12 November 2015

European Commission orders recovery of incompatible state aid given to Estonian Air

Following an investigation, the European Commission (Commission) has found that Estonia (or the State) granted aid measures to Estonian Air which gave the national flagbearer an undue advantage over its competitors, breaching the European state aid rules. Estonian Air has been  “consistently loss-making”  since 2006 and the Commission found that the overall pattern of aid provided by the State resulted in Estonia Air having “an unfair selective advantage over its competitors” and did not actually help the airline to restore its economic viability.

The Commission found that in 2009, the State’s participation in a €2.48 million capital increase in Estonian Air and the sale of Estonian Air’s ground-handling facilities to the state-owned Tallinn Airport for €2.4 million, were conducted in accordance with market conditions and therefore did not qualify as state aid within the meaning of the European rules.

However, the Commission concluded that several subsidy measures (totalling €125.6 million, €84.9 million of which have already been paid out) granted by the State were incompatible with the Commission’s Rescue and Restructuring Aid Guidelines, which provide that state aid may only be granted once during a ten-year period. This principle is known as the “one time, last time” principle, and it aims to ensure that undertakings do not rely on public funds where they should be competing on merit instead. The incompatible subsidies include:

  1. a State capital injection of €17.9 million in November 2010;
  2. an additional State capital injection of €30 million in two tranches (December 2011 and March 2012);
  3. a rescue loan facility of €37 million provided by the State in several tranches between December 2012 and November 2014; and
  4. a planned additional State capital increase of €40.7 million.

The Commission also found that Estonian Air did not have "a credible restructuring plan” capable of ensuring that it could actually become viable without the assistance of state aid. Finally, neither the State nor Estonian Air displayed sufficient intention to limit the distortion to competition that was created by the State’s support.

To remedy these infringements, the Commission ordered Estonian Air to pay back the aid that it had received (€84.9 million plus interest).

Commissioner Vestager commented: “Companies should compete based on a sustainable business model rather than relying on continued support by the State to stay in the market.  It would not be a good use of taxpayer money to keep Estonian Air in the market artificially – nor would it be fair to competitors.”

This is the latest in a series of Commission decisions relating to airline restructuring. For example, Malev and Cyprus Airways were both recently made to repay a series of capital injections, loan facilities and tax deferrals which were found to amount to illicit state aid. Commentators therefore consider the Commission’s latest decision as a continuation of clear and consistent guidance in this area of law.

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