As the European Commission starts investigating Iberia's plan for a second state aid package from the Spanish government, it emerges that Aer Lingus was allowed to receive the second tranche of its £175 million ($270 million) aid package despite the breach of a key condition.

Iberia is seeking approval for a $1 billion capital injection to be funded from the recent privatisation of other companies controlled by its state holding company, Teneo. The Commission has rejected Iberia's argument that this does not constitute state aid, and an investigation will go into full swing in April.

Commission officials have said that Iberia can qualify for a second aid package only if the carrier has been affected by exceptional circumstances outside its control. Iberia says it has, and cites much lower economic growth than had been predicted, a 27 per cent devaluation of the peseta against the US dollar, liberalisation of domestic routes in Spain, and an increased burden from debt repayments.

Iberia points out that it has secured a two-year agreement from its unions giving a 15 per cent overall pay cut and increased productivity, and that unit costs will have been cut from 7.4 cents per available seat km in 1993 to 6.5 cents this year. Its new restructuring plan includes another 3,500 redundancies, the paying down of debt, the conversion of Viva into a charter carrier, a 5 to 10 per cent capacity reduction, and a 13 per cent cut in the fleet.

Brussels sources say the payment of £50 million (US$78 million) to Aer Lingus was approved in December despite the fact that the group failed to meet the condition to cut its annual operating costs by £50 million last year.

The airline operation in fact exceeded the cost reduction target, but the shortfall arose from the Team Aer Lingus maintenance operation. The Irish government has to submit a report on the Team restructuring by 30 June, and the Commission has made the third tranche of aid, due in December, conditional on the Team question being resolved.

The Commission's decision is bound to be questioned by critics who will argue that the conditions attached to state aid consents are worthless if carriers are to be allowed to break them. However, officials argue that some leeway must be permissible to ensure fair treatment, and that it would have been unfair to penalise Aer Lingus when the airline itself has exceeded its targets. Critics were given ammunition by the three-month delay in publication of the decision.

The Commission is also understood to have decided that Aer Lingus' competitive actions against Ryanair on UK regional routes, including fare cuts and the planned replacement of turboprops with leased BAe146-300s, make commercial sense and do not require investigation. But it has yet to rule on last year's predatory pricing complaint by Ryanair against Aer Lingus.

Source: Airline Business