Estonian ministers are suspending discussions with two companies which had sought to acquire the troubled carrier Nordic Aviation Group, although efforts to privatise the company will continue.

The ministry of climate change says two entities had submitted binding purchase offers.

But one has been determined to be “financially insufficient”, and both contained additional terms which could not be agreed.

The ministry adds that there were also unanswered questions about the origin of funding for the second offer.

Nordic Aviation Group, which operates under the Nordica brand, emerged in 2015 as the government looked to a successor for the collapsed flag-carrier Estonian Air.

But the country’s national audit office found last year that the government did not have the necessary capabilities to serve as Nordica’s owner, and recommended that it sell the airline and its associated aircraft lessor Transpordi Varahaldus.

Nordica Airbus-c-Nordica

Source: Nordica

Two purchase offers for Nordica were determined to be insufficient

Accountancy company Ernst & Young Baltic, in collaboration with Baltic law firm Fort, also presented conclusions of a special audit of Nordica to the Estonian parliament in February this year, which revealed concerns over several aspects of risk management within the carrier.

This special audit had analysed management decisions taken over the course of January 2020 to July 2023.

It found that the board had “not paid enough attention” to risks and possible mitigation before entering transactions and starting new projects – such as opening routes, resuming flights, or signing service contracts.

Some projects were implemented despite being subject to requests for additional financial analysis, and profitability was based on “optimistic assumptions”, it states. The impact on project profitability when circumstances changed were not discussed.

Decision by some of the management bodies might also have created “risks of conflict of interest” in the company, the special audit adds.

Nordica embarked on efforts to restructure in August last year, acknowledging its weak economic situation as revenues fell far below expectations and were significantly exceeded by expenditure.

The company attributed its performance to various issues including an “overly optimistic” expansion strategy, a shortage of personnel, delays in leasing aircraft, longer maintenance times, and higher costs.

While the talks with potential investors have halted, the climate ministry insists Nordic Aviation Group will continue to operate and privatisation remains the government’s aim.

“In order to break even, costs will be reduced and existing contracts will be negotiated to improve their profitability,” says the climate ministry’s transport undersecretary, Sander Salmu.

He says these measures might not be sufficient to leave the company able to operate entirely on its own, but they will enable the government to proceed with sale efforts – either with or without lessor Transpordi Varahaldus.

Over the next six months the climate and finance ministries will review the terms of the sale – with a view to potential restructuring of the company – and prepare a new privatisation process in co-operation with the privatisation advisor.