Europe clears restructuring aid for Air Baltic and Adria

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Measures taken by the Latvian and Slovenian governments to aid restructuring at Air Baltic and Adria Airways, respectively, were in line with EU state-aid rules, the European Commission has found.

The Commission had in November 2012 opened an in-depth investigation of public support measures in favour of Air Baltic. Specifically, the European body examined an LVL16 million ($31 million) loan granted by Latvia in October 2011; the acquisition by the state and the airline's main shareholder BAS of 0%-coupon bonds issued in 2010; and certain transfers and payments made "on behalf or to the benefit" of Air Baltic by a nationalised bank.

The loan, the Commission has found, was "provided by the state together with a loan from BAS... in proportion to their shareholding". The bond acquisition is similarly deemed to have been "carried out in proportion to their respective shareholdings and at the same conditions", while the other measures "were carried out on market terms" and "procured no undue economic advantage to Air Baltic".

The Commission did find that three other measures were not carried out on market terms, but considers them compatible with 2004 guidelines on state aid for the rescue and restructuring of companies in difficulty. The measures in question are a second government loan granted in tranches of LVL41.6 million and LVL25.4 million made available in December 2011 and December 2012, respectively; a capital increase Latvia and BAS agreed in December 2011, foreseeing a cash contribution from BAS which never materialised; and a transfer to Air Baltic of a €5 million ($6.8 million) claim held by Latvia, in exchange of just LVL1.

"The restructuring plan submitted by Latvia covering a five-year period (2011-2016) appears to be a reliable basis for Air Baltic's return to long-term viability within a reasonable timescale," says the Commission, adding: "Air Baltic's withdrawal from certain routes and surrender of slots will limit the distortions of competition brought about by the aid; and Air Baltic contributes to the costs of restructuring by securing several private financial injections and loans and a lease agreement for new aircraft."

The probe into Slovenian carrier Adria Airways was likewise launched in November 2012, and included in its scope public capital injections in 2007, 2009 and 2010. These amounted to some €15.2 million ($20.7 million) and were made by state-owned holding companies. The Commission has found that the injections "were based on reliable valuations" and that Adria "paid the market price for the capital". Therefore, it concludes, they "provided no undue advantage" and "do not constitute state aid".

The acquisition of MRO subsidiary Adria Airways Tehnika by state holding company PDP and the majority state-owned manager of Ljubljana's airport, in 2010-2011, has also been cleared by the Commission, which notes that the share price "was determined on the basis of a valuation report prepared by an independent expert" and concludes that "the decision to invest in AAT was taken on the basis of market-oriented considerations [and] did not involve state aid".

However, a €50 million cash injection by Slovenia and PDP in 2011 did constitute state aid, says the Commission: "Although several banks converted €19.7 million of debt into equity at the same time, these conversions cannot be compared to the cash injection provided by the state. The banks improved their credit position vis-a-vis Adria Airways, given that their remaining debt received improved terms and collateralisation, while the state assumed new risks by increasing its shareholding."

But, as with Air Baltic, the Commission has decided that the state aid to Adria squares with rescue-and-restructuring guidelines, and the rationale for the verdict is almost identical: Adria has a restructuring plan that "should enable the company to return to long-term viability within a reasonable timeframe"; the airline is to cancel routes, surrender slots and reduce its fleet; and it will bear part of the restructuring costs, with sale of several assets planned, including that of AAT.

"The debt-to-equity conversion carried out by the banks in 2011 is a sign that the markets believe that Adria Airways may become viable," adds the Commission.