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Brussels, 29.09.2010C(2010)6472 final

In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus […].

PUBLIC VERSION

WORKING LANGUAGE

This document is made available for information purposes only.

Subject: State aid N 4/2010 and N 7/2010 – Spain - Individual R&D aid to ALESTIS Aerospace SL.

Dear Sir,

The Commission wishes to inform you that it has decided to raise no objections to the above-mentioned cases for the reasons set out below.

1. PROCEDURE

(1) On 4.1.2010, Spain notified its intention to grant two interest-free loans to ALESTIS aerospace SL" (hereinafter: ALESTIS). Each loan is for one individual R&D-project, namely the development of:

• the Tailcone section 'S19.1' of the future Airbus A-350 XWB , registered as State-aid case N 4/2010;

• the Belly Fairing of the future Airbus A-350 XWB, registered as State-aid case N 7/2010.

(2) The Commission combined both State-aid cases and treated them jointly. Spain had pre-notified both measures to the Commission on 26.5.2009.

(3) On 23 February 2010, the Commission requested supplementary information. The Spanish authorities replied to that information request by letters of 26.4.2010, registered on the next day, and of 17.4.2010, registered on the next day.

EUROPEAN COMMISSION

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(4) On 3.6.2010, the Commission asked for further information. Spain responded by letters of 12.7 2010, registered on the same day, and of 13.7.2010, registered on the next day.

(5) By letter dated 9.9.2010, the Commission sought the consent of the Spanish authorities on an extension of the original period of two months within which the Commission is required to adopt a decision, in accordance with Article 4(5) of Regulation 659/1999.1

By letter dated 13.9.2010, registered on the same day, the Spanish authorities agreed to that request. The deadline was extended accordingly, to 15.10.2010

2. DESCRIPTION OF THE MEASURES

2.1. Objective of the aid

(6) Under the proposed measures, the Spanish authorities plan to grant aid in the form of interest-free State loans to ALESTIS for certain R&D activities.

2.2. Legal basis and granting authority

(7) The Spanish authorities submitted that the national legal basis under which they intend to grant the aid are:

• Approval by the Council of Ministers of 11 December 2009 which authorises the Minister of Industry, Tourism and Commerce to grant aid to i.a. ALESTISfor its participation as Tier-1 supplier in the Airbus A-350 XWB-programme and its Trent-XWB-engine: Acuerdo de Consejo de Ministros por el que se autoriza al Ministerio de Industria Turismo y Comercio a conceder ayudas a las entidades ARIES AEROESTRUCTURAS AEROESPACIALES S.L.U., ALESTIS AEROSPACE S.L., DESARROLLOS AERONÁUTICOS DE CASTILLA LA MANCHA S.A. e INDUSTRIA DE TURBOPROPULSORES S.A. para su participación como subcontratistas de primer nivel en el programa de desarrollo del avión AIRBUS A350 XWB y su motor TRENT XWB;

• Royal decree no. 1588/2009 of 16 October 2009 providing rules for loans to Spanish Tier-1 suppliers in the Airbus A-350-programme and its Trent-XWB-engine: Real Decreto 1588/2009, del 16 de octubre, por el que se regula la concesión directa de préstamos para la participación de subcontratistas de primer nivel establecidos en España en el programa de desarrollo de la nueva familia de aviones Airbus A350 XWB y de su motor Trent XWB

(8) The granting authority is the Spanish Ministry of Industry, Tourism and Commerce.

2.3. The beneficiary

(9) ALESTIS is a large enterprise in the aeronautic sector.2 It is based in Spain and also has two plants in Brazil. Alestis was established on 26.1.2009. The establishment was

1 OJ L 83, 27.3.1999, p.1.2 NACE code: C30.3.0 – Manufacture of air and space craft and related machinery

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initiated on 13.6.2007, when Alcor Group3 decided to set up a new company, 'Aerospace Group SK 10 SL', […]* and with a view to participate in the Airbus' A350 XWB-programme. Later on, in 2008, […]* Alcor decided to name the company 'ALESTIS Aerospace SL'. […]*.

(10) The capitalisation process was complex and was affected by the financial crisis. […]*. Finally, Alcor found other shareholders who respectively injected capital (Cajasol, Unicaja and Banco Europeo de Finanzas - BEF, Soprea) or provided industrial assets (The aeronautical affiliates of ALCOR, namely SK3000, SK10 Andalucía, SK2024, SK10 do Brasil, SK380, SK10 D&T, SKEpsilon and SK10 Composites, as well as of EADS, namely SACESA, were incorporated into ALESTIS).

(11) The shareholder structure of ALESTIS is as follows: ALCOR (42.15%), BEF (6.80%), Cajasol (15%), Unicaja (14.30%), SOPREA (19.90%), EADS (1.85%).

2.4. Description of the projects

(12) ALESTIS' contribution to the A-350 XWB will consist of two work packages:

• Development of the A-350 XWB's Tailcone 'S19.1';

• Development of the Belly Fairing of that same aircraft.

(13) Both R&D projects in question concern the development of components for a new generation aircraft family from Airbus, the A-350 XWB (eXtra Wide Body). The A-350 XWB is a civil long-range configuration airplane which will be developed in three different versions (-800, -900 and -1000) with 276-343 seats and a range of 6,900-7,200 nautical miles. The first type of the A-350 XWB, namely the A-350-900, is expected to be certified in December 2012 and to enter into service in June 2013.

(14) The new airplane is designed for high efficiency, maximum reliability and optimised performance. Next generation manufacturing and assembly techniques are required tomake the A-350 XWB more efficient and reliable, in particular by using technologies and procedures resulting in improved fuel efficiency4, reduced emissions of carbon dioxide and lower noise levels. The main characteristic of both projects is the use of carbon fibre in combination with resins. The overall objective is a significant weight reduction, in particular in order to reduce the aircraft's fuel consumption, and thus its cost-effectiveness.

(15) According to the Spanish authorities, prototypes that are eligible for aid will be used for test purposes only and will not be commercially used. Such testing would in general be destructive and would be necessary for the purposes of certification, system qualification, the definition of additional product specifications, and testing the demonstration of manufacturing viability.

3 The group Alcor is active in several sectors and among them also in the aeronautic sector with 8 controlled

companies: SK3000, SK2024, SK10 Andalucia, SKEpsilon, SK380, SK10 D&T, SK10 Composites and SK10doBrasil

* Business secret4 A general decrease of 25% fuel consumption per passenger is estimated for the improved airplane.

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2.4.1. Tailcone 'S19.1' (N 4/2010)

(16) Section 19.1 is located in the A-350 XWB's aft fuselage, behind Section 19. It is divided into 3 zones: the inspection zone, the compartment zone and the exhaust muffler compartment.

(17) The objectives of this project are the development of a new manufacturing and assembly process, the improvement of materials, weight saving, and a greater structural integration through manufacturing of a single piece.

(18) The 'single-piece' approach is new. By comparison, the tail cone of the Airbus A-380 is manufactured in two parts, thus being less complex but heavier, and panels are riveted one to the other. ALESTIS aims at […]* which is a new concept for this specific part of the plane. In particular, the novelty consists in […]*.

(19) One further difference to customary design is, among others, the complexity of the part where the Auxiliary Power Unit (APU) is placed. […]*.

2.4.2. The Belly Fairing (N 7/2010)

(20) The Belly Fairing is the lower part of the A-350 XWB's amidships fuselage. It covers the connecting parts between wings and fuselage.

(21) The project aims at a novel conception of the design and manufacture of the Belly Fairing. ALESTIS will use new materials to develop acoustic skins and the skin of cooling systems. The aim is to increase passenger comfort by a significant noise reduction. For the first time in industry, […]*.

Tailcone 'S19.1'

Belly Fairing

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2.5. R&D categories and eligible costs

2.5.1. Tailcone S.19.1 (N 4/2010)

(22) Industrial research represents 7.5% of the total eligible costs of that project; experimental development represents 92.5%. Investments that are eligible for aid are spread over five financial years, starting in 2009 and running until 2013 inclusive.

(23) Total eligible costs of the project amount to EUR 56.55 million. Any cost overlap with other projects is excluded. Below table shows eligible costs broken down according to cost/R&D-categories:

Tailcone S.19.1 Industrial Research

(million EUR)

Experimental Development(million EUR)

Personnel Costs […]* […]*Costs of instruments and equipment […]* […]*Costs for buildings and land […]* […]*Cost of contractual research, technical knowledge and patents bought or licensed from outside sources at market prices

[…]* […]*

Additional overheads incurred directly as a result of the research project;

[…]* […]*

Subtotal […]* […]*Total eligible costs 56.550

2.5.2. The Belly Fairing (N 7/2010)

(24) In the Belly Fairing project, only experimental development activities are carried out.

(25) The total eligible costs of the project amounts to EUR 111.775 million. Investmentsthat are eligible for aid are spread over five financial years, starting in 2009 and running until 2013 inclusive. Any cost overlap with other projects is excluded. Below table shows eligible costs broken down according to cost categories:

Belly Fairing Experimental Development(million EUR)

Personnel Costs […]*Costs of instruments and equipment […]*Costs for buildings and land […]*Cost of contractual research, technical knowledge and patents bought or licensed from outside sources at market prices

[…]*

Additional overheads incurred directly as a result of the research project

[…]*

Total eligible costs 111.775

2.6. Supplier selection and application for aid

(26) Airbus selected ALESTIS through a call for tender. That process as well as the process of application for aid is described hereunder:

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• In November 2007, […]* informally approached the Spanish authorities and requested aid for non-specified R&D-projects in the A-350 XWB-framework, with investments that were then estimated to be approx. EUR 175 million. The Spanish authorities responded favourably, by letter of intent, of 30 November 2007.

• Also in November 2007, Airbus starts the call for tender for one single work package, embracing i) Main Landing Gear Doors (MLGD); and ii) Belly Fairings for the A-350 XWB. At that stage, the Tailcone S19.1 was not part of that particular call because Airbus was then aiming at a single Tier-1 supplier both for MLGD and Belly Fairings. ALCOR took the overall lead in preparing the bid, acting through the intermediate vehicle 'SK10', which was the predecessor of ALESTIS.

• In late June 2008, Airbus revised its tendering policy and decided to split the concerned work package in two. Then, Airbus asked SK10 to extract the MLGD-work package from its tender and to replace it by a work package that is similar in size, volume and technological content. SK10 accordingly decided to tender for the Tailcone S19.1 work package. SK10 found that the Tailcone component had characteristics similar to MLGD, in terms of the volume and size of business, of financing requirements as well as of technological contents (as regards coatings with fibre-placement technology;composite frames and stringers). For that reason, SK10 did not update its previous application for aid.

• On 4 July 2008, SK10 presented its Best and Final offer (BAFO) for the Belly-Fairing contract to Airbus.

• The same day, SK10 submitted a formal aid application, however stillreferring to the development of i) Main Landing Gear Doors (MLGD); and ii) the Belly Fairing. The Tailcone S19.1 was not yet referred to, as SK10 considered the Tailcone S19.1-project quite similar.

• Also on the same day, Airbus awarded the Belly-Fairing work package to SK10. The contract was signed on 6 August 2008, effective as from 4. July 2008.

• In August 2008, Airbus opens the new call for tender for the now distinct Tailcone S19.1 package.

• On 27 November 2008, SK10 presented its BAFO for the Tailcone S.19.1.

• On 29 January 2009, ALESTIS (being SK10's successor) submits updated formal aid requests for i) the Tailcone project and now also for ii) the Belly-Fairing project. In view of the above mentioned similarities between the MLGD and the Tailcone S19.1 work packages, this was regarded by the Spanish authorities as a mere technical amendment to the original aid request.

• On 1st February 2009, work on both the Belly-Fairing and the Tailcone S19.1 projects starts.

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• On 2nd February 2009, the supply contract concerning the Tailcone S.19.1 is formally signed.

(27) As far as the Spanish authorities are aware, ALESTIS competed with at least one other bidder for the Tailcone S19.1 and at least three other bidders for the Belly-Fairing.

2.7. Aid instruments, aid amounts and aid intensities

(28) The Spanish authorities intend to grant two interest-free loans without collaterals to ALESTIS. The nominal loan amounts will correspond to 75 % of the total eligible costs and the aid will be disbursed in five annual instalments. Following a five-year grace period, the loans will last up to 15 years. .

(29) In order to determine the aid amounts resulting from the loans and taking account of disbursements in several instalments, the Spanish authorities have calculated the gross grant equivalent for the aid. The calculations are based on the Communication from the Commission on the revision of the method for setting the reference and discount rates5 (hereafter "the Communication on reference and discount rates"), taking into account the following assumptions:

• Base rate: 1.45% (applicable on 11 December 2009, when the Spanish Council of Ministers authorised the Ministry of Tourism, Industry and Commerce to grant aid to the ALESTIS);

• Discount rate: 2.45% (base rate + 100bp)

• Collateralisation: low;

• Rating: BBB ('good');6

• Corresponding margin on top of the base rate: 220 bp;

• Reference rate: 3.65% (1.45% base rate + 220 bp. margin).

(30) Aid intensities

Aid intensities Tailcone-S19.1 (N 4/2010)

Aid intensity Belly Fairing (N 7/2010)

total eligible costs EUR 56,550,480.00 111,775,004.00

total amount of the soft loan EUR 42,412,860.00 83,831,252.00

Percentage of eligible costs covered by total amount

75.00% 75.00%

Gross grant equivalent EUR7 13,246,744.86 25,427,311.58

5 OJ C 14, 19.1.2008, p. 6.6 That rating was provided by Unicaja, by letter to ALESTIS, dated 13 November 2009. Since ALESTIS is a

new enterprise, that rating was not based on a balance-sheet approach. Instead, Unicaja considered the credit history of ALESTIS' shareholders and the industrial record of Alcor and Sacesa. As to the independence of the rating we note that Unicaja holds 14.3% of ALESTIS shares. In said letter, Unicaja asserts that it has applied its internal credit-rating criteria. Spain provided the list of criteria and argued that Unicaja had no reason to issue an unreasonably favourable rating, as its credibility would have been at stake in case of failure.

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Aid intensity8

% 24.16% 23.50%

2.8. Duration

(31) The planned investments will be made over five financial years starting in 2009 and ending no later than 31 December 2013. As described above, the loans will be disbursed in five instalments, for eligible costs incurred from 2009 until 2013 inclusive. The Spanish authorities confirmed that the aid will not be granted before the Commission's approval.

2.9. Cumulation

(32) According to the Spanish authorities, the aid can not be cumulated with aid from other local, regional, national or Community schemes to cover the same eligible costs.

3. ASSESSMENT

3.1. Existence of aid

(33) According to Article 107(1) of the TFEU, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market.

(34) The notified loans will be provided by the Spanish authorities from the State budget and will result in foregone interest revenues and they are thus funded from State resources. The loans in question will be provided to one single beneficiary, namely ALESTIS, and are therefore selective. By relieving ALESTIS from R&D costs which should otherwise have been borne by that enterprise, the measures confer an advantage to ALESTIS. The beneficiary is active in the sector of manufacture of air and spacecraft and related machinery, which is open for trade between Member States. The aid could thus improve the financial situation and enhance the market position of ALESTIS and thereby distorts or threatens to distort competition and affects trade between the Member States.

(35) Consequently, the notified measures constitute State aid within the meaning of Article 107(1) of the TFEU.

3.2. Legality of the aid

(36) The Commission notes that the Spanish authorities have complied with Article 108(3) of the TFEU by notifying the aid measures to the Commission and by not putting the measures into effect until the Commission's authorisation thereof.

7 The gross-grant equivalent has been discounted to its present value. 8 The aid intensity is based on the discounted value of the gross-grant equivalent and of the eligible costs.

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3.3. Basis for assessment of compatibility of the aid with the TFEU

(37) According to Article 107(3)(c) of the TFEU, aid may be compatible with the internal market if it facilitates the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(38) In the notified cases, the objective of the measures is to promote R&D&I activities. The Community Framework for State aid for Research and Development and Innovation9 (hereafter the "R&D&I Framework") sets forth criteria based on which the Commission will assess whether aid for certain R&D activities is compatible with the internal market under the mentioned Article 107(3)(c) of the TFEU.

(39) The R&D&I Framework provides conditions for two different levels of compatibilityassessment:

− A general level of analysis: Chapters 5 (in particular, section 5.1 Aid for R&D projects), 6 (Incentive effect and necessity of the aid) and 8 (Cumulation) lay down general conditions for the compatibility of R&D aid measures.

− A detailed level of analysis: For aid with a higher risk of distortion of competition due to the activity, aid amount or type of beneficiary, a detailed analysis has to be carried out in addition to the general analysis. The purpose of this assessment is to ensure that such aid does not distort competition to an extent contrary to the common interest, but actually contributes to the common interest. This occurs when the benefits of State aid in terms of additional R&D&I outweigh the harm to competition and trade. Chapter 7 of the R&D&I Framework provides assessment criteria for positive and negative effects of the aid and the balancing of such effects.

(40) The notified aid measures are not based on an aid scheme, but granted ad hoc, to a large enterprise. The assessment below follows the order of the criteria for a detailed assessment, as set out in Chapter 7 of the R&D&I Framework. The assessment of the fulfilment of the general conditions set out in Chapters 5, 6 and 8 of the R&D&I-Framework is integrated in the appropriate part of the detailed assessment. In particular, compliance with the conditions set out in section 5.1 and Chapter 8 of the R&D&I Framework (concerning research categories, eligible costs, aid intensity and cumulation) is assessed under point 3.4.4 below, regarding the proportionality of the aid, while compliance with the conditions of Chapter 6, regarding the incentive effect and the necessity of the aid, is assessed under point 3.4.3 below.

3.4. Positive effects

(41) According to point 7.3 of the R&D&I Framework, the fact that the aid induces the beneficiary to pursue R&D activities in the Community which would not otherwise have been pursued constitutes the main positive element to take into consideration when assessing the compatibility of the aid. In this respect, the Commission will notably pay attention to the net increase of R&D conducted by the undertaking, the contribution of the measure to the global improvement of the sector concerned as

9 OJ C 323, 30.12.2006, p. 1.

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regards its level of R&D and the contribution of the measure to the improvement of the Community situation regarding R&D activities in the international context.

3.4.1. Existence of a market failure

(42) According to points 1.3.2 and 7.3.1 of the R&D&I Framework, market failures may prevent the market from achieving optimal output, and State aid may be necessary to increase R&D in the economy only to the extent that the market, on its own, fails to deliver an optimal outcome.

(43) The Commission will consequently analyse if the level of R&D&I activities undertaken within the Community would be inferior if the Tailcone S 19.1 and Belly-Fairing work packages would not be undertaken by ALESTIS and, if so, if this result is optimal or if a general market failure exists.

(44) In addition, according to the R&D&I Framework, the Commission should establish precisely the specific market failure which the beneficiary is faced with and which justifies the aid subject to the detailed assessment.

(45) Depending on the specific market failure addressed, the Commission takes into consideration the following elements: knowledge spill-over (3.4.1.1), imperfect and asymmetric information (3.4.1.2) and coordination failure (3.4.1.3). For State aid targeting R&D projects or activities located in assisted areas, the Commission also takes into account the specific problems related to these areas (3.4.1.4).

3.4.1.1. Knowledge spill-over

(46) The newly established organisational structure of the aeronautical sector with increasing risk-sharing of design and development of a high number of componentscreates a close link between the airframe manufacturers and their risk-sharing partners (Tier-1 suppliers). In turn, these are linked with their own network of sub-contractors (Tier-2 suppliers), which necessitates the dissemination of knowledge (in particular on composite technologies that are at the heart of the A350 XWB R&D innovations) across the entire aeronautical industry. This latter effect seems particularly relevant in the case of the Airbus model since the manufacturer would consider selecting as risk-sharing partners not only several huge aero structure producers, but also a larger network of smaller Tier-1 suppliers, and support their development in order to reach a sufficient critical size and meet the new technological requirements.

(47) The Commission has found in several previous State aid decisions10 in the aeronautic sector that the passage from an architecture where each subcontractor is in direct relationship with the airframe manufacturer, to a "pyramidal" architecture where a small number of Tier-1 partners are delegated part of the plane development favours the knowledge dissemination within the industry.

10 See e.g. Commission's decisions on State aid cases N 357/2009, Aid to GKN Aerospace Services Limited

(GKN ASL), paragraphs 76-78, OJ C 305, 16.12.2009, p. 4.; N 525/2009, Aid to Sogerma for the 'Main Landing Gear Bay' (MLGB) project paragraphs 75 and 76, OJ C 178, 3.7.2010, p. 2); N 527/2009, Aid toDaher-Socata for the 'Main Landing Gear Doors' (MLGD) project,paragraphs 76 and 77, OJ C 178, 3.7.2010, p. 2); combined cases N 5/2010 and N 6/2010, State loans for R&D to ARESA, not yet published in the OJ, paragraphs 57 et seq.

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(48) In the cases at hand, ALESTIS will sub-contract a high proportion of the work and must disclose aspects of the technological results of R&D activities to its partners and suppliers, which will use them to develop the range of materials, machinery and services within their own domains.

(49) Knowledge dissemination/technology transfer will in particular take place in i) systems development and ii) composites development. ALESTIS will disclose aspects of the technological results of R&D work to its partners and suppliers in the field of aeronautical structure design, systems, and structure calculation with more powerful computer tools. In particular, knowledge on […]* as some of these activities will be subcontracted to other enterprises. Further, knowledge in other limited-access disciplines will be passed on, e.g. testing, maintenance processes etc.

(50) ALESTIS has moreover entered into cooperation agreements with research centres and universities, for various research and testing activities. Such agreements were made under market conditions. According to Spain, joint projects implying the transfer of knowledge, in particular on carbon fibre support structures or certain projects in the field of soundproofing to other sectors are already being considered.

(51) The Commission therefore concludes that the projects will entail knowledge spill-overand dissemination of technical knowledge to the benefit of the aeronautical sector, other industries and eventually to the EU as a whole. It is also possible that some of their results will have industrial applications outside of the aerospace sector.

3.4.1.2. Imperfect and asymmetric information

(52) The Spanish authorities consider that the aid to ALESTIS is necessary in order to cope with a market failure mainly due to imperfect and asymmetric information on the financial markets. In the present cases, potential financial partners would be reticent to provide sufficient finance to accompany ALESTIS's industrial evolution, in view of (a) the risk involved in the projects and (b) the difficulties to get a clear picture of the profitability of the projects and of ALESTIS's ensuing financial situation.

3.4.1.2.1. Risk and complexity of research

(53) As described in previous Commission decisions,11 the inherent risks linked to the aircraft sector are numerous. They include extensive research and development requirements, significant up-front investment and general risks (such as higher costs and delays) associated with the introduction of new technologies and materials and their certification. Moreover, competition and market access (including downward price pressure from amortised legacy aircraft programmes and national purchasing preferences), as well as aircraft market cyclicality, make it a particularly competitive environment for new innovative products. In addition, there is a considerable risk ofsignificant penalties and/or liquidated damages for late delivery. Product liability, warranty claims and aircraft performance guarantees are also important risk factors. Exposure to foreign currency fluctuations also impacts the profitability forecasts.

11 See e.g. State aid case N 654/2008, Large R&D aid to Bombardier, OJ C 298, 8.12.2009, p. 2, paragraphs

113-114; above mentioned cases involving State aid to GKN (paragraphs 86-87), to Sogerma (paragraph 66) and to Daher-Socata (paragraph 67).

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Lastly, it is a highly regulated environment and associated risks of changes to regulations are important for aircraft companies.

(54) Due to the above-mentioned risks, there seems to be a general defect of financing in the aeronautic industry that prevents the concerned enterprises to realize all the necessary adaptations to become risk-sharing Tier-1 suppliers. The current economic and financial crisis largely worsened the phenomenon.

(55) In the present cases, developing next generation technologies for large composite aero structures requires ALESTIS to design a new manufacturing process, as well as new tooling, moulds and machines. The projects are capital-intensive with high technical and commercial risks, and a long pay-back period.12

(56) The development of the next generation technologies for large composite aero-structures requires designing a new manufacturing process, new tooling, new moulds and new machines. According to Spain, a significant technological risk is due to the exacting requirements for the application of new materials and new manufacturing concepts. The main technical risk lies in the maturity of the technologies.

(57) Technological risks arise in particular from novelties linked to the introduction of composite materials in all the relevant aeronautical structures. Some […]*characteristics are:

– Tailcone S19.1 (N4/2007):

• Maintenance doors: […]*.

• Outer skin: […]*.

– Belly Fairing (N 7/2010):

• Using carbon fibre for a belly fairing is a 'first' in the industry; […]*.

• New design concepts […]*.

(58) In addition to the technical risks, the projects face market and commercial risks, stemming from the programme itself (difficulties likely to have an impact on the A350 XWB programme due to the technological, industrial or commercial choices made by Airbus and all its partners and subcontractors) or from external factors (for example a systemic crisis affecting air transport as a whole). In particular, the delay of the programme can compromise its commercial viability or even lead to its cancellation. ALESTIS would be obliged to pay for costs incurred by itself or by Airbus as a consequence of non-excusable delays (e.g. delays within the control of ALESTIS).

(59) On the basis of the above, it can be concluded that R&D projects in the aeronautic sector, and in particular the ones in question, are subject to technological, market and commercial risks. Given the technological complexity of the R&D activities to be carried out within the projects, financial institutions do not dispose of a sufficient

12 Without the aid, the projects would reach break-even point in 2018, i.e. after 9 years after the start of the

development phase.

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visibility in order to properly estimate the risks or the profitability perspectives of the projects. The projects, therefore, suffer from financial constraints which can be explained by this asymmetric information.

3.4.1.2.2. External financing constraints

(60) Due to the above-mentioned risks, businesses such as ALESTIS that are specialised in aero structures, suffer globally from a general shortage of external financing in the aeronautic industry that prevents the concerned aero structures suppliers to realize all the necessary adaptations to become risk-sharing partners of the main airframe manufacturers (Airbus and Boeing).

(61) For R&D projects as specific as the ones to be carried out by ALESTIS, the problems of imperfect and asymmetric information concern primarily the difficulties of the aeronautic companies to obtain traditional bank financing. In the particular case, this obstacle is reinforced by the fact that both projects are running over many years and face the risk of technological failure, as well as commercial risks beyond ALESTIS' control. Moreover, the technological characteristics of projects in the aeronautic sectorare not fully defined at the signature of the contract with the principal. Therefore, the final component can still evolve due to internal and external technical requirements. This absence of precise definition of the product and of its costs also makes the recourse to commercial financing difficult.

(62) The difficulty of companies in the aeronautic sector to obtain external financing from the financial markets has been recognised in several previous State aid decisions13 and is in line with a recent study of the competitiveness of the EU Aerospace Industry carried out by ECORYS14.

(63) In June 2007, when ALCOR started setting up the new company and sought capital injections, participation in the A350 XWB-programme was considered as the key project to enable ALESTIS to compete at a global level. […]*.

(64) .Initially, ALCOR hoped for capital injections from […]*. In turn […]* sought refinancing on the financial market. That effort was coordinated by the bank Caixa Cataluña, which was expected to provide a large part of funding. In a parallel process, ALCOR negotiated with […]*15 and […]*16. However, neither of these entities could provide funding. The financial needs exceeded the amount available to […]*, and other partners to complement funds were not available. Then, ALCOR attempted to establish a […]* agreement with […]* and […]* to attain the required capitalisation level, which did also not materialise. Finally, when the financial crisis unfolded, […]*withdrew from the project, in December 2008. That withdrawal was mainly due to the

13 See e.g. the above mentioned cases involving State aid to GKN (paragraphs 94-96), Sogerma (paragraphs

71-72) and Daher-Socata (paragraphs 72-73).14 ECORYS, CES ifo, Idea Consult, Bauhaus Luftfahrt and Decision Etudes & Conseil: FWC Sector

Competitiveness Studies – Competitiveness of the EU Aerospace Industry with focus on Aeronautics Industry (carried out on behalf of the European Commission, DG ENTR), 15.12.2009, see in particular section 6.3.4.

15 […]*.16 […]*.

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very high up-front investments needed and the severe impact of the crisis in the […]*sector.

(65) Eventually, some capital was provided by the current partners SOPREA, UNICAJA, Corporación Cajasol, and BEF. The Memorandum of Association was signed on 26 January 2009, which means that in total, the quest for adequate funding lasted 1 ½ years. However, even that agreement has not resulted in the provision of funding up to the required amount.

(66) Moreover, as will be shown in section 3.4.3.2 below ("profitability"), in the absence of aid the profitability of the projects under assessment did not enable ALESTIS, nor would it probably enable any other company in the sector, to guarantee an acceptable return for private investors, which consequently would not be inclined to invest in this type of projects.

(67) Although the mere fact that a bank would not provide loans to a specific borrower is not sufficient to constitute indisputable proof of a market failure (since this could rather reflect a risk/benefit assessment in view of the customer’s profile), the evidence in these cases seems to confirm the general conclusion reached by the Commission in previous decisions:17 the aeronautic sector faces specific issues (e.g. exceptionally long duration of and high costs of the R&D projects), which makes it difficult, if not impossible, to obtain bank funding for projects like the ones in question.

(68) In the present cases, it has also been shown that external funding from the financial markets was difficult to obtain due to the high risks, the long durations and the insufficient profitability of the projects.

3.4.1.3. The coordination issue in the aircraft industry

(69) It has also been indicated in previous decisions18 that the European aero structure manufacturers encounter difficulties related to the change of business model of their industry.

(70) The current structure of the worldwide aeronautic markets is explained by the wave of mergers that occurred between 1990 and 2000 and that created the current independent aeronautical groups. This structural change has been followed by a behavioural evolution: now, Airbus and Boeing, as project superintendents, want their main engineor equipment suppliers to play the role of risk-sharing partners and not to limit themselves to deliver goods that only meet specifications already pre-defined by the airframe manufacturers. The Tier-1 suppliers thus have to contribute to the technological and innovative development of the aero structures, in order to increase the global performance of the future planes.

(71) As the new organisation implies not only direct relationships between the airframe manufacturer and its sub-contractors, but multi-level contacts between Airbus, its Tier-1 suppliers and their Tier-2 sub-contractors, these new working methods raise coordination issues. The structural change from an organisation "in rake" to a

17 See footnote 13 above.18 See e.g. the above mentioned cases involving State aid to Sogerma (paragraphs 57-62) and to Daher-Socata

(paragraphs 58-63).

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pyramidal architecture could lead to a long term increase of technological ability and productivity, but it is initially costly to implement in terms of "transaction costs"19.

(72) The new organisation in the sector implies a coordination of all the actors of the supply chain, which does not seem to appear spontaneously. Although the aid may in general terms contribute to tackle this coordination issue at the European level, the Commission notices however that the above mentioned failures remain of a general nature, and that it cannot be concluded that the projects under assessment are directly affected.

3.4.1.4. R&D&I activities in an assisted region

(73) ALESTIS is located in Andalusia, an assisted region under Article 107(3)(a) of the TFEU. According to information provided by the Spanish authorities, that region is characterised by:

• a low internationalisation level, i.e. investment abroad that stem from the region: Andalusian investments constitute only 1.3% of total investment abroad from all 17 regions, and the top 5 regions percentages between 8.4 and 38.5%;

• low R&D-spending; only 1% of Andalusia's GDP is committed to R&D-activities, being far below the Lisbon/EU-2020 3%-objective;

• poor access to credit; among Spanish regions, Andalusia ranks last in credit accommodation;

• small size of local industry.

(74) On that basis, the Spanish authorities argue that there is an increased degree of market failure in the particular case.

3.4.1.5. Conclusion on market failure

(75) On the basis of the above, the Commission finds that the projects at hand are likely to generate important positive effects within the Community. The aid which Spain plans to grant allows to overcome a market failure characterised mainly by imperfect and asymmetric information on the financial markets, which prevents the financing of the projects in question, of which the risks and the related profitability are difficult for capital providers to estimate in a reliable way. Furthermore, the market failure is likely to be negatively affected by the fact that the projects will be carried out in an assisted region.

(76) Consequently, the Commission considers that the projects concerned are affected by the market failures which are described in point 7.3.1 of the R&D&I Framework and they would therefore probably not have been carried out in the absence of State aid.

19 Such as "information costs" of the Tier-1 partner for the selection process of the Tier-2 suppliers (determining

whether these suppliers will be able to produce), the "bargaining costs" required to come to an acceptable transaction (e.g. negotiating the price and drawing up an appropriate contract) or the "enforcement costs" to make the terms of the contract respected and take appropriate measures if it is not the case.

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3.4.2. Appropriateness of the instrument

(77) An important element in the balancing test is whether and to what extent State aid can be considered an appropriate instrument to increase R&D activities, given that other less distortive instruments may achieve the same results.

(78) According to the Spanish authorities, the notified aids are required in order to compensate for the identified market failures and enable the implementation of the Tailcone S19.1 and Belly-Fairing work packages. General measures such as e.g. tax instruments are, in their view, not sufficient for over-coming market failures for projects as the one at hand with high up-front investments in early stages, risks and long pay-back periods.

(79) Before granting the interest-free loans, the Spanish authorities considered potential alternatives, such as direct grants and repayable advances. In both cases, they howeverconcluded that such aid instruments would not allow ALESTIS to get sufficient financing in the early stages of the projects. As regards grants, the R&D&I Framework limits the aid intensities for large enterprises to 50 % for industrial research and 25 % for experimental development activities, whilst repayable advances may be granted up to 60 % of the eligible costs for industrial research and 40 % for experimental development activities. As mentioned above, the Tailcone S19.1 projectpredominantly consists of experimental development and the Belly-Fairing project exclusively consists of experimental development. However, to enable the high up-front investments in the early stages of both projects and thus carry out the projects, ALESTIS would require a nominal amount of […]* % of the eligible costs. On that basis, Spain considers it preferable to grant the aid in the form of loans, whose principal moreover always has to be reimbursed regardless of the degree of technological and commercial success, or actual failure of the projects.

(80) The Commission also finds that State aid in the form of interest-free loans is an appropriate instrument in order to enable ALESTIS to carry out the projects.

3.4.3. Incentive effect and necessity of aid

(81) State aid must have an incentive effect, i.e. result in the recipient changing its behaviour so that it increases its level of R&D activity. If such activity would have been carried out even without the aid, the aid does not contribute to deliver an objective of common interest.

(82) As laid down in Chapter 6, second paragraph, of the R&D&I Framework, an aid does not present an incentive for the beneficiary where the R&D activity commences prior to the beneficiary applying for aid to the national authorities.

(83) In the particular case, […]* who was then engaged in establishing the capitalisation of the future ALESTIS, submitted an informal aid application already in November 2007, providing an indicative amount of necessary investments. That amount, being EUR[…]*corresponds to the amount of eligible investments incurred for the projects in question, being EUR 168.33 million altogether.

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(84) Later in the process, on 4 July 2008, ALESTIS' predecessor company SK10 submitted a formal aid application, referring to the development of i) Main Landing Gear Doors (MLGD); and ii) the Belly Fairing. However, Airbus had changed its selection policy in the meantime and eventually awarded ALESTIS the Tailcone S19.1 work package instead of the MLGD-work package.

(85) ALESTIS signed the contracts with Airbus on the A350 XWB work packages only after having received a preliminary agreement from the government on public support.

(86) Later, on 29 January 2009, ALESTIS (being SK10's successor) submitted a revised formal aid request, concerning i) the Tailcone project and ii) the Belly-Fairing project. Work on both projects started simultaneously on 1st February 2009.

(87) The revision of the original aid request was of a formal character: it was due to the fact that ALESTIS had been awarded a work package that was different from the one it had initially tendered for in November 2007 and which was subject to the initial aid request. Indeed, the company had no reason to believe that the Spanish authorities would grant aid only for the combined MLGD/Belly-Fairing work package and not for the two work packages in question, namely the Tailcone S19.1 and the Belly-Fairing. In particular, the Spanish authorities asserted that in its informal contacts with the beneficiary, the competent Ministry had repeatedly pointed out that eligibility for aid will be assessed on the basis of technological content, positive effects on the industry in Spain and the European Union, and on cohesion, given that the beneficiary is located in an assisted region.

(88) Hence, the formal aid application was submitted before the commencement of the R&D activities on each work package. The formal criterion of Chapter 6 of the R&D&I Framework is therefore met.

(89) When a measure is subject to a detailed assessment, the Commission however requires that the incentive effect of the aid is substantiated more precisely in order to avoid undue distortion of competition. In its analysis, the Commission takes into account the following elements set out in point 7.3.3 of the R&D&I Framework: specification of intended change, counterfactual analysis, level of profitability, amount of investment and time path of cash flows, the level of risk involved in the research project and continuous evaluation.

3.4.3.1. Counterfactual analysis and specification of intended change

(90) According to the R&D&I Framework, the intended change in behaviour which the State aid aims at has to be well specified and the change has to be identified by counterfactual analysis, i.e. by means of a comparison with what would be the level of intended activity with and without the aid. The difference in the two scenarios is considered to be the impact of the aid measure and substantiates the incentive effect.

(91) When ALESTIS considered financing for its projects, it defined the primary strategic objective of positioning itself as one of the main Tier-1 aeronautical suppliers in Europe.20 ALESTIS considered bidding for the two projects in question as vital to reach that strategic objective. ALESTIS took into account that currently there is no

20 According to section II of the Memorandum of Association, drawn up on 26.1.2009.

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other program in the market that allows it to develop corresponding technological capacities. ALESTIS concluded that not participating in the A-350 XWB programmewould result in being relegated to Tier-2 status. That status would entail commercial risks that ALESTIS did not consider as acceptable, in particular as it would then be exposed to price competition with suppliers from low-cost countries.

(92) For the following reasons, ALESTIS would not have carried out the projects without the aid and could not have resorted to any other activity instead:

• Given above described market failure, ALESTIS did not muster adequate funding to carry out both projects;

• ALESTIS could not resort to reducing the scope and/or expenses of the projects in order to compensate for that funding gap. Rigorous customer specifications and certification criteria did not allow any reduction of planned development efforts.

• Nor could ALESTIS resort to participation in the programme as a Tier-2 supplier, i.e. provide only part of the work packages, with less or no development activities involved. Firstly, Tier-2 status would exclude ALESTIS from direct contractual bonds with Airbus as a Tier-1 risk-sharing supplier, thus significantly reducing chances of future contracts. Secondly, Tier-2 status implies that ALESTIS could no longer develop technologies that would enhance its capabilities and possibly distinguish it from competitors. Lastly, ALESTIS could not be even sure to obtain Tier-2 status.

(93) In conclusion, the absence of adequate external funding would have compromised the beneficiary's long-term viability, as the projects would not have been carried out in the absence of aid. So in both cases in question, State aid displays its incentive effect by allowing the company to carry out both R&D projects.

(94) Compared to the counterfactual situation where the projects would not have been carried out, the change brought about by the aid is identical to the entire size and scope of the projects in question, namely total project costs to the amount of approx. EUR […]* in the period from […]*. Those R&D-investments constitute a […]*-fold increase in R&D-expenses incurred by ALCOR's affiliates in the previous period […]*, which amounted to EUR […]*.

3.4.3.2. Level of profitability

(95) According to section 7.3.3 of the R&D&I Framework, if a project would not in itself be profitable to undertake for a private undertaking, but would generate important benefits for society, it is more likely that the aid has an incentive effect. To evaluate the overall profitability of the projects, evaluation methodologies can be used which isstandard practice in the industry concerned.

(96) The Spanish authorities have submitted information on standard investment criteria and relevant financial indicators for both projects, with and without aid. According to the documentation provided, the aid has a significant impact on the weighted average cost of capital (WACC) of ALESTIS, as the presence of aid changes the enterprise'sdebt/equity ratio, by increasing the debt level and reducing the need for equity. In the

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particular cases, equity financing is much costlier than debt financing, given the high remuneration that would normally be required by shareholders, in the range of […]*%at the time when the project was planned. Therefore, the WACC would be significantly higher without aid than with aid, in both projects. The WACC, in turn, determines the net present value (NPV) of the projects. Consequently, the aid substantially uplifts the NPV in both projects. For the purposes of its business case, ALESTIS assumes deliveries of […]* A350 XWB-aircraft, in a production phase from […]* until […]*.

(97) The tables hereunder present the base cases:

Tailcone S19.1 (N 4/2010) – base case:

(98) Belly Fairing (N 7/2010) – base case:

(99) The Commission verified the WACC and cash-flow calculations provided by the Spanish authorities and confirms that overall finding. The Commission moreover found that these calculations do not take into account the fact that the cost of equity and the cost of debt are themselves a function of the debt/equity ratio (both increase when the debt/equity ratio increases), so that the positive impact of the aid on the company's WACC, as well as on each project's NPV, may have been slightly overestimated.

(100) Moreover, even if the profitability analysis does not factor in important strategic advantages of the projects for ALESTIS (related to becoming a long-term risk-sharing partner of Airbus), the above financial indicators are conditional upon success at the technological stage of the projects. If and when the projects were to fail already at the

'Tailcone S.19' – base case Without aid With aid

WACC […]*% […]*%

NPV […]*EUR […]*EUR

Cash-flows turn positive in […]* […]*

Maximum negative cash flow […]*EUR […]*EUR

Belly Fairing – base case Without aid With aid

WACC […]*% […]*%

NPV […]*EUR […]*EUR

Cash-flows turn positive in […]* […]*

Maximum negative cash flow […]*EUR […]*EUR

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R&D stage, ALESTIS would face substantial losses. Therefore, it can be concluded that the public support enables ALESTIS to develop the Tailcone S19.1 and Belly Fairing work packages, by providing it with the necessary financial resources and by reducing its maximum financial exposure.

3.4.3.3. Investment amount and cash flow

(101) According to section 7.3.3 of the R&D&I Framework, high start-up investment, low level appropriable cash flows and a significant fraction of cash flows arising in the very long-term future are considered positive elements in assessing whether aid has an incentive effect.

(102) ALESTIS's total investment in both projects, including both eligible R&D-expenses and other investments, costs are estimated to EUR […]* for the Tailcone S19.1 work package and EUR […]* for the Belly-Fairing work package. Total investments are made in a period from 2009 until 2015 inclusive. R&D-expenses that are eligible for aid are incurred in a period from 2009 until 2013 inclusive.

(103) For both work packages, the eligible part of these amounts is invested during a period of five years (2009-2013). However, ALESTIS expects delivery of the first aircraft only in 2012 and expects sales to be limited during the first years. Without the aid, break-even would not be reached until […]*.

3.4.3.4. Level of risk involved in the research project

(104) In general, the more technical the nature of the project is, the higher is the probability of failure. In particular, given the scientific ambition and the duration of the programme, there are risks linked to both the Tailcone S19.1 and the Belly-Fairingwork packages since the technical development of new-generation aero structuresrequire new development processes, new tools and new production methods.

(105) The technological, commercial and market risks of the projects have been described in section 3.4.1.2.1 above. The fact that the level of risks in both projects is high indicates that the planned aid is likely to have induced ALESTIS to pursue R&D which it would not otherwise have pursued.

3.4.3.5. Continuous evaluation

(106) Measures which define well specified milestones resulting in a project being terminated in the event of failure or where a publicly available ex-post monitoring is foreseen will according to point 7.3.3 of the R&D&I Framework be considered more positively as regards the assessment of the incentive effect.

(107) In this regard, the Spanish authorities have indicated that ALESTIS every six months provides the Ministry of Industry, Tourism and Commerce with a full technical and financial progress report of the projects. A monitoring commission chaired by the General-Director of Industry will be established. This commission will be in charge of monitoring of the projects’ progress and will meet when its President considers it necessary and at least once a year.

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(108) In the event of total or partial programme failure attributable to ALESTIS, the Ministry of Industry, Tourism and Commerce will require the full repayment of the issued loans and corresponding interest.

3.4.3.6. Conclusion on incentive effect

(109) On the basis of the above, and in particular in view of the financial structure of ALESTIS in the absence of aid, and the corresponding impact on the level of profitability of the projects and related financial indicators, the Commission finds that the aid has an incentive effect insofar as ALESTIS would most probably not have undertake the projects in the absence of aid. Therefore, it can be concluded that the aid has an incentive effect on ALESTIS.

3.4.4. Proportionality of the aid

(110) Section 5.1 of the R&D&I Framework sets out general conditions for analysing theproportionality of State aid for R&D projects. Compliance with these rules is examined in section 3.4.4.1 below, as regards research categories and eligible costs and in section 3.4.4.2 for aid intensity.

(111) The R&D&I Framework states that additional information is however necessary to demonstrate the proportionality of aid measures subject to a detailed assessment. In accordance with point 7.3.4 of that Framework, the Commission analyses in section 3.4.4.3 below the extent to which aid to ALESTIS is limited to the minimum necessary.

(112) Finally, compliance with the cumulation rules set out in Chapter 8 of the R&D&I Framework is assessed in section 3.4.4.4.

3.4.4.1. Research categories and eligible costs

(113) In accordance with point 5.1.1 of the R&D&I Framework, the aided activities must fall within one or more of the following three research categories: fundamental research, industrial research and experimental development.

(114) In the Tailcone S19.1 work package, R&D activities embracing the process definition for the manufacturing of totally integrated skins and the necessary means and tools,and manufacturing of simulation-means and tools, constitute industrial research within the meaning of point 2.2 (f) of the R&D&I Framework. Such activities constitute planned research or critical investigation with the aim of acquiring new knowledge and skills for developing new products and processes or for bringing about a significant improvement in existing products and processes.

(115) The remaining eligible R&D activities under both projects meet the definition of experimental development set out in point 2.2 (g) of the R&D&I Framework. These activities consist of acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services. These activities may comprise producing drafts, drawings, plans and other documentation, provided that they are not intended for commercial use.

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(116) The Commission has also verified that the eligible costs proposed by Spain are in linewith the eligible costs listed in point 5.1.4 of the R&D&I Framework:

– personnel costs are included to the extent that researchers, technicians and other supporting staff are employed on the research projects;

– contractual research, technical knowledge and patents are bought or licensed externally at market prices;

– additional overheads are incurred directly as a result of the research projects.They cover engineering computing system, engineering management/ administration and engineering facility/infrastructure costs.

(117) The Commission can, therefore, conclude that the proposed aid measures are in compliance with points 5.1.1 and 5.1.4 of the R&D&I Framework.

3.4.4.2. Aid intensity

(118) According to section 5.1.2 of the R&D&I Framework, the maximum allowed intensity for aid for industrial research is 50 %, while the corresponding percentage is 25 % for aid for experimental development activities.

(119) Where aid is awarded in a form other than a grant, the aid amount must, according to point 2.2(c) of the R&D&I Framework, be defined as the grant equivalent of aid. According to the same provision, aid payable in several instalments shall be discounted to its value at the time of the granting. The interest rate to be used for discounting purposes and for calculating the aid amount in a soft loan shall be the reference rate applicable at the time of granting.

(120) As described in section 2.7 above, in order to determine the aid element of the State loans provided to ALESTIS, the Spanish authorities have calculated the gross grant equivalent stemming from the foregone interest for the soft loans. As a basis for their calculations of the grant equivalent, the Spanish authorities have used the methodology for setting reference and discount rates which is provided in the Communication on reference and discount rates.

(121) The Commission notes that the base rate used by the Spanish authorities is the one published by the Commission on 1.12.2009, and thus applicable on 11 December 2009, when the Spanish Council of Ministers authorised the Ministry of Tourism, Industry and Commerce to grant aid to the ALESTIS.

(122) Spain has submitted evidence in the form of rating certificates for ALESTIS showing that the margin used in the calculations is the appropriate one according to the Communication on reference and discount rates. Also the discount rate used by the Spanish authorities for the calculations of NPV is in compliance with the methodology of the mentioned Communication.

(123) The Commission has verified corresponding information provided by the Spanish authorities and found that the gross grant equivalent of the aid corresponds to an aid intensity of 24.16% for the Tailcone S19.1 project and to 23.50% for the Belly-Fairing

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project. Both aid intensities are therefore below the maxima allowed by the R&D&I Framework both for industrial research and experimental development.

3.4.4.3. Aid limited to the minimum necessary

(124) In addition to the general provisions regarding proportionality, in cases subject to detailed assessment the Commission assesses in accordance with point 7.3.4 of the R&D&I Framework whether the aid is limited to the minimum amount necessary to implement the project in question.

(125) In the present cases, the Spanish authorities have submitted information showing that the aid amount is the minimum required by the beneficiary in order to carry out the projects. The projects consist of industrial research in the Tailcone S19.1 project(constituting […]* % of the eligible costs of that work package and […]*% of overall eligible costs) and experimental development ([…]*% of overall eligible costs). Amaximum aid intensity of 50 % for industrial research and of 25% for experimental development is allowed under the R&D&I Framework. Hence, a maximum average aid intensity of 25.66% for the two work packages would be allowed. The Spanish authorities have, however, limited the aid so that it remains below 25 %.

(126) The Commission also notes that Airbus selected ALESTIS through a competitive call for tender, which is a further indication that eligible costs are limited to the minimum necessary.

(127) Furthermore, it has been shown in section 3.4.3.2 above that an aid of a lower nominal value (as a percentage of the eligible costs) would most probably not be sufficient to enable ALESTIS to undertake the projects, as its debt/equity ration would be altered such that the costs of financing the projects would have been too high and thusinacceptable for the beneficiary.

3.4.4.4. Cumulation of aid

(128) The Spanish authorities have confirmed that the aid in question cannot be cumulated with aid received from other local, regional, national or Community schemes to cover the same eligible costs. Therefore, the conditions set out in Chapter 8 of the R&D&I Framework are met.

3.4.4.5. Conclusion on proportionality

(129) In conclusion, for the reasons detailed above, the Commission considers the aid to beproportionate.

3.5. The distortion of competition and trade

(130) As set out in section 7.4 of the R&D&I Framework, when assessing the negative effects of aid, the Commission focuses its analysis of the distortions of competition on the foreseeable impact of the aid on competition between undertakings in the product markets concerned. The relevant markets for the cases at hand are identified in section 3.5.1 below.

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(131) In the following sections, the potential effects of the aid on these markets will be analysed by looking at three distinct ways in which it can distort competition in product markets: R&D aid can distort the dynamic incentives of market players to invest (section 3.5.2 below), R&D aid can create or maintain positions of market power (section 3.5.3 below) and R&D aid can maintain an inefficient market structure (section 3.5.4 below). In particular where such aid leads to crowding out of competitors, the aid measures may essentially result in a shift of trade flows and location of economic activity.

3.5.1. Identification of the relevant markets

(132) The projects under assessment concern the design and development of the Tailcone S19.1 and of the Belly Fairing of the new A350 XWB aircraft. It follows from the decisional practice of the Commission,21 that the concerned market in such cases is the market for aero structures, which is a global market covering in particular aircraft fuselages, wings, nacelles, undercarriages, pylons and empennages.

(133) The global aero structures market is highly fragmented, both in terms of size and geography. Its total value was in 2008 estimated to be about $35.9 billion and is expected to grow each year over the next decade.22

– Almost half of the work in the overall aero structures industry ($15.9 billion) is performed in-house by the Prime manufacturers on their own programmes due to complexity and technology.

– Another significant share of the market (approximately $13.2 billion) consists of suppliers who are often closely tied into a relationship with one or two Tier-1 suppliers, which are generally capable of being risk-sharing partners in the design and manufacture of essential aircraft components. According to the Spanish authorities, there are some 50 Tier-1 suppliers in Europe, which is the leading region in this market. Within the category of Tier-1 suppliers, it is possible to distinguish suppliers that are capable of supplying the largest, most complex components for sub-assemblies and whose capabilities often overlap with those of aircraft manufacturers themselves (so-called Super Tier-1). Such suppliers include Spirit Aerosystems (US), Alenia (Italy), Goodrich (US), Mitsubishi (Japan), Vought (US), Aircelle (France) and GKN Aerospace (UK).

– The remaining share of the market (about $6.8 billion) is accounted for by Tier-2 suppliers providing aero structures either to the Primes directly or to Tier-1 suppliers. According to Spain, there are about 76 Tier-2 suppliers in Europe.

21 See e.g. the mentioned decisions on State aid to GKN, Sogerma and Daher-Socata.22 With respect to the total global aero structures market and its growth, the information submitted by Spain is

supported by data from Aerostructures 2009 by Counterpoint Market Intelligence Ltd. The information (including the division of the market between Primes, Tier 1 and Tier2 suppliers) is in line with information submitted to the Commission in previous State aid cases (e.g. the mentioned GKN case).

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(134) From a demand-side perspective, there is a wide range of capability and competencewithin the aero-structures market. Depending on the complexity of the component, it is in the Prime’s interest to select the best supplier. Furthermore, aircraft manufacturers can choose a variety of materials from which to manufacture aero structures at the aircraft design and development stage. Traditionally, aero structures were made out of metallic materials. However, increasing use is being made of composite aero structures, whose use is now growing faster than the use of metallic aero structures. The demand for composites is to a high extent driven by improving performance to meet environmental requirements as well as cost of ownership and operational drivers.

(135) On the supply side, Tier 1 suppliers normally have the capability to design and manufacture aero-structure components of very different types, with the exception of certain very complex and specific parts of aero structures (e.g. the nose section). In the particular case, this is illustrated by the fact that ALESTIS initially competed for the Main-Landing Gear Doors and only later for the Tailcone S19.1.

(136) The candidates for undertaking projects as the ones in question are therefore numerous. With respect to materials, even if the production of composite and metallic aero structures demands different technologies and processes, taking into account the increasing importance of composites, most manufacturers of large aero structures, in particular Tier-1 suppliers, have developed competence in that domain. There is substitutability between composite and metallic aero structures.

3.5.2. Distorting dynamic incentives

(137) According to the R&D&I Framework, the main concern related to R&D aid is that competitors' dynamic incentives to invest are distorted. When an undertaking receives aid, this generally increases the likelihood of successful R&D on the part of this undertaking leading to an increased presence on the product market in the future. This increased presence may lead competitors to reduce the scope of their original investment plants (crowding out).

(138) Section 7.4.1 of the R&D&I Framework foresees a number of indicators for the analysis of the potential distortion of dynamic incentives, the most relevant of which are considered below in the light of the characteristics of the projects concerned.

3.5.2.1. Aid amount

(139) Aid measures involving significant aid amounts are more likely to lead to significant crowding out effects.

(140) State aid for both work packages amounts to EUR 38.67 million in total. This amount is low compared to the total amount of R&D investment in the aeronautic sector: in 2006 the Spanish aerospace and defence sector invested EUR 575 million in R&D. In 2007, the European aeronautical sector invested EUR 11.7 billion in R&D.

(141) The aid is approximately 0.33 % of the annual R&D expenditure in the European aeronautical sector and is, as such, not likely to dissuade any aircraft component supplier to invest in research and development.

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3.5.2.2. Closeness to the market

(142) The more an aid measure is aimed at R&D&I activity that is close to the market, the more it is liable to develop significant crowding out effects. In the cases at hand, the activities to be carried out by ALESTIS are predominantly experimental development. Although the activities are thus relatively close to the market, and due to that fact more liable to lead to crowding out effects, the Commission notes that the projects in fineaim to develop products which are subject to a delivery contract with Airbus and does therefore not consider this criterion as relevant.

3.5.2.3. Exit barriers

(143) The existence of exit barriers may reduce distortions of competitors' dynamic incentives. The reason is that competitors are more likely to maintain (or even increase) their investment plans when exit barriers to the innovation process are high.

(144) According to the Spanish authorities, the exit barriers in the aeronautical sector are high. First, engineering is highly specialised due to the demanding and inflexible ways for working with costumers (e.g. use of specific materials and processes for each customer and aircraft). Second, the level of requirements and precision in the production processes are extremely high which makes them inflexible to be used for any other sector and/or product without further significant investments. Third, contracts with customers are very long-term and so is the R&D return, which is always bound to such contracts. Fourth, production facilities require high investments.

(145) Against that background and in line with its previous decisional practice in similar State aid cases,23 the Commission finds that there are high exit barriers on the relevant market and that these barriers make any crowding out effect of the aid measures at hand less likely to occur.

3.5.2.4. Incentives to compete for a future market

(146) R&D aid may lead to a situation where competitors of the aid beneficiary renounce competing for a future market, because the advantage provided by the aid (in terms of the degree of technological advance or in terms of timing) reduces the possibility for them to profitably enter this future market.

(147) Firstly, ALESTIS faces competition from a large number of Tier-1 and Tier-2 suppliers, who are generally increasing their efforts to secure major aero-structures packages on a global basis. Many of the aero-structure suppliers involved in the A350 XWB programme are responsible for several parts of the aircraft and participated in the selection procedure of other work packages than the ones they were finally awarded by Airbus. This shows that companies in the aero structures industry possess generic capabilities that allow them to bid and undertake a variety of work packages and that they are not specialised to the point where the loss of one package precludes their involvement in others.

23 See e.g. above mentioned State aid cases State aid to Bombardier; Aid to GKN Aerospace Services Limited

(GKN ASL); Aid to Sogerma for the 'Main Landing Gear Bay' (MLGB) project; Aid to Daher-Socata for the 'Main Landing Gear Doors' (MLGD) project; and combined State-aid cases N 296/2009 and N 297/2009, Aid to Diehl Aircabin GmbH ( 'F2F'; 'Airducts' ), OJ C 70, 19.3.2010, p. 22.

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(148) Secondly, even if the projects increase ALESTIS's expertise and knowledge in both composite use and the particular components in question, the products resulting from the aided R&D will be specific to only one type of aircraft, namely the A350 XWB. The next generation of airplanes is likely to give rise to new technical specifications and therefore the incentive to compete for future markets will not be significantly affected by the aid.

(149) Finally, ALESTIS will be unable to appropriate all innovation generated by the aidedR&D. The knowledge spill-over of the projects will allow the whole sector (and possibly other sectors) to gain from ALESTIS's research, especially as regards the use of composites. The aid in question may thus contribute to the dynamics of the market.

3.5.2.5. Product differentiation and intensity of competition

(150) Where product innovation concerns developing differentiated products (related e.g. to distinct standards, technologies and consumer groups) and when there are many effective competitors, competitors are less likely to be affected by the aid.

(151) As mentioned above, the Tailcone S19.1 and the Belly Fairing are specific to the A350 XWB aircraft and are being developed in accordance with specifications laid down by Airbus. It will not be possible to use the product resulting from the supported R&D project on other airplanes.

3.5.2.6. Conclusion on distorting dynamic incentives

(152) Given the relatively small aid amount granted to ALESTIS, the intensity of competition on the aero-structures market, the related incentives to compete for future markets, and the highly specialised and differentiated product that will result from the project, the Commission considers that the aid will not have the effect of distorting the dynamic incentives of the market.

3.5.3. Creating market power

(153) Aid in support of R&D may have distortive effects in terms of increasing or maintaining the degree of market power in product markets. Market power is the power to influence prices, output, the variety or quality of goods and services, or other parameters of competition on the market for a significant period of time, to the detriment of consumers.

(154) The Commission is concerned mainly about R&D aid allowing the beneficiary to transfer or strengthen market power held on existing product markets to future product markets. According to point 7.4.2, second paragraph, of the R&D&I Framework, the Commission is unlikely to identify competition concerns related to market power in markets where each aid beneficiary has a market share below 25% and in marketshaving a market concentration with Herfindahl-Hirschman Index (HHI) of below 2000. The most relevant indicators foreseen under point 7.4.2 of the R&D&I Framework for an analysis of creation of market power in the present cases are considered below.

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3.5.3.1. Market power of the beneficiary and market structure

(155) Where the recipient is already dominant on a product market, the aid measure may reinforce this dominance by further weakening the competitive constraint that competitors can exert on the recipient undertaking. Similarly, State aid measures may have significant impact in oligopolistic markets where only a few players are active.

(156) As regards the projects under assessment, the Spanish authorities estimate ALESTIS'market share to be in the range of 1%, based on invoicing figures. The Spanish authorities moreover assume that participation in the A350 XWB-programme with the aided projects could increase the beneficiary's market share to up to […]*%. Theyhowever pointed out that such estimate is difficult to provide, given that precise data are not publicly available and that the market is highly fragmented.

(157) The fact that 44% of the global composite aero-structures market is shared by enterprises that each have a market share that is below 1%, while 56% is shared among 16 large established Tier-1 suppliers among which ALESTIS is not listed, as well as the fact that the market has pronounced growth dynamics is sufficient indication that ALESTIS' present market share is in the range of 1%, and that it is very unlikely to get a dominant position through the aid in the foreseeable future.

3.5.3.2. Level of entry barriers

(158) According to Spain, there are high entry barriers on the aero structures market. First, competition is among existing companies is fierce and makes it more difficult for new actors to enter the market. In addition, a number of certifications are required which are both costly and time-consuming. Another barrier to entry is the fact that a high and specialised level of excellence is required in the production plant and machinery as well as in human resources.

(159) However, the mentioned high initial investments notwithstanding, it appears that each supplier which is already active on the aero structures market can shift to a new segment without meeting major obstacles. The fact that ALESTIS initially competed for the Main-Landing Gear Doors but later switched to Tailcone S19.1 insteadsupports that presumption. As described above, there is a trend in the aero-structures market for Tier-1 suppliers to outsource to a higher extent the responsibility of developing and designing a higher number of components. This trend is likely to increase the technological competence and improve the productivity in the sector and favour a higher degree of mobility of the actors in terms of competence since they could pass from one segment to another even with less difficulties than in the past.

3.5.3.3. Buyer power

(160) The customers of aero structures are major international aircraft manufacturers whoselect the best offers available from a wide range of potential suppliers. They are used to outsourcing aero-structure manufacturing and have their own in-house R&D and manufacturing capabilities. Even if ALESTIS would have had a dominant position on the market, this would thus anyway be countered by the presence of strong buyers who are keen in preserving sufficient competition.

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3.5.3.4. Conclusion on the creation of market power

(161) Taking into consideration in particular the very fragmented structure of the aero-structure market, ALESTIS's limited position on that market, and the foreseeable reduction in entry barriers that stems from the structural evolution of such market, the aid is not likely to create a significant market power for ALESTIS.

3.5.4. Maintaining inefficient market structures

(162) R&D&I aid must not support inefficient undertakings and thus lead to market structures where many market players operate significantly below an efficient scale. In its assessment of the market structure, the Commission considers whether the aid is granted in markets featuring overcapacity, in declining industries or in sensitive sectors. Concerns are less likely in situations where State aid for R&D&I aims at changing the growth dynamics of the sector, notably by introducing new technologies.

(163) Based on information provided by the Spanish authorities, including the 2009 Annual Report of ALESTIS, the Commission finds that ALESTIS is not in financial difficulties.

(164) The aeronautic sector is not in decline but rather a growing industry. According to information submitted by the Spanish authorities24, the market is estimated to increase in value by approximately $ 10 billion during the coming six years (2010-2015).

(165) The Commission hence concludes that there are no indications that the aid would contribute to maintaining inefficient market structures. On the contrary, since the aid will contribute to sustaining the growth dynamics of the sector by facilitating the introduction and further development of innovative technologies (linked to the use of composite), the aid could even lead to stronger competition on the market.

3.6. Balancing test

(166) Pursuant to section 7.5 of the R&D&I Framework, the Commission balances the effects of the measure in light of the positive and negative elements assessed above and determines whether the resulting distortions adversely affects competition and trading conditions to an extent contrary to common interest.

(167) Following the above assessment, the Commission finds that both projects suffer frommarket failures since the market would not deliver them without aid. This is mainly due to imperfect and asymmetric information linked to technological, commercial and market risks that render any commercial financing particularly difficult. In addition, there is a market failure due to knowledge spill-over. The market failure is likely to be aggravated by the fact that the projects will be carried out in an assisted region. Since the aid is necessary for the projects to be carried out, it has a clear incentive effect. The aid is proportionate, in particular since Spain has limited it to the minimum necessary.

24 Source: Aerostructures 2009 by Counterpoint Market Intelligence Ltd.

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(168) Due to the large number of players on the highly fragmented aero-structure market, to ALESTIS's limited market share, to the expected growth rate of the market and to the conditions of the aid measure, the negative effects of the aid are limited. The aid measures do not support the creation of a position of power nor do they maintain inefficient market structures. On the contrary, they might even increase competition between Tier-1 suppliers on the market of aero structures.

(169) Against this background, since the positive effects of the measure significantly outweigh its negative effects, the Commission concludes that the balancing test for the aid under assessment is positive.

4. DECISION

(170) The Commission considers the notified aid compatible with the TFEU on the basis of Article 107(3)(c) thereof and has accordingly decided not to raise objections to the notified measure.

(171) The Commission reminds the Spanish authorities of their obligations to submit an annual report on implementation of the aid.

(172) The Commission further reminds the Spanish authorities that, in accordance with Article 108(3) of the TFEU, all plans to alter the projects must be notified.

If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/eu_law/state_aids/state_aids_texts_es.htm

Your request should be sent by registered letter or fax to:European CommissionDirectorate-General for CompetitionDirectorate for State AidState Aid GreffeB — 1049 BrusselsFax No: +3222961242

Yours faithfully,For the Commission

Joaquin ALMUNIAVice-President of the Commission