State aid: Commission approves restructuring aid for LOT Polish Airlines
29-Jul-2014 The European Commission has concluded that restructuring aid of PLN 804 million (around €200 million), which Poland plans to grant to its national flag carrier LOT, is in line with EU state aid rules. The Commission found, in particular, that LOT's restructuring plan will allow the company to become viable in the long-term without unduly distorting competition in the Single Market.
Commission Vice President in charge of competition policy Joaquín Almunia said: "LOT has prepared a credible restructuring plan that should make it a viable company in the near future. At the same time, it gives up some profitable routes and slots at several congested airports, which creates opportunities for its competitors and reduces the competition distortions brought about by the aid."
LOT has been in financial difficulties for several years, reporting significant losses and negative equity. In May 2013, the Commission approved temporarily a €100 million rescue loan, upon the commitment of Poland to notify a restructuring plan capable of ensuring the long-term viability of the firm (see IP/13/431). In June 2013 Poland notified the restructuring plan to the Commission. The plan provides for a €200 million capital increase intended to help LOT finance the restructuring. The Commission opened an in-depth investigation in November 2013 (see IP/13/1045) to assess its compatibility with the requirements of the 2004 guidelines on state aid for the rescue and restructuring of companies in difficulty (see MEMO/04/172).
The investigation revealed that the restructuring plan, which aims at restoring LOT's viability by 2015, is based on realistic assumptions and should enable the company to return to long-term viability within a reasonable timeframe. LOT's actual financial results in 2013 were already better than expected and the company reported a net profit for the first time since 2007. The proposed capacity reduction, which includes a withdrawal from some profitable routes and return of several airport slots, will limit the distortions of competition brought about by the aid. Finally, LOT's own contribution to the costs of restructuring, provided in the form of a finance lease obtained on market terms, covers more than 50% of these costs, and thus even exceeds the level required in the guidelines.
The Commission has also examined information received from third parties who claimed that LOT had already received state aid in the form of deferred airport charges by Polish state-owned airports. Moreover, the Commission has examined other transactions which allegedly involved state aid, including the sale of real estate and of subsidiaries, the provision of several loans from public and private companies and the purchase of fuel. If these allegations had proved true, LOT would have breached the so called "one time, last time" principle according to which a firm can receive restructuring aid only once over a period of 10 years. The Commission found that none of these measures involved state aid within the meaning of EU rules, as they either involved no state resources or were carried out on market terms and thus did not confer any undue economic advantage to LOT.
The Commission therefore concluded that the planned restructuring aid complies with the conditions set out in the guidelines.
Background
LOT is a state-owned company, employing approximately 1 660 people and operating a fleet of 47 planes. It has reported losses in every financial year since 2008 (except from 2013) and faced increasing liquidity problems as the sources of funding used so far (e.g. the sale of subsidiaries) have been exhausted. In November 2012, the Commission concluded that the sale of three of LOT's subsidiaries to state-owned entities did not involve state aid (see IP/12/1243). Previous restructuring attempts undertaken in 2009-2012 had not been successful. The financial difficulties culminated in December 2012 when LOT was forced to ask for rescue aid in order to avoid bankruptcy.
Aid granted to companies in difficulty is highly distortive of competition as it artificially keeps a company in the market that would otherwise have left it. It can therefore only be granted under strict conditions.
The Commission's guidelines on rescue and restructuring aid for companies in difficulty (see MEMO/04/172) require, in particular, 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 that cannot become viable again 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).
On 9 July 2014, the Commission has finalised its in-depth investigations for SAS Scandinavian Airlines (see IP/14/797), Adria Airways (see IP/14/788) and airBaltic (see IP/14/789). Previously, the Commission adopted decisions concerning the restructuring of Air Malta (see IP/12/702) and Czech Airlines (see IP/12/981). See also policy brief on the Commission's policy concerning state aid granted to airlines in difficulty.