European Commission's decision on state aid to Estonian Air is negative

Photo: Toomas Huik

According to information that has been officially confirmed, the European Commission's Directorate General for Competition ruled on Friday that state aid to Estonian Air was not legal and the airline has to pay the money back to the state.

Following an in-depth investigation, the European Commission has concluded that aid measures by Estonia in favor of national flag carrier Estonian Air gave the company an undue advantage over its competitors in breach of EU state aid rules, the Commission said.

Estonian Air therefore needs to pay back the state aid already received, which according to the Commission's information amounts to about 85 million euros plus interest, and cannot receive an additional 40 million euros of restructuring aid. Estonian Air has been consistently loss-making since 2006. The Commission's investigation has shown that the aid measures cannot be approved under EU state aid rules, 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.

«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,» Commissioner Margrethe Vestager, in charge of competition policy, said.

Estonian Air has been in financial difficulties for many years. It has repeatedly benefitted from public support measures during that period. Some of these measures did not involve state aid but 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.

The Commission's investigation found that a 2.48 million euros 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 euros, 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 favor of Estonian Air amounting to a total of 125.6 million euros, out of which 84.9 million euros have already been paid out. In particular, these concern a state capital injection of 17.9 million euros in November 2010; an additional state capital injection of 30 million euros in two tranches, in December 2011 and March 2012; a rescue loan facility of 37 million euros provided by the state in several tranches between December 2012 and November 2014; and a planned additional state capital increase of 40.7 million euros.

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.

Under the Guidelines rescue and restructuring aid can only be granted once in a ten-year period or the so-called "one time, last time" principle. This is to avoid that a company relies on public money instead of competition on the merits. However, Estonia granted at least three public subsidy measures to Estonian Air between 2010 and 2014 with another capital injection still foreseen.

The Commission's investigation 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. Finally, the plan did not include sufficient measures aimed at limiting the distortions of competition created by the State support.

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 -- a total of 84.9 million euros plus interest -- to Estonian taxpayers. This is necessary to ensure a level-playing field in the internal market.

The Estonian government made repeated equity injections into Estonian Air and gave rescue aid to the company in 2008-2014 amounting to approximately 130 million euros.

The government informed the European Commission of its plan to grant the national carrier a rescue loan of 8.3 million euros in December 2012.

The EU executive opened in February 2013 an in-depth inquiry into support measures granted to the troubled airline, having doubts about the measures being in line with EU state aid rules.

The Commission started looking into three capital injections: 7.3 million euros in 2009, 19.9 million euros in 2010 and a further 30 million euros in 2011-2012, about which the government had not informed it. In the 2009 and 2010 measures also private shareholders participated, but in 2011-2012 the money was provided solely by the government.

The Commission said in April 2013 it was extending the scope of the investigation to include the decision by Estonia on Feb. 28 of the same year to increase a previous rescue loan by 28.7 million euros.

The government officially sought the Commission's permission to give state aid to Estonian Air only in May 2013. According to the restructuring plan submitted at the time, the company was to be downsized to the point where it would be capable of serving the destinations that are essential for Estonia, being at the same time financially independent as a business. Estonian Air was expected to swing to profit in 2015.

The airline received another 40 million euros in a support measure later on.

A modified restructuring plan submitted to the European Commission in fall 2014 envisioned bringing in Infortar Grupp, a major shareholder in the listed shipping group Tallink Grupp, as a majority shareholder.