothing to do with the commitments given by SEA to union representatives in the agreements in question. The Municipality had participated only in the meeting of 26 March 2002, and had protected the interests of workers as the majority shareholder and particularly as the responsible authority in the local community. As such it had not entered into any commitment, but had given the unions ‘confirmation’ at political level of SEA’s business decisions, and in particular its strategy of saving jobs, with the intention of supporting the unions in overseeing the implementation of those decisions. The agreement, which was clearly of a socio-political nature, had no value in law, and served only to reassure the unions as to the trustworthiness of SEA’s commitments. From the documents taken into consideration by the Commission, it could not be inferred that the Municipality of Milan had played a determining role in the decision to cover SEA Handling’s losses, or that it had assumed any obligation in that respect. SEA therefore took its own business decisions in complete freedom and independence.

(60) In general, the correspondence from 2002 to 2005 between company management and certain members of the Municipal Council, who were denied access to certain SEA internal documents which they had requested, in particular the business plan, provided proof of a lack of interference by the administration in the activities of SEA. According to the Italian authorities, there was additional proof in the fact that SEA had specifically asserted its independence from the administration, for example in response to a question submitted by a municipal councillor.

(61) The Italian authorities also stated that the Municipality could not legitimately enter into valid and effective commitments without formal acts adopted by its competent bodies giving specific indications of financial coverage.

(62) The second indication of imputability identified by the Commission was the particular dependency of the directors and managers of SEA on the Municipality of Milan: here the Italian authorities disputed the Commission’s elevation of claims made in newspaper articles to the level of evidence. They also put forward the following observations.

(63) First, regarding the SEA directors’ signing of ‘blank resignations’ that were submitted to the mayor of Milan before the end of their term of office, the Italian authorities maintained that such resignations did not show the existence of a situation of particular dependency of SEA directors on the Municipality. As acknowledged by the chairman of the board of directors at the ordinary meeting held on 24 February 2006, this was a common practice ‘used specifically to take timely steps to remove directors alleged to have acted improperly’. The chairman ruled out the use of such letters in cases where the shareholder disagreed with managerial decisions made by the board of directors: the board had exclusive responsibility for such decisions. He stressed that ‘in any case, nobody has ever applied any pressure with reference to this letter or to other documents’, and that such letters had ‘moral value, but no legal value’. According to the representative of the Municipality at the same SEA ordinary meeting, such letters ‘would be entirely unlikely to influence the conduct of board members. The members of the board are subject only to the general meeting of shareholders: only by that body can they be appointed and dismissed, and only to that body are they responsible for company management’. According to the Italian authorities, the only effect of the abovementioned letters was that a director dismissed by the shareholders’ meeting would lose entitlement to compensation for unfair dismissal.

(64) Second, still with regard to the relationship of particular dependency of SEA on the Municipality of Milan, the Italian authorities observed, contrary to the claims of the Commission, that in its supervisory role the Municipality of Milan did not appoint representatives to the board of directors, but merely designated them: board members were appointed only by the general meeting, in accordance with the ordinary rules of private law governing limited companies under the Italian Civil Code. They also argued that in line with the ordinary legal rules, as was often the case, the constitution of SEA gave the board of directors the power to select the names of directors to be submitted for the meeting’s approval.

(65) The Italian authorities affirmed that other indicators that might tend to demonstrate the imputability of a State measure, and in particular the classes of evidence identified by the Court of Justice in the Stardust Marine case, likewise led to the conclusion that the measure under examination in this case was not imputable to the State. SEA was not integrated into the structures of the public administration in any way, either locally or at the national level. Turning to the nature of its activities and the exercise of the latter on the market in normal conditions of competition with private operators, the Italian authorities stated that SEA always acted as an ordinary private firm. The legal status of the undertaking could not demonstrate that the measures were imputable to the State either, because SEA was in every respect a private company. Finally, in reference to the last kind of evidence identified by the court, namely the intensity of the supervision exercised by the public authorities over the management of the undertaking, they contended that the Municipality exercised no influence whatsoever and that the company had itself proclaimed its independence from the administration, which demonstrated that the administration was not involved in the adoption of any corporate decisions.

Application of the private investor test

(66) With regard to the application of the private investor test, the Italian authorities argued that the factual evidence (economic and other data) which the Commission had assembled during the course of its preliminary investigations, but which related to a time after the disputed acts were decided, could be used where necessary to evaluate the compatibility of the measures with the rules of the Treaty, if they were classified as aid; but such evidence was of no help in determining whether the financial measures in question were compatible with the private investor test. The Commission’s entire reasoning was vitiated by an erroneous application of the private investor test, which derived from an inaccurate assessment of the background to the case.

(67) With regard to the context that had to be taken into consideration, the Italian authorities observed, first, that the Commission had taken no account of the fact that, as part of the liberalisation of the European ground handling services market following the adoption of Directive 96/67/EC, transposed into Italian legislation by Legislative Decree No 18/99, SEA had decided not simply to separate its accounts, but to spin off the activities in question and transfer them to a new legal entity. This break-up was instrumental in the group’s strategic aims of finding an industrial partner to provide ground handling services and identifying measures to improve the efficiency of ground handling services at Linate and Malpensa airports.

(68) According to the Italian authorities, as part of the liberalisation process, airport management companies had generally reorganised ground handling services after having considered the two viable commercial models: ground handling services might be provided not directly by the airport manager but instead by outside companies operating on an international scale (‘outsourcing’, e.g. airports in London, Copenhagen, Spain or Dublin), or they might be provided directly by the airport manager with only the accounts being separated (e.g. Frankfurt or Vienna) or through the formation of a separate company (SEA or Paris) (‘direct management’). Each of the two models had its advantages and disadvantages, which the airport management companies had looked at carefully, particularly given the different regulatory circumstances in each country. Outsourcing allowed resources to be focused on core business, and benefited the profit and loss account immediately, because in most cases ground handling services operated at a loss, unless they were provided on a large scale and not only at the airport managed by the company. But keeping ground handling activities allowed airport managers to exercise greater control over the quality of the service, which, leaving the regulatory aspects aside, had knock-on benefits on group profits, particularly in the medium to long term.

(69) This second model, which had been chosen by SEA, enabled the airport manager to protect the role of the airport centre and the transfer processes, to retain control over the level of quality of the service provided, to provide select ground handling services at airports in which no other operators were able to supply them and, finally, to maintain a strong influence over airport security. This option necessitated high operating costs which were inherent in the direct provision of ground handling services. Productivity in this area could not be measured in exclusively financial terms.

(70) The Italian authorities argued that this strategy of the SEA group was perfectly rational, because it enabled SEA to retain ground handling services, counting on a gradual increase in productivity and on the quality of services and medium- to long-term benefits to the group. At the same time, by spinning off the activities and transferring the provision of services to a separate company (SEA Handling), SEA would be able to capitalise on any opportunities for partnership with other operators in the sector, with the aim of recovering profitability thanks to the synergies achieved through integration into an international network and the acquisition of further operational know-how.

(71) SEA, therefore, intended to bear the losses initially recorded by its subsidiary with a view to the benefits that would ensue for the group, along with a gradual improvement in SEA Handling’s revenue and profitability (which was initially forecast to happen after three years of activity, i.e. by 2005), to be achieved through measures set out in a restructuring plan which also provided, if possible, for the entry of a strategic partner which would acquire a significant minority share in SEA Handling.

(72) In May 2001, SEA launched a competitive bidding procedure aimed at identifying a minority strategic partner in SEA Handling, at the end of which the offer submitted by […] was found to be the most advantageous. The negotiations undertaken with […] came very close to signature, particularly thanks to a relaunch plan. But thereafter the negotiations ran aground, owing mainly to disagreement over the valuation of the company.

(73) The measures set forth in the SEA group’s consolidated business plan for 2002-2006 (‘the 2002-2006 consolidated business plan’) focused on a recovery of labour productivity of 20 % in that period. These measures were judged appropriate and sufficient to validate the choice of business model that had been made. While the objective for the recovery of profitability was not met, the financial results were encouraging, and confirmed SEA’s view of the suitability of the business model chosen, in the economic interests of the group and its shareholders.

(74) The Italian authorities argued that the fact that SEA Handling saw no recovery in profitability within the term initially proposed was due to a market scenario that differed greatly from what had been forecast, as a result of two international factors which significantly affected the development of air traffic in that period, namely SARS and the Iraq war, and the consequent economic challenges faced by international airlines, which suffered a sharp rise in oil prices and consequently had to accept a drop in prices in a competitive environment that was far more aggressive than expected.

(75) The Italian authorities asked the Commission to reconsider its objection to SEA’s decision to continue to cover the losses of its subsidiary even when, in its view, economic developments in its first two full years of activity (2003 and 2004) showed that an upturn in profitability within three years would be impossible. The Italian authorities argued that this objection was based on a simplistic application of the private investor test, essentially in terms of mere short-term profit. The Commission had overlooked the fact that, in the case in point, there were other factors be taken into account, in addition to the financial flows generated directly by the investment, especially because the parent company was vertically connected to its subsidiary, and that an appreciable part of its business depended on the quality of the services the subsidiary provided. The Commission had confined itself to looking at the lack of profitability of the measure in first two years of operation, and had completely ignored the specific nature of the sector, in which an airport manager might have an interest in carrying on a ground handling business, or supporting it financially, irrespective of its immediate profitability.

(76) The Italian authorities also provided a counterfactual analysis conducted by an external consultant with the aim of proving that the hypotheses behind the document supplied by SEA, ‘Presentazione del piano aziendale 2003-2007 di SEA Handling’ (Presentation of the SEA Handling 2003-2007 business plan, hereinafter ‘the 2003-2007 business plan’) were realistic and reasonable, and that a number of unforeseen circumstances had had serious negative effects on SEA Handling, resulting in losses greater than those reasonably foreseeable when the decision to cover the losses was made. The primary finding of this analysis was that the main reason that the results recorded fell short of those forecast in the business plan was the fall in traffic handled and in prices. In other words, while SEA Handling had managed to achieve its objectives in terms of reducing unit costs, it had not reached the financial targets set in the business plan owing to the significant loss of revenue due to the drop in traffic and in prices by comparison with the levels forecast.

(77) The Commission had also failed to give proper consideration to the specific character of the sector in Italy in light of the applicable Italian regulations. First, pursuant to Article 3.3 of Legislative Decree No 18/99 and Article 705.2(d) of the Sea and Air Navigation Code, the airport manager was required to ensure that the airport had all the necessary ground handling services, either providing them directly or coordinating the activities of operators who provided such services themselves or through outside parties. Additionally, with specific reference to Linate and Malpensa airports, Article 4 of the agreement signed between ENAC (the Italian Civil Aviation Authority) and SEA on 4 September 2001 specifically required SEA to guarantee ground handling services and to ensure the availability and efficiency of all vehicles, equipment and systems and anything else necessary for the continued, regular and effective provision of such services.

(78) The Italian authorities argued that this legislation did not allow SEA simply to transfer or outsource ground handling activities. Even if it were to decide to move in that direction, it would still have to conclude the appropriate contracts and bear the necessary costs in order to satisfy itself that the services met the demands and requirements imposed by the legislation or deriving from provisions laid down in the measure entrusting it with the management of the airport. The airport manager continued to be responsible to the public authority for the regular and effective provision of ground handling services.

(79) For the correct application of the private investor test to the case, lastly, the Italian authorities observed that according to established case-law, the private operator with which the conduct of the public enterprise was to be compared must be of a comparable size and nature (24), and that the investment consisting of the coverage of the losses of SEA Handling was decided and carried out by the SEA Group, shareholder in SEA Handling and holder of the concession for the management of Malpensa and Linate airports. First, this meant, as the Commission had indeed pointed out in its decision, that the conduct of SEA could not be compared to that of an ordinary investor laying out capital with a view to realising a profit in the relatively short term, but instead had to be compared to the conduct of a private holding company or a private group of undertakings pursuing a structural policy — whether general or sectoral — and guided by prospects of profitability in the longer term (25). Second, consideration must also be given to the specific features of the regulated sector in question, and to the normal dynamics, in that context, of the economic relations between the parent and the subsidiary (26).

(80) Consequently, the Italian authorities considered that the Commission should have evaluated the measures in question from a group perspective, that is, examining SEA’s consolidated balance sheet; if it had done so, it would have found that the group had received substantial gross revenue, and had been well able to absorb the losses of its ground handling division internally while creating value for its shareholders.

(81) Besides the probability of deriving indirect material profit from the coverage of SEA Handling’s losses, there were other considerations to be taken into account, including: (a) the possibility of obtaining indirect economic advantages from commercial relations with the subsidiary; (b) the difficulties of outsourcing in the national context of reference, given the economic obligations undertaken and the commitments made to the public authorities; (c) the protection of the image of the group; and (d) the fulfilment of obligations towards the state deriving from the agreement and from the law.

(82) In the three-year period of 2003-2005, the SEA group had achieved significant results with regard to the quality of the service provided to users. Waiting times for arriving baggage had improved and calls managed by SEA had seen their punctuality improve.

(83) In conclusion, the Italian authorities considered that SEA’s conduct in the case was perfectly compatible with that of a private business group which was pursuing a structural policy and which preferred to compensate the losses of one of its business divisions for the present, with a view to improving long-term profitability and in consideration of other factors of a financial or non-financial nature that were inherent to the group’s economic interests. Contrary to the Commission’s arguments, therefore, the existence of solid prospects for a return to profitability within a reasonable time was demonstrated by the constant economic improvement seen by SEA Handling in the period 2003-2005, despite its inability to find a strategic minority partner and despite the difficult market situation.

Compatibility

(84) Regarding the admissibility of the measures, the Italian authorities essentially made the following claims: (i) considering the constant losses recorded by its ground handling divisions, even prior to the formation of SEA Handling, it was clear that the company had been in difficulty since the date it went into operation; (ii) the restructuring of SEA Handling was based on a restructuring plan consisting of various documents regarding the period 2003-2010, aimed at restoring the profitability of its ground handling business; (iii) those documents set out in detail SEA’s strategy and the schedule of measures to be taken.

(85) More specifically, the 2002-2006 consolidated business plan laid down the following measures for recovering ground handling productivity and increasing revenue: — incentives for reducing the employee absentee rate; — computerisation and rationalisation of operating branch activities; — allowing overtime; — integration of Malpensa airport sectors A and B as of January 2002; — introduction of new employment contracts with flexible hours; and — measures aimed at reducing staff transfer times.

(86) Additionally, the Italian authorities argued that one of the most important restructuring measures was the selection of a minority shareholder.

(87) Second, according to the Italian authorities, the 2003-2007 business plan, which was centred on SEA Handling, identified the main factors having negative effects on the functioning of the company: it cited in particular the cost of labour, organisational imbalances, and insufficient technological innovation. The document indicated the principal measures needed to restore company productivity: (i) increase of the company’s market share; (ii) measures to increase technological innovation; (iii) measures to improve adaptability to customer needs; (iv) review of non-core activities with high costs; (v) reduction of labour costs; (vi) recovery of revenue from activities other than ground handling services.

(88) Third, the Italian authorities observed that the document ‘Executive Summary — Linee guida del piano strategico 2007-2012 del gruppo SEA — 11 maggio 2007’ (Executive Summary: Guidelines for the SEA group’s 2007-2012 strategic plan, 11 May 2007, hereinafter ‘the 2007-2012 strategic plan’) included a three-phase plan aimed at returning SEA Handling to viability by 2011. The aim of returning its ground handling business to profitability was also apparent in the SEA group strategic plan for 2009-2016 (‘the 2009-2016 strategic plan’) and in the SEA group business plan for 2011-2013 (‘the 2011-2013 business plan’).

(89) Fourth, the Italian authorities argued that there was no distortion of competition, since the measures in question were necessary for liberalising the market. In any event measures had been taken to ensure that competition was not unduly distorted, most notably the gradual reduction in employment levels (with 1 755 jobs cut in 2003-2010) and reduced market presence (a complete withdrawal from all non-core business; the ending of de-icing activity; and the failed attempts to sell a minority share in SEA Handling).

(90) Finally, Italy contended that the aid was clearly limited to the minimum necessary, given the operating losses sustained by the company and the amount needed to ensure continuity of ground handling operations. The aid did not result in an increase in the company’s market share to the detriment of its competitors, since no investment measures were taken that were not included in the restructuring plans.

5. OBSERVATIONS OF THE INTERESTED PARTIES

5.1. SEA

(91) In its observations, SEA supported the arguments presented by the Italian authorities, and elaborated on certain aspects.

The imputability to the Italian State of the measures for the coverage of losses

(92) The Commission had asserted that the Municipality had played an active role in the union agreement of 4 April 2002; SEA began by looking more closely at the Stardust Marine judgment, arguing that the burden of proof with regard to imputability lay with the Commission, and asserting that the evidence provided in the case was limited in volume and was flimsy in content and consistency. There was far more solid and meaningful counterevidence to show that SEA had made its choices with regard to the restructuring of SEA Handling independently.

(93) The agreements reached with the union organisations were aimed at reassuring employees that their rights would be safeguarded and that the employment protection measures based on the strategy adopted by SEA would be implemented. SEA’s board of directors had decided to reorganise the group, but had not given any commitment that in the course of the reorganisation staff numbers would not be cut in the light of market demands. All decisions to cut or restructure the business up to the present day were based entirely on economic considerations, and the Municipality and the political forces that were represented there had played no significant role.

(94) Social concerns were clearly reflected both in Legislative Decree 18/99, Article 14 of which was concerned with ‘social protection’, and in Directive 96/67/EC, which acknowledged that Member States ‘must retain the power to ensure an adequate level of social protection for the staff of undertakings providing ground handling services’ (recital 24), and went on to authorise Member States to take the necessary measures to ensure protection of the rights of workers, without prejudice to the application of the Directive and ‘subject to the other provisions of Community law’. SEA had taken its business decisions freely, and social concerns had played a role only within the limits imposed by the legislation.

(95) Moreover, the Commission had ignored certain counterevidence suggested by the Municipality of Milan, namely the fact that the commitments allegedly given in the union agreement of 26 March 2002 had never been applied, and the limited duration of those commitments.

(96) The Commission alleged that the Municipality exercised supervision; SEA stated that it had full decision-making and managerial independence, and that it exercised that independence freely, without any influence being brought to bear by the Municipality or the Province of Milan. Corporate management was the exclusive responsibility of the directors, and outside entities (e.g. controlling shareholders) could not exercise the powers and functions of directors. Even if it were to be supposed, purely for the sake of argument, that the majority public shareholder could ordinarily exercise effective influence over the decisions of the SEA’s governing bodies, the crucial consideration in order to show that there was imputability for purposes of the Stardust Marine judgment was not the organisational structure but actual interference in the disputed decisions.

(97) According to SEA, the Commission had to take greater account of the contrasting positions which emerged at the meeting of the Milan Municipal Council on 16 June 2003, the minutes of which unequivocally demonstrated the company’s decision-making and managerial autonomy, on the one hand when the municipal councillors acknowledged SEA’s refusal to provide classified information that was being discussed in negotiations with union organisations, and on the other in light of the rejection of a motion calling on the Municipal Executive to ask SEA to present a business plan: not only would this motion have been approved, but there would never have been any need to put it forward, had the Municipality of Milan actually exercised or had it been aware that it could exercise the influence which the Commission seemed to want to attribute to it.

(98) Concerning the ‘blank resignations’, SEA added to the statements made by the Municipality of Milan that at the SEA general meeting on 24 February 2006, the chairman of the SEA board of auditors had confirmed that none of the members of the board had been asked to sign such letters. All the answers given at that meeting with regard to blank resignations were clear evidence against the theory that there was a relationship of particular dependency on the Municipality of Milan. Moreover, as affirmed by SEA’s chairman at the same meeting, the board of directors did not comply with the shareholder’s request that a dividend of between EUR 250 million and EUR 280 million should be distributed, and instead set the amount available at EUR 200 million, thus taking a decision against the wishes of the Municipality and showing that the company had not been influenced by the existence of these letters.

(99) Finally, the accusations that SEA’s board of directors was dependent on the Municipality of Milan, which had been reported in the media, dated from 2006, and proved nothing with regard to influence exercised by the Municipality over SEA before that year. There were in fact no grounds to suppose that any such influence existed, if the Commission could not produce solid evidence to that effect that took account of the sequence of events.

Application of the private investor test

(100) SEA recalled that in ALFA Romeo (27) and ENI-Lanerossi (28) the Court of Justice had held that just as a private shareholder might reasonably subscribe the capital necessary to secure the survival of a company which was experiencing temporary difficulties but was capable of becoming profitable again, possibly after a reorganisation, so might a parent company decide to bear the losses of one of its subsidiaries for reasons other than the pursuit of a short-term return on investment. In ENI-Lanerossi, the Court indicated that in the eyes of a private investor pursuing an objective of long-term profitability (not merely financial), a transfer of capital to a loss-making subsidiary might be justified by considerations such as the likelihood of an indirect material profit from the investment, the prospect of disposing of the subsidiary on better terms, or the desire to protect the group’s image or to redirect its activities.

(101) In the case in point, SEA considered that in the eyes of a private investor the compensation of SEA Handling’s losses might be validly justified not only by the presence of a strategic plan and restructuring programme with good long-term profit prospects, but also by considerations other than a mere financial return on investment, considerations that derived from the special responsibility incumbent upon SEA as airport manager and from its image, bearing in mind that at no time did the internal compensation impose any specific debt or financial burden on the group, which was in fact generating a significant net profit.

(102) Additionally, SEA stated that its investment decisions were based not necessarily on considerations of immediate profit, such as might guide the decisions, possibly speculative, of a minority shareholder without powers of control, or of a controlling shareholder driven exclusively by a desire to secure maximum profit from ground handling support services seen in isolation, but rather on far broader considerations directed towards the objective of maximising the overall long-term profits of the SEA group.

The context of the measures

(103) SEA submitted that the Commission could not neglect to consider the regulatory context in which the compensation of losses took place. The regulatory framework generated the competitive pressure under which SEA operated and the obligations by which it was bound, and had an impact on its industrial decisions and on the results obtained as a result of such decisions. However, since the contested measures were implemented in the period immediately after the adoption of Directive 96/67/EC, which sought to liberalise the sector, and its transposal at domestic level, SEA pointed out that from 1996 it had allowed an outside provider of ground handling services (ATA Handling) in its airports.

(104) It also pointed out that Italy had opted for a complete liberalisation of the ground handling services market, the only proviso being that the supervisory authority ENAC was entitled to impose temporary restrictions on the number of service providers provided it had proper grounds. ENAC had certified 246 providers, 84 of which were authorised to operate at Linate and Malpensa, and SEA considered that ENAC had thereby congested the ground handling services market at certain Italian airports. The option chosen by Italy favoured the entry of numerous operators, but the market trend was towards a reduction in the number of ground handling service providers operating at each airport. This was confirmed by the rules recently approved by ENAC, which introduced requirements stricter than those previously applying to the certification of providers of such services, in order to ensure more careful selection of operators, who would then be expected to guarantee services with higher levels of quality and security. SEA argued that the choices made in other European countries went in the opposite direction, in order to avoid excessive competitive pressure and thus an imbalance in the economic conditions of providers due to pressure exerted on their prices.

(105) In a developing competitive context, SEA stated that the decision to split the company was taken in the light of its strategic commercial model, which at that time was based on the use of Malpensa airport as a hub, with a need for control, monitoring and management of ground handling services (following a model similar to those at Frankfurt and Vienna airports).

(106) SEA insisted that in analysing the economic logic of its decisions, consideration had to be given to the nature of the ground handling services market. First, the ground handling business had a very low profit margin, a factor amplified by the liberalisation of the market: profitability was poor when the service was not actually provided at a loss. The operators that found it easiest to make a profit, if only a modest one, were usually those that had a network, oftentimes international, through which they were able to distribute business risk across various sites of operation. For example, a presence at multiple airports enabled the operator to offset costs incurred in countries that had stricter regulatory or contractual requirements concerning workforce management against lower costs incurred in countries where the rules were more flexible. The operators that managed to obtain positive margins overall were those that had an international network and achieved substantial synergies through exclusive global contracts, a single, centralised administration, economies of scale in their investments, market shares that were small but often linked to one reference carrier or specific working hours, and economies of scale achieved by serving a particular carrier in multiple airports.

(107) The market was heterogeneous from a supply perspective as ground handling services could be provided by entities of different types, capacities, responsibilities and areas of activity: airport managers with separate accounts, airport managers with separate business structures, outside service providers (which in turn could be divided into domestic or international networks and SMEs), or airlines which provided their own ground handling services.

(108) The Commission consequently must not fail to consider the functioning and general development of the ground handling market and to compare the progression of SEA Handling with that of comparable operators. From the point of view of the general development of the market, given that profit margins were very low, SEA considered that coming from a situation of severe deficit in terms of productivity of the business division, and a wide imbalance in terms of its cost structure, with a particularly difficult market situation and general economic climate, a gain in profitability could not be miraculous or sudden, and an extension of the timeframe initially established would be anything but surprising.

(109) SEA therefore contested the argument that given the impossibility of absorbing SEA Handling’s losses within the forecast three-year period, SEA should have revised its strategy and detached itself from its ground handling division. SEA stresses that it could not reopen discussion of its decisions every year: ground handling, like all airport-related economic sectors, reckoned in periods of years, and the validity of decisions could be properly evaluated only over the long term.

(110) Regarding the comparison of the economic performance of SEA Handling with those of other operators, SEA suggested that a truly comparable operator had to be an airport manager providing ground handling services through a separate company, and the only such operator was […]. In the period 2004-2006, […] had reported losses in its ground handling business, and the negative results had continued in subsequent years and seemed destined to continue in the near future.

(111) Given its commercial model as a hub, SEA had to have an operator which was capable of providing all the necessary ground handling services at high quality standards. Only SEA Handling was able to meet those requirements, since none of the others on the market had the material resources, economic resources and above all staff resources needed to guarantee provision of all the services called for under this model.

(112) Leaving aside its own interests, SEA had a legal obligation, in that the national regulations held the airport manager responsible in the event of any failure in the provision of ground handling services.

(113) Moreover, the complete liberalisation of the market in Italy imposed heavier burdens on the airport manager than it would have had to bear in a market that was only partially open. The airport manager had an obligation and a responsibility towards the supervisory authority to maintain special task forces capable of ensuring continued service in case of emergencies or unforeseen events. It had no way of imposing continued service obligations on new operators, whereas such obligations could be envisaged in tender specifications used in a selection procedure as part of a partial liberalisation.

The economic rationality of SEA’s conduct

(114) SEA argues that the separation and subsequent transfer of ground handling activity to a subsidiary, SEA Handing, were conducted in compliance with European Union law and with a view to engaging with liberalisation on the best possible terms, making the most of the long-term development openings it offered. The separation was intended to enable SEA to better implement the policies needed to improve the efficiency and productivity of both companies, while at the same time seizing any opportunities to secure alliances with external partners.

(115) SEA states that the spin-off of ground handling activities led to an increase in its costs, due to the obligation on it with regard to the management of emergencies and unforeseen events. By way of illustration, the savings it obtained from economies of scale deriving from its ability use the marginal cost of SEA Handling personnel for continued service, rather than incurring the cost of setting up and maintaining a specialised group, amounted to EUR 10,7 million in 2003 and EUR 8,7 million in 2010.

(116) SEA contended that from the outset SEA Handling had a very heavy cost structure, with extraordinary burdens and the specific task of gradually bringing ground handling services first to sustainability and then to profitability. From the beginning, therefore, SEA had implemented an intense restructuring and recovery programme with the aim, if possible, of identifying a strategic partner that could contribute to the pursuit of those objectives.

(117) In May 2001 SEA launched a competitive bidding procedure with a view to selecting one or more operators looking to purchase a minority share in SEA Handling — a procedure in which a large number of leading operators in the industry participated. Following an analysis of the credentials and bids of interested companies, in the same year, SEA entered into negotiations with […], which had submitted the most advantageous partnership proposal. Although the negotiations reached an advanced stage, and a plan was drawn up to re-launch SEA Handling, the SEA board of directors, at its meeting on 10 September 2002, decided not to accept the operator’s bid, considering it […]. SEA acknowledged that the failure of those negotiations compromised the viability of its target to return SEA Handling to profitability within the term initially proposed, a target for which the identification of a strategic minority partner was considered an important tool.

(118) In April 2008 SEA launched a new procedure for the partial sale of SEA Handling, which has yet to reach a conclusion, despite initial interest from a leading international operator.

(119) SEA emphasised that the SEA Handling recovery program was based primarily on the hub airport commercial model chosen by the group, and had a medium/long term timeframe that would allow an adequate economic return on the financial commitments required to undertake such activity. SEA pointed out that Directive 96/67/EC stated that where the number of ground handling service providers was limited providers were to be selected, by an appropriate procedure, for seven years, implicitly acknowledging that shorter periods of time would be insufficient to achieve adequate organisational scheduling and the consequent economic return.

(120) Specifically, the program consisted of measures to improve labour productivity and gradually to reduce staff costs. These objectives were to be achieved by taking both qualitative measures, addressing the way ground handling activities were carried out, and quantitative measures, looking at staff numbers. In the first place the restructuring plan interlocked with the SEA group’s 2002-2006 consolidated business plan, which outlined the group’s strategy and objectives and the measures to be adopted to return its ground handling services to profitability. Thereafter, SEA Handling’s 2003-2007 business plan, adopted on 29 July 2003, provided for a restructuring program aimed at improving the efficiency of all services, structures and human resources pertaining to ground handling. SEA hoped it could return its ground handling business to profitability within three years, that is, by 2005, or at the latest by 2007.

(121) SEA therefore disputed the Commission’s claims that the group’s consolidated business plan did not give a detailed description of the measures that SEA intended to adopt to reorganise SEA Handling, and that there was no detailed business plan specifically for SEA Handling that set out the strategy for saving the company and the steps by which the strategy was to be implemented.

(122) SEA considered that the improvement in the key economic indicators between 2003 and 2004 was encouraging and showed the validity of SEA’s actions. The return to profitability by 2005 envisaged in the 2003-2007 business plan was stifled by a series of factors that had a negative impact on SEA Handling’s economic situation of SEA Handling. Among these, SEA cites the spread of SARS in 2002-2003; the outbreak of the Iraq war in 2003 and the growing threat of international terrorism; intensified pressure to cut ground handling prices in 2006, following the arrival of new operators at Malpensa airport, particularly Aviapartner, which resulted in a downward revision of several contracts, including that with Alitalia (– 6 % of the unit price); the ‘de-hubbing’ of Milan Malpensa airport decided by Alitalia in 2007, the full effects of which were felt as of April 2008; and the ash cloud produced by the Icelandic volcano Eyjafjallajökull in 2010.

(123) In light of the worsening in SEA Handling’s position in 2006-2007, and following the de-hubbing by Alitalia, SEA had to decide whether to maintain its commercial model, in which case it would have to adapt and update the programme for the relaunch of SEA Handling. SEA finally decided in 2007 to focus on creating an innovative ‘self-hub’ or ‘virtual hub’ model, and confirmed the strategic decision to continue with the recovery and restructuring of SEA Handling, reiterating the importance of ground handling services to its own industrial plans, as in the previous model. Its decision was based on the results already achieved in terms of labour productivity and staff cuts, on the fact that its past experience showed that a return to profitability was possible, and on the consideration that any other solution, including outsourcing, continued to raise the same counterindications that had been evaluated in 2003.

(124) The coverage of losses was still justified, because the use of outside operators to provide certain continued service activities was neither economically advisable (given the higher cost of outsourced services compared to the synergies that could be achieved internally) nor practicable (given the absence of outside operators able to provide a comprehensive set of ground handling services, and the poor reliability and quality of services provided on numerous occasions by the operators working at the Milan airports).

(125) As regards the practicality of the services offered by outside operators, SEA contends, first, that while the certification necessary to provide all ground handling services at Milan airports was obtained by some outside providers, such as Aviapartner, in 2006 and thereafter, the real situation was quite different. The standardised certification procedure followed by ENAC was inadequate, because it was often based on whether the ground handling provider met certain requirements stated in terms of the group as a whole, rather than the actual capacity that the company was able to guarantee at a given airport. As airport manager, SEA ought to have been involved in the ground handling service provider certification procedure, so that it did not have to suffer directly the consequences of service failures or inefficiencies on the part of outside operators, without having the power to penalise them. Under the new ENAC regulations of 19 January 2011, the airport manager was to give a reasoned opinion on the regularity of the procedure and on the standards for providers.

(126) Second, no outside operators were actually able to offer the complete set of services, since their commercial strategy consisted of focusing on the most profitable services.

(127) Third, the operators working at the airports owed a considerable amount of money to SEA Handling, which often had to intervene in emergencies to make up their shortcomings, and had finally decided to go through legal channels to recover its claims.

(128) Fourth, contrary to the statements made by the Commission, the main competitors currently operating at the Milan airports, ATA Handling and Aviapartner, had not made profits. ATA Handling had recorded losses between 2003 and 2005 which, according to SEA, were heavier at the Milan airports. Aviapartner had made profits across the network of airports in which it operated, but SEA considered it likely that the company had recorded losses on the services it provided at the Milan airports.

(129) As regards the assessment of SEA Handling’s financial performance, which it had been argued might have led to a different decision, SEA stressed that in the ground handling sector the effects of business decisions could be evaluated only in the long term and that, consequently, SEA’s decision could not reasonably have been changed after just a few years, particularly in light of the encouraging results obtained in the initial three years, which had had positive effects that were compromised only by events that took place thereafter outside the SEA group.

(130) As regards the accounting arrangements, SEA stated that SEA Handling’s results did not receive the subsidy to ground handling services that could be given by assigning business to the subsidiary that was paid in accordance with a more profitable scale of rates, rather than at market prices, as was the case with other European operators. SEA Handling was also the only ground handling service provider in the Milan airports that regularly paid the airport manager the fee for the use of common facilities; if, like other operators working at the Milan airports, it were not to pay this fee, SEA Handling’s accounts would already be in the black (in 2011). Finally, the accounts for ground handling services did not include revenues deriving from the management of centralised infrastructure, as was the case with comparable operators. The inclusion of these activities at set rates in SEA Handling’s accounts would generate additional annual revenues of around EUR 70 million. SEA cited the example of […], which included in its ground handling services accounts revenues deriving from ‘centralised infrastructure management’, an item which did not appear on the exhaustive list of ground handling services contained in Annex A to Directive 96/67/EC, nor in the IATA Standard Ground Handling Agreement. If it had acted in the same way in the period 2005-2009 SEA would have achieved a total gross operating margin of between – EUR 9 million and + EUR 8 million (compared to an actual total of between – EUR 42,5 million and – EUR 23,2 million), which would have reduced the operating loss by an average of 100 %.

(131) SEA stated that by 2012 it would have finally returned its ground handling services to profitability, thanks to its perseverance in implementing its restructuring plan, which had proved to be prudent and consistent with the conduct that could be expected of a private investor operating in a market economy. SEA would be able to resume its search for a strategic ground handling partner, for example, in order to develop its own business in the sector, at the Milan airports and elsewhere, and potentially also in order to expand its business to specialist services that it did not yet provide.

(132) Many airport managers of a comparable business type, including larger undertakings such as […], had expressly ruled out any intention of withdrawing from ground handling services, even though they had sometimes been encouraged to do so by financial analysts, thus confirming the validity of this commercial model.

5.2. […]

(133) […] pointed out that the ground handling industry generally generated profits despite the reduced margins. Staff costs made up a significant part of each operator’s outgoings, probably somewhere between 60 and 70 % of revenue, and it was therefore vital to keep close control of operations using specific planning systems.

(134) There were economies of scale in the sector: the cost per passenger fell as the number of passengers rose. The optimum level of cost per passenger was reached when 8-9 million passengers were being managed in a year, and SEA Handling comfortably surpassed this level, handling around 22 million passengers at the two airports with a market share that was constantly above 70 %.

(135) […] cited SAGAT Handling as an example of an undertaking that was profitable on the market, managing around 2,5 million passengers in 2009 with a staff cost equivalent to around 55 % of its turnover. It also cited Fraport Ground Services Austria, Swissport, and Menzies.

(136) The primary cause of SEA Handling’s poor profitability was its high staff costs, which consistently exceeded 85 % of its turnover between 2002 and 2008, a burden which […] saw as unsustainable. […] found this particularly surprising in that SEA Handling seemed to have access to the cassa integrazione layoff fund.

(137) The possibility could not be ruled out that SEA Handling might have received aid in other forms. […] suggested that SEA Handling’s push-back, tow-in, de-icing and bussing services were provided by SEA, while SEA Handling sold such services to its clients. […] expressed doubts regarding the regularity of operations given the lack of transparency with regard to the billing of these services to SEA Handling.

(138) Likewise, SEA might be giving further support to SEA Handling by providing its own staff. Without proper billing SEA Handling might have been receiving unlawful aid.

(139) SEA might also be giving aid to SEA Handling by making combined offers to airlines proposing a discount based on the provision of SEA Handling services. From newspaper reports […] had observed that whenever SEA attracted a new airline the ground handling services were almost always provided by SEA Handling.

(140) Finally, […] collective agreement between ground handling service providers and the trade unions. This agreement applied to all personnel of ground handling service providers. Only SEA continued to apply its own collective agreement, which was less favourable to SEA both economically and legally and in both the short term and the long term: this was a choice that was not consistent with policy that was stated to be focused on cutting costs.

6. OBSERVATIONS MADE BY THE ITALIAN AUTHORITIES IN RESPONSE TO THE COMMENTS SUBMITTED BY INTERESTED PARTIES

(141) The Italian authorities submitted their own observations in response those put forward by […].

(142) The Italian authorities contended that the first argument, based on the idea that the profitability of a ground handling company depended on the volume of traffic it managed and thus on the number of passengers it served, was a simplistic argument deriving from an abstract assessment that took no account of the fact that SEA’s decisions were guided by long-term economic considerations. This economy of scale was not a decisive factor in a ground handling company’s economic performance. More specifically, the revenue of such a company was entirely unrelated to the number of passengers managed, but depended on the number of flights served and their tonnage.

(143) For purposes of the private investor test the main question was not whether the company might have been able to make profits which, for whatever reason, it had proved unable to achieve, but whether the shareholder had a sound economic interest in investing in the company in the hope of gaining a return on its investment, even in the long term, or even in strategic terms rather than purely financial terms. Accordingly, the fact that the firm was potentially in a position to generate profits suggested that it did satisfy this test.

(144) The Italian authorities also argued that in order to make a profit it was not sufficient to handle a large volume of traffic. They stressed the importance of operating over a broad network of airports, to which they had already drawn attention in the past.

(145) A ground handling services provider which was not linked to an airport manager, and which did not hold a dominant market position at a given airport, could follow a commercial strategy that focused solely on the services it considered profitable. SEA Handling could not follow such a strategy: as a subsidiary of the airport manager, given the airport manager’s obligations towards the regulatory authority (ENAC) to ensure continued and effective provision of the entire range of ground handling services exhaustively listed in Directive 96/67/EC at Linate and Malpensa airports, it could not choose to provide only the services that were the most economically advantageous, or to provide services only at certain times of the day.

(146) The Italian authorities disputed the statement that a large number of European ground handling undertakings had substantial profit margins. In 2009, the seven biggest operators on the Italian market recorded losses (in addition to SEA Handling these were Aviohandling, Flightcare, ATA Handling, Aviapartner, Marconi Handling and SAGA). Only SAGAT Handling, whose share of the Italian ground handling market was very small, made a profit, and that profit was modest.

(147) In any event, SEA handling’s economic performance could not be compared with those of operators in the sector in Italy or in Europe such as SAGAT Handling, Fraport Ground Services Austria, Swissport or Menzies. Nor did these arguments help with the analysis for purposes of the private investor test; it had to be asked, rather, whether there were other operators comparable to SEA Handling whose shareholders, even if private, had taken decisions similar to those of SEA. The activities of SAGAT Handling and of SEA Handling presented different levels of complexity. Menzies Aviation and Swissport were independent ground handling undertakings operating in the form of an international network, and their economic indicators could not be reliably compared to those of SEA Handling for reasons already explained by the Italian authorities.

(148) It had been argued that staff costs had an excessive impact on SEA Handling’s turnover compared to the industry average, and that this was evidence of a failure to comply with the private investor test; the Italian authorities contended that this argument took no account of the diversity between different operators. More specifically, operators that had been created following the separation of ground handling and airport management services, like SEA Handling, were inevitably going to experience a higher labour cost compared to new players, at least during their first years of operation.

(149) For subsidiaries of an airport manager which offered the full range of ground handling services, this average impact of staff costs on turnover had to be set at 70-75 %. The higher cost was due to the fact that such undertakings used highly qualified personnel with extensive knowledge of the industry and of the rules and procedures by which it was governed, and were able to provide the entire range of ground handling services. As such, the shareholder/airport manager, despite wanting to gradually reduce the impact of labour costs, would attach greater importance to the preservation of accumulated expertise and integration with ground handling services, both of which were of significant strategic value to the group. The Italian authorities also pointed out that new market players were not affected by historic costs resulting from pre-existing contracts.

(150) The Italian authorities said the shifts in the impact of labour costs on turnover were very different from what had been described by […]: over the period 2002-2011 the movement had been positive, reaching just under 80 % in 2010, with a trend towards the average for independent ground handling operators, which was just under 70 %.

(151) Regarding the suspected forms of aid indicated by […], the Italian authorities rejected what they considered mere suppositions put forward without any foundation or supporting evidence.

(152) The services for which SEA Handling uses SEA (push-back, tow-in, bussing) were governed by paid subcontracting agreements, concluded on market terms, as shown both in the customer airline agreements and on the certificate issued by ENAC. Access to those services was provided in a way that did not discriminate against any other operator requesting them, and the outsourcing of certain services was common practice in the Italian ground handling industry.

(153) The affirmation that SEA Handling used SEA staff free for the provision of ground handling services was unfounded, and when ground handling services were hived off all the skills required for the provision of such services had been allocated to SEA Handling’s cost centres.

(154) With regard to the alleged concession by SEA of more favourable terms to new airlines for access to the Milan airports (i.e. discounts) on the condition that they favour SEA Handling over its competitors, the Italian authorities considered this claim to be completely unfounded, devoid of any proof and indeed contradicted by the facts, since leading carriers such as Gulf Air at Malpensa and Air Malta, Air Baltic and Carpatair at Linate had chosen providers that were competitors of SEA Handling.

(155) Finally, concerning the application to SEA Handling employees of SEA’s collective bargaining agreement rather than the new collective bargaining agreement specifically for workers in the ground handling industry, […], even if this were to prove more advantageous than its predecessor from an economic and regulatory perspective, the Italian authorities emphasised above all that, irrespective of the content and application of the agreement in question, the objection raised was irrelevant in these proceedings, given that it concerned an event that had occurred outside the relevant period.

(156) In any case, having regard to the collective bargaining agreement, which consisted of a general, all-inclusive part and three specific sections, negotiated separately by each of the representative associations affected (Assoaeroporti, Assohandlers and Assocatering), SEA Handling applied the general part of the agreement to its employees, along with the specific rules negotiated by Assoaeroporti, because SEA Handling could not exempt itself from compliance with the agreements concluded previously with union organisations, as described in the union agreement of 4 February 2002 (29), according to which ‘SEA Handling will apply the collective bargaining agreement signed by Assoaeroporti and union organisations’.

7. ADDITIONAL INFORMATION SUBMITTED ON 28 JUNE 2012

(157) Following the meeting of 19 June 2012, the Municipality of Milan submitted additional observations setting out its assessment of the measures in question, particularly regarding its view that the reorganisation of SEA Handling was an internal matter for the SEA group, the business model chosen by SEA for the development of the airports under its management, and the need to distinguish between the different periods under investigation.

The reorganisation of SEA Handling is an internal matter for the SEA group

(158) The Milan authorities reaffirmed that at no time had SEA sought financial support for its recovery from its shareholders, the Municipality and Province of Milan. On the contrary, the public authorities in question had received substantial dividends from the SEA group, totalling EUR 550 million over the period 2002-2012.

(159) It could not be assumed — and it had yet to be shown — that if SEA had decided not to cover the debts of the handling company, and instead to use the services of an independent operator, the public authorities would have received an even higher financial benefit. This was due essentially to the difficulty of obtaining from outsiders, at competitive prices, all the ground handling services which SEA, as airport manager, was required to provide to all airlines and passengers on a continuous, accessible and comprehensive basis, in accordance with the regulations in force; to the difficulty of maintaining supervision over service quality, a requirement which was vital to airport competitiveness and to the recovery of traffic (which SEA had in fact achieved thanks to its chosen business model); and to the intrinsic link between the company’s business model and the airport’s hub model (particularly after Alitalia’s de-hubbing from the Milan Malpensa airport and the need to develop a self-hub or virtual hub concept). The Municipality of Milan was unaware of any assessments made by the Commission, or by independent experts on its behalf, which might serve to dispute these affirmations.

(160) Finally, given the lack of any financial flows originating with SEA’s public shareholders, and the fact that the decision to reorganise SEA Handling was in line with SEA’s strategic objectives, any finding that the measures at issue constituted State aid should be accompanied by proof of the imputability to the State of every single decision to cover losses made during the entire period in question, and especially in the second phase (post-2007), to which the considerations in the opening decision did not apply, although the Municipality in any event disputed them.

The SEA group business model

(161) The Milan authorities reiterated that the chosen model, based on the option not to outsource ground handling services, would benefit long-term airport development. This course was preferable from a group perspective when the airport system in question acted as a hub. The management of an airport system based on the presence of a hub carrier, or on the provision of hub activity, given the high degree of complexity of the system, required that the manager should provide some airport services direct, including handling, in order to ensure the efficient operation of the airport. The Milan authorities cited the examples of Frankfurt, Vienna and Paris airports. The choice was justified by the following considerations: (a) It was consistent with SEA’s goal of developing its hub activity at the Milan Malpensa airport, which required continuous supervision, monitoring and management of ground handling services provided to the hub carrier, and was even more important when pursuing a self-hub or virtual hub model. Under the ‘self-hub’ or ‘virtual hub’ model the airport would be developed as a hub without the presence of one or more hub carriers. Under this model the airport manager itself would offer users the opportunity to use the airport as a hub, and would connect arriving and departing flights operated by all carriers at the airport irrespective of whether any interconnection agreements between carriers were in place. (b) It was supported by the fact that the biggest and best-performing airport hubs in continental Europe had opted for the same solution. (c) It was necessary for developing freight traffic at the Milan airports, a sector in which competition between European airports was seeing strong growth, and the potential for attracting new carriers was also related to the level of specialisation of handling services. The commercial model selected by SEA had allowed constant growth in freight activity in Milan, which was in first position in Italy and sixth in Europe, with the highest concentration of all-cargo carriers originating in the Middle and Far East, which were the areas experiencing the fastest economic growth in the world. d) It was consistent with the business model chosen for increasing the capital of the airport management company with a view to its subsequent privatisation.

Distinction between the periods under investigation for the purpose of assessment of the measures

(162) The Milan authorities cited the 2003-2007 business plan, which had been submitted to the Commission after the formal investigation procedure was initiated. In their opinion, the plan showed that SEA’s actions in covering the losses were decided in compliance with the private investor test.

(163) However, the analysis of the SEA Handling 2003-2007 business plan must in any event demonstrate that the reorganisation of SEA Handling complied with the Community guidelines on State aid for rescuing and restructuring firms in difficulty (‘the 2004 Restructuring Guidelines’) (30), given that the reorganisation was carried out with a significant contribution from the subsidiary, the financial intervention was limited to the minimum needed in order to prevent a situation of insolvency arising under the applicable corporate law regulations, and SEA Handling had put all of its own efforts into the recovery, losing market share to its competitors and giving up certain peripheral activities outside its core business.

(164) While the shareholder’s hopes of a recovery within the planned five-year period had been frustrated by a series of external events, combined with the difficult initial situation of the company (which was not formed as a start-up, but as a spin-off of an existing company division in difficulty) and the complete liberalisation of the ground handling market in Italy, nevertheless the efforts made in the first, challenging period showed that the recovery of SEA Handling was certainly possible. At the end of that first period, the company found itself in an economic situation and with a productivity level that were significantly better than in 2002.

(165) Regarding the second phase of the recovery, the Milan authorities referred to the SEA group’s strategic plans for 2007-2012 and 2009-2016. According to the SEA group, break-even point was expected to be reached in the course of 2012. If despite the evidence submitted the Commission were to take a contrary view, the Milan authorities considered that it should analyse each of the interventions in the capital of SEA Handling individually, to establish the presence of aid and in particular the imputability of the aid to the Municipality of Milan, which was firmly denied.

8. ASSESSMENT OF THE MEASURES UNDER ARTICLE 107(1) OF THE TFEU

(166) Following the formal investigation initiated in compliance with Article 108(2) of the TFEU, and taking into account the arguments put forward by the Italian authorities and by the interested parties, the Commission considers that the measures in question constitute State aid which is incompatible with the internal market under Article 107(1) of the TFEU and inadmissible under Article 108(3) of the TFEU.

(167) Regarding the period to which this decision relates, the Commission asked Italy to provide any information it judged necessary to determine the compatibility of the measures in question, specifying the period indicated in Section 2.1 and Section 5 of the opening decision. In Section 5, the Commission asked it to provide the 2002 business plan for SEA Handling, with any subsequent amendments, or any document concerning the strategy and return to profitability of SEA Handling; SEA Handling’s economic results for the entire 20022009 period; the exact amounts and form of compensation of losses and, in particular, all relevant data for the period from 2005 to date.

(168) In any case, the Italian authorities were asked to submit their observations on the entire duration of the period examined in the opening decision. In paragraph 42 of the decision the Commission particularly stipulated that the Commission therefore deems it necessary to examine the period 2002-2010 to determine whether SEA Handling received illegal State aid in the form of compensation for losses during that period.

(169) Moreover, since the Italian authorities had not provided the above information for the whole of the period expressly referred to in the opening decision, the Commission specified the documents to be provided and the period under examination for a second time in its letter of 11 July 2011.

(170) Following this letter from the Commission, the Italian authorities submitted observation and provided details up to 2010, mainly in their letter of 15 September 2011.

(171) Additionally, the Commission observes that the measures investigated for the period 2006-2010 were of the same kind as those examined for the previous period, namely capital injections to cover operating losses, and were adopted by the same body for the benefit of the same company. The Commission therefore had a duty to examine the entire period in question within the context of these proceedings.

(172) For these reasons the Commission considers that the period under investigation runs from the date on which SEA Handling was set up in 2002 until the Commission’s decision to initiate the formal investigation on 23 June 2010.

(173) This Decision first addresses the question whether SEA Handling was a firm in difficulty within the meaning of the Community Guidelines on State aid for rescuing and restructuring firms in difficulty of 1999 (‘the 1999 Restructuring Guidelines’) (31) and the 2004 Restructuring Guidelines (Section 8.1). The Commission then assesses whether the measures in question constitute State aid to SEA Handling within the meaning of Article 107(1) of the TFEU (Section 8.2), and, finally, whether such aid can be declared compatible with the internal market (Section 8.3).

8.1. SEA HANDLING’S DIFFICULTIES

The 1999 Restructuring Guidelines

(174) Point 5 of the 1999 Restructuring Guidelines states that a firm is regarded as being in difficulty where more than half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months; or … where it fulfils the criteria under its domestic law for being the subject of collective insolvency proceedings.

(175) Point 6 of the 1999 Restructuring Guidelines states that the usual signs of a firm being in difficulty are increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges and falling or nil net asset value.

(176) The General Court has confirmed that the fact that point 6 of the 1999 Restructuring Guidelines refers to ‘increasing’ losses cannot prevent the Commission from taking into account the continuous presence of losses over several consecutive years as a sign of financial difficulties, even though those losses were not increasing (32). The Commission considers that in 2002, at the time when the decision to carry out an initial injection of capital was taken, SEA’s financial difficulties were evident. The company’s situation improved significantly in the period 2003-2004 period. It was working against substantial losses which generated a cumulative operating loss of more than EUR 140 million in three years.

(177) The General Court has also accepted that a substantial reduction in a company’s capital is a relevant factor in determining whether the firm is in difficulty (33). The Commission considers that the continuing losses recorded by the company, the consequent reduction of its capital, and the decision by SEA to carry out the injections of capital to which this investigation relates in order to address that reduction, clearly show that the company was facing serious financial difficulties throughout the period under investigation. In its annual reports and accounts at 31 December 2002, 2003 and 2004, the company itself declared losses at SEA Handling which exceeded one third of its capital.

(178) The General Court has also held that the list of economic factors that may indicate that a firm is difficulty set out in the 1999 Restructuring Guidelines is not exhaustive (34). SEA Handling’s debts rose from EUR 250,3 million in 2002 to EUR 310,6 million in 2003, and fell only slightly in 2004, down to EUR 259,3 million. The net asset value of SEA Handling also fell, from EUR 35,1 million in 2002 to EUR 34,8 million in 2003. These indicators too highlight the financial difficulties faced by the firm in 2002 and 2003.

(179) The annual report and accounts at 31 December 2003 refer to the negative results of SEA Handling, whose costs remained too high in relation to its market share irrespective of the partial benefit deriving from the labour force agreements. The prospect of a further decline in volume of handling activities in future years means the company will be unable to achieve economic balance within the proposed time-frames. Similarly, the annual report and accounts at 31 December 2004 state that returning SEA Handling to viability in the next few years remains difficult, particularly in light of the growing competition in the market following the arrival of new operators. Similar statements are contained in the report and accounts at 31 December 2005.

(180) Finally, the fact that the company was in difficulty at the time of the first injection of capital has also been repeatedly reiterated by the Italian authorities and by SEA (35), and has been confirmed in the many business plans submitted to the Commission. It will be enough to point out that the 2002-2006 consolidated business plan envisaged that ground handling activities would return to profitability gradually by 2003 (p. 31). SEA Handling itself confirmed, in its comments on the opening decision, that it would not have been able to absorb its losses for the period 2003-2005. If those losses had not been covered by SEA, SEA Handling would have been insolvent.

The 2004 Restructuring Guidelines

(181) The definition of a firm ‘in difficulty’ remains substantially unchanged in the 2004 Restructuring Guidelines. The provisions in points 5 and 6 of the 1999 Restructuring Guidelines reappear as points 10 and 11 of the 2004 Restructuring Guidelines.

(182) In addition, point 11 of the 2004 Restructuring Guidelines states that Even when none of the circumstances set out in point 10 are present, a firm may still be considered to be in difficulties, in particular where the usual signs of a firm being in difficulty are present, such as increasing losses, diminishing turnover, growing stock inventories, excess capacity, declining cash flow, mounting debt, rising interest charges an