State aid: Commission approves restructuring aid for Latvian airline airBaltic
09-Jul-2014 The European Commission has concluded that a number of measures granted by Latvia in the context of the restructuring of the airline airBaltic in 2011 and 2012 were in line with EU state aid rules. The Commission found, in particular, that airBaltic's restructuring plan will allow the company to become viable in the long term without unduly distorting competition in the Single Market.
AirBaltic experienced financial difficulties as of 2008, which resulted in significant losses and negative equity in 2010 and 2011, and received several public support measures. The Commission opened an in-depth investigation in November 2012 to assess the conformity of the measures with EU state aid rules (see IP/12/1245).
The Commission examined a LVL 16 million loan (approx. €22.65 million) granted by Latvia in October 2011, the interest rate of which was substantially reduced in December 2011. The Commission found that this loan was provided by the state together with a loan from BAS, the main private shareholder of airBaltic at the time, in proportion to their shareholding. The Commission also looked at the acquisition by Latvia and BAS of
0%-coupon bonds issued by airBaltic in 2010, and found that it was carried out in proportion to their respective shareholdings and at the same conditions. In addition, the Commission examined certain transfers and payments made on behalf or to the benefit of airBaltic by a nationalised bank. The Commission concluded that these measures were carried out on market terms, they procured no undue economic advantage to airBaltic and therefore do not involve any state aid within the meaning of EU rules.
By contrast, the Commission concluded that three other measures were not carried out on market terms. These measures are:
- a second loan granted by Latvia - the first tranche of LVL 41.6 million (approx. €58.89 million) was made available to airBaltic in December 2011; the second tranche of LVL 25.4 million (approx. €35.96 million) in December 2012;
- a capital increase agreed in December 2011 by Latvia and BAS through loan conversions and a cash contribution from BAS, but in which BAS in the end did not participate; and
- a transfer to airBaltic of a €5 million claim held by Latvia in exchange of just LVL 1.
Since these measures do not correspond to what a private investor in a market economy would have accepted, they entail an advantage to airBaltic and therefore state aid. The Commission then assessed whether this aid is compatible with the Commission's 2004 guidelines on state aid for the rescue and restructuring of companies in difficulty (see MEMO/04/172). The Commission found that:
- the restructuring plan submitted by Latvia covering a 5-year period (2011-2016) appears to be a reliable basis for airBaltic's return to long-term viability within a reasonable timescale;
- airBaltic's withdrawal from certain routes and surrender of slots will limit the distortions of competition brought about by the aid; and
- airBaltic contributes to the costs of restructuring by securing several private financial injections and loans and a lease agreement for new aircraft.
The granting of the aid therefore complies with the conditions set out in the guidelines: the aid is accompanied by a restructuring plan that should enable the company to become viable again, appropriate measures are foreseen to compensate for the distortions of competition created by the aid, and the company contributes to the costs of restructuring at the required level.
Background
The Commission assessed the measures under its 2004 Rescue and Restructuring Guidelines (see MEMO/04/172). Rescue and restructuring aid is highly distortive of competition as it artificially keeps a company in the market that would otherwise have left it. The guidelines therefore require that beneficiaries work out a sound restructuring plan that enables them to become viable in the long-term on the basis of realistic assumptions. This is to avoid that a company keeps asking for public support. The plan must provide for measures to reduce the distortions of competition induced by the state support, such as the reduction of capacity or market share. Furthermore, the beneficiary needs to make a significant own contribution to the costs of restructuring. Finally, rescue and/or restructuring aid may be granted only once over a 10-year period ('one time, last time' principle).
Public interventions in companies that carry out economic activities can be considered free of state aid within the meaning of the EU rules when they are made on terms that a private player operating under market conditions would have accepted (the so-called "market economy investor principle" - MEIP).