Published on November 10th, 2015 | by Jim Lee0
EU decision effectively closes down Estonian Air
In a brief statement on 7th November, the Management Board of Estonian Air announced that it had decided to cease operations, starting from 8th November, following a decision by the European Commission (EC), which said that Estonian Air had received State aid, which is incompatible with the internal market and must be paid back. Estonian Air was founded in 1991 and is owned by the Estonian state (97.34%) and the SAS Group (2.66%). It has been a member of IATA (the International Air Transport Association) since 1992, operating from its home base at Tallinn Airport. It is a relatively small operation, with five aircraft, one Bombardier CRJ-701ER (ES-ACF) three Bombardier CRJ-900s (ES-ACB/C/D) and one Embraer 170SU (ES-AED) plus three in storage (ES-AEA/B/C). The airline employs around 200 people and in 2014 it carried around 553,200 passengers. So how did it come to pass that a relatively small airline, serving a country of just 1 3 million people, and only about three quarters the size of Ireland, come to fall foul of the European Commission, resulting in its closure?
Estonian Air is the flag carrier airline of Estonia, and was originally established by the government, with aircraft acquired from the defunct local Aeroflot Division, following the breakup of the Soviet Union. In 1992, the airline became a member of IATA and its first western aircraft, a Boeing 737-500, was delivered in 1995. The company was partially privatised in 1996, with 66% of shares being sold to Maersk Air (49%) and Cresco investment bank (17%). The company leased two Boeing 737-500s to replace older Soviet aircraft, and in 1996, after obtaining two more Fokker 50s, it was able to retire the Soviet fleet entirely. In 2003, Maersk Air sold its shares to SAS and the Fokker 50s were retired. On 27th November 2008, the then Estonian Prime Minister Andrus Ansip announced, that SAS had approached his government, urgently requesting a cash injection to save the airline and offering to buy out the government’s shareholding. Ultimately SAS acquired 49% of the airline, but by 2012, the states shareholding was increased to 97.34%.
Air transport had been traditionally been a highly regulated industry in Europe, dominated by national flag carriers and state-owned airports. The EU’s internal market has sought to remove all commercial restrictions for airlines flying within the EU, such as restrictions on the routes, the number of flights or the setting of fares. All EU airlines may now operate air services on any route within the EU. Air transport makes a key contribution to the European economy, with more than 150 scheduled airlines, a network of over 400 airports, and 60 air navigation service providers. The aviation sector employs more than 3 million people in the European Union (EU). Airlines and airports alone contribute more than €140 billion to the European GDP. Some 800 million passengers departed or arrived at EU airports in 2010. In theory then, the EC should be supporting this industry and in particular supporting connectively to the more remote and poorer parts of the community. However, the effect seems to consolidate the industry, effectively potentially reducing competition and making it harder for smaller or niche carriers to enter or survive in the market.
This is in part because the EC believes that rescue and restructuring aid is highly distortive of competition, as it artificially keeps a company in the market that would otherwise have exited it. For that reason the Commission opened two in-depth investigations into public support measures in favour of Estonian Air in February 2013 and February 2014. This is consistent with the Commission’s position, which has seen it conduct a number of in-depth investigations, concerning airlines restructuring. In some cases, the relevant measures involved no state aid (e.g. SAS Scandinavian Airlines), in others they were in line with common EU rules (e.g. Adria Airways, airBaltic, LOT airlines, Air Malta and Czech Airlines), in still others, airlines had to pay back the undue advantages they had received (Malév, Cyprus Airways). The Commission has sought to ensure that aid can only be granted under strict conditions. The EU Rescue and Restructuring Aid Guidelines (2004 EU Guidelines on State aid for rescuing and restructuring firms in difficulty (and since August 2014 the ‘2014 Rescue and Restructuring Aid Guidelines’), therefore require that beneficiaries work out a sound restructuring plan, that enables them to become viable in the long-term and on the basis of realistic assumptions.
The Commission say that this is to avoid a situation where a company keeps asking for public support instead of competing on the merits. The restructuring plan must provide for measures to reduce the distortions of competition induced by the state support, such as reductions in capacity or market share. Also, the beneficiary needs to make a significant own contribution to the costs of restructuring. Finally, rescue and/or restructuring aid under the Guidelines may be granted only once over a ten-year period (the so-called ‘one time, last time’ principle). This is to avoid a situation where a company relies on public money instead of competition on the merits. Estonian Air has been in financial difficulties for many years and the Commission believes it has repeatedly benefitted from public support measures during that period. It was granted at least three public subsidy measures by its Government between 2010 and 2014 and another capital injection was expected.
While not all these support measures involved state aid, the Commission have said that “a large majority of them provided Estonian Air with an unfair selective advantage over its competitors that cannot be justified under EU state aid rules”.
Commission orders Estonia to recover state aid from Estonian Air
Following its in-depth investigation, the Commission concluded that aid measures by Estonia, in favour of national flag carrier Estonian Air, gave the company an undue advantage over its competitors, in breach of EU state aid rules. It ordered Estonia to recover, what it described as, the “incompatible aid” from Estonian Air. As a result the airline was required to pay back the state aid already received, which according to information provided by the Commission, amounts to about €85 million plus interest. In addition it cannot now receive an additional €40 million of restructuring aid. The investigation found that Estonian Air has been consistently loss-making since 2006 and it had shown that the aid measures cannot be approved under EU state aid rules. This is because “they involve repeated public support that did not enable the company to become viable again and did not limit the distortions of competition created by the aid”.
The Commission’s investigation also found that a €2.48 million State participation in a capital increase in Estonian Air and the sale of Estonian Air’s ground-handling activities to the State-owned Tallinn Airport for €2.4 million, both in 2009, were conducted in line with market conditions. Therefore, they did not involve state aid within the meaning of the EU rules.
On the other hand, several subsequent measures provided Estonian Air with a selective advantage over its competitors and therefore involved state aid in favour of Estonian Air amounting to a total of €125.6 million (out of which €84.9 million have already been paid out). In particular, these concern:
- A State capital injection of €17.9 million in November 2010;
- An additional State capital injection of €30 million in two tranches (December 2011 and March 2012);
- A rescue loan facility of €37 million provided by the State in several tranches between December 2012 and November 2014; and
- A planned additional State capital increase of €40.7 million.
State aid for companies in difficulty can only be approved if the measures comply with conditions set out in the applicable Commission Rescue and Restructuring Aid Guidelines referred to above.
In the press release issued on 7th November, Commissioner Margrethe Vestager, in charge of competition policy, said: “Companies should compete based on a sustainable business model rather than relying on continued support by the State to stay in the market. Estonian Air has repeatedly received public subsidies over the past five years but did not carry out the necessary restructuring to become viable as a business. 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, which have to compete without such support.”
The press release noted that the Commission’s investigation had also revealed that Estonian Air “did not have a credible restructuring plan capable of ensuring that the company would become viable without continued state support”. It added that, “the plan did not include sufficient measures aimed at limiting the distortions of competition created by the State support”.
The statement concluded “the repeated public support measures have already given the airline a considerable economic advantage that its competitors did not have. In order to remedy this distortion of competition, Estonian Air now needs to pay back the aid already received (€84.9 million plus interest) to Estonian taxpayers. This is necessary to ensure a level-playing field in the internal market”.
Given that in the other instances where airlines were forced to pay back the so called “undue advantages they had received” e.g. Malév and Cyprus Airways, had led to their demise, the Commission should not have been surprised that the same fate would befall Estonian Air.
So what now?
Firstly the Management Board in deciding to cease all operations, starting from 8th November, noted that “during last year our airline has done a big turnaround and with more capacity provider contracts we proved that Estonian Air can become a sustainable and profitable Regional Airline” “Nevertheless, the European competition authorities deemed our state aid violating the rules” said Jan Palmér, the CEO of Estonian Air. He added that “Estonian Air team is extremely honoured to have made valuable contribution in development of Estonian tourism and economy over 24 years” and said he would “like to thank all Estonian Air employees, customers and partners for making it happen”.
In the aftermath of the suspension of services Estonian Air said it had arranged replacement flights for passengers affected by the grounding for the 8th, 9th and 10th November. Those booked on Estonian Air flights starting 11th November would receive full refunds from the carrier. The Estonian Ministry of Economic Affairs and Communication also confirmed that all flights taking place on 8th, 9th and 10th of November “will be replaced”. In addition, the Ministry had already established a new holding company – Nordic Aviation – in anticipation of the likely EC negative ruling. It had also decided that Nordic Aviation would use the final tranche of €40.7 million for initial capex requirements with domestic and foreign investors being offered stakes in the new national airline. Nordic Aviation Group was founded on 25th September 2015 and the company’s Board Members of the Board are Jaan Tamm, Ahto Pärl and Erik Sakkov. Its Supervisory Council consists of Peeter Tohver, Katrin Rasmann, Toomas Haidak and Toomas Uibo. What the Commission’s view of the Government using this €40.7 million in additional State capital, to effectively replace Estonian Air, is unknown but it is certainly an interesting development.
Nordic Aviation Group takes over Estonian Air routes
In a statement on 7th November, Nordic Aviation Group confirmed that it had been “formed by appointment of Estonian government” and was fully state-owned. Its statement confirmed that it would commence operations “in cooperation with five European flight operators” the following morning, serving eight routes. These were Amsterdam, Brussels, Copenhagen, Stockholm, Oslo, Kiev, Trondheim and Vilnius. It was intended that the first flight operated by Nordic Aviation would depart from Tallin “to Amsterdam at 06:50”.
The statement went on; “currently the role of Nordic Aviation is limited to ordering the flights as the company does not have its own fleet nor crew yet. The flights are carried out in cooperation with such airlines as bmi regional, Trade Air, NextJet and Carpatair that provide the fleet and the crews, and Adria Airways that provides the air operator’s certificate (AOC), commercial platform and ticketing system. Thus, the rules of Adria Airways will initially apply on Nordic Aviation flights”.
Estonian Air’s partner NextJet, the largest regional airline in Sweden, is also directly affected by the EC ruling and will have to wet-lease another ATR turboprop for its Stockholm Arlanda to Gällivare and Arvidsjaur routes, previously served, using Estonian Air’s CRJ-900s. Accordingly, passengers who have booked tickets on the routes Gällivare – Arlanda or Arvidsjaur – Arlanda on Estonian Air´s webpage, were rebooked to Nextjets flights.
With Nordic Aviation lacking its own AOC, some flights are being operated using Adria Airways’ flight numbers, although the extent of other services by bmi regional (ERJ-145s), NextJet (BAe ATPs), Zagreb based Trade Air and Timisoara based Carpatair (both using Fokker 100s), is not yet apparent. However, online check-in for Nordic Aviation Group/Adria flights is not available and passengers can only check in for flights at the airport check-in counter at the moment. Tallinn Airport is advising Nordic Aviation/Adria, passengers to arrive to the airport 2 hours before the departure.
Nordic Aviation was planning to operate the following flight schedule from 8th November. Amsterdam (twice daily except Saturday evenings), Brussels (twice daily except Saturdays and Thursday, Friday and Sunday mornings), Copenhagen (three times daily except Saturday evenings and Sunday mornings), Oslo (twice daily except Saturdays), Kiev (daily except Tuesdays and Saturdays), Trondheim (on Fridays and Sundays), Vilnius (twice daily on weekdays). It is planned to operate Munich on Saturdays starting 19th December. Unfortunately, Nordic Aviation is unable to offer flights to Moscow and St Petersburg at the moment. In order to start flying to Russia the two countries need to renew the bilateral agreements.
In its statement, Peeter Tohver, chairperson of the Supervisory Council of Nordic Aviation Group, said it was important to point out that Nordic Aviation is a new and independent company and is not the legal successor of Estonian Air. He added “The rules of European Union are very harsh, that is why we start with a clean sheet and a new team. The government has appointed the company to continue providing the flights in the similar scale with the previous operator. We have done serious work in this regard and are now ready to serve the passengers.”
His colleague, Erik Sakkov, a Member of the Board of Nordic Aviation, noted that this current situation “is a transitional period”. He went on “In the course of time, we will develop a new brand of Estonian national airline based on Nordic Aviation. We hope to present these plans during next summer,” He concluded. “Dear passengers, we encourage you to fly with us. Please help us in creating the new airline from day one, support us and buy tickets to our flights. Your input is of great significance.”