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This article was written and first published on gediminas.ziemelis.com on 13th February 2018
Smart way for Estonia to avoid illegal state airline support?
Tomas’s Comment:
A sad story on how the European Commission failed privately owned airlines in the Estonian Air fiasco and how countries can cheat the EC and not be punished, when we saw Hungary’s Malev and Cyprus’s Cyprus Airways shut down for good for the same illegal state aid to their money-losing airlines.
The year 2015 was a rough year for Estonia and its national flag carriers. After European Commission concluded the airline had been given illicit state aid, Estonian Air went bankrupt as it could not afford to return the sums – € 85 million. At the same period of time, as a contingency plan, Estonian state established new national flag carrier that would take over all the passengers but with no previous debt or problems. This is how Nordica (initially – Nordic Aviation) was found, as a last resort for a small Baltic country to ensure having a national flag carrier.
Today Nordica is 49% owned by LOT, and operates 6 x ATR-72-600’s (4 for SAS), 2 x CRJ-700’s and 10 x CRJ-900 and doing more ‘white label’ ACMI flying, it has just established a base at Groningen, the Netherlands for 5 routes to Copenhagen, Munich, Nice, Brussels and Ibiza (seasonal), none of this would be possible without the generous hand of the Estonian Government, which illegally subsidized Estonian Air for years, and then after being forced by the EC to repay the Euro 85 million, prepared a new airline (Nordic Aviation Group) to take over the Estonian Air routes the same day it went into bankruptcy, they laughed at the EC and just started another airline with public money to compete with privately owned competitors! shame on EC and Estonia.
“Everybody understands that having national airlines is a much needed thing for every country. As it is known, national carrier, particularly in the beginning, is a huge burden. Especially, if we have in mind that the airlines belong to small countries, such as Estonia. There were quite a few examples on how airlines go bankrupt but the new solution of Estonians gave a small gap for succeeding and it worked,” notices Gediminas Ziemelis, Chairman of the Board at Avia Solutions Group.
Airlines – essential for economy of small country
Aviation industry is extremely important to an annual gross domestic product (GDP) for every country in the world. Air transport can play a key role in economic development and in long term economic growth. As it is calculated, aviation directly brings approximately 1% of the GDP. Let’s count, how much Estonia could have lost if they wouldn’t have saved their airlines: in 2014 Estonia’s GDP was around 21,6 billion, in 2015 – 18,3 billion, in 2016 – around 19 billion and in 2017 – around 20 billion euros.
“The government officials realized that for a small country like Estonia, airlines are essential. Losing national carrier means losing all the airways and possible tourists. That would also isolate the country from basically all the world as it would become more difficult to reach it and it would be a huge damage for the economy. That is why even two months before the European Commission delivered their conclusions of investigation, they have officially stated of founding a new aviation group, in case of bad ruling. A contingency plan was made and it became a saviour of quite a part of Estonian economy,” said G. Ziemelis.
Loophole that saved Estonian aviation industry
At the beginning of operations, Nordica was operating under the name of Slovenian carrier Adria Airways. Now, from November 2016, they have a strategic partnership with LOT Polish Airlines. LOT has 49% of the shares and Nordica is carrying LOT’s flight codes and call signs on most of the flights. Although the subsidiary of Nordica – Regional Jet – has an Air Operator’s Certificate (AOC), Nordica regular flights currently use the airline codes of LOT, except for flights to Russia.
Therefore, up until this day, Nordica has no AOC of its own and it can be seen in Estonia’s Civil Aviation Administration website.“Everybody in aviation industry knows how difficult it is to get an AOC and how expensive it is. Besides that, the AOC has one more bad side – it prevents the operator to receive a financial aid from the state. For small countries and moderately small airlines the aid is essential but Estonians learned it the hard way that trying to pull this off in a normal way is impossible,” explained G. Ziemelis, adding that it was a very good strategic move that has built a new company, Nordica, to its success.
Despite some troubles, Nordica is becoming quite a successful carrier. In 2017 they have reached their new record and transferred over 613 thousand passengers, growing the numbers by 63 percent in comparison with 2016. They have expanded their aircraft fleet to 16 planes, created 19 destinations and increased punctuality.
“Nordica – isn’t the only one example of such situation. There must be a little coincidence that at the same year, just earlier, Canadian cheap flights company NewLeaf was found and did quite the same thing, just branded themselves as a virtual airline. This way they were able to move around aviation business and operate without an AOC, only attaching themselves to the license of the bigger company. This is more or less the same thing what Nordica did,” explained G. Ziemelis
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The Government rushed its decisions about Estonian Air and gave the airline tens of millions without giving the matter enough consideration
TALLINN, 24 May 2016 – The National Audit Office is of the opinion that the resolution of the European Commission, in which it finds that the decision of the state of Estonia to support national airline AS Estonian Air with 84.9 million euros, was against the rules of the European Union, could have been avoided if the Government had complied with the principles of the State Assets Act and made sure that giving money and loans to AS Estonian Air was purposeful, expedient, economical and lawful.
The basis on which the Government made decisions about AS Estonian Air was that Estonia needed a Tallinn-based airline by all means. The Government did not consider any other options of guaranteeing air services either substantively or thoroughly, and failed to demand a comprehensive business plan of AS Estonian Air, declared realistic by an independent expert, or a legal analysis confirming the compliance of the Government’s decision with the state aid rules of the European Union, in any of the cases when it decided to give or lend money to the airline (ca 85 million in total). This way, the Government could not have reasonable assurance that it was being a rational investor when giving money to the airline.
The first analyses of state aid were commissioned in 2013 when the Commission had already launched proceedings. By this time the decisions to give money to AS Estonian Air, which led to the Commission’s negative position, had already been made a long time ago: the decisive factor for the Commission was the decision, made in 2011, to allocate 30 million euros for the expansion strategy of AS Estonia without notifying the Commission about this. Thus, the National Audit Office finds that the main reasons why the Commission made a negative decision where the decisions made by the Government before notifying the Commission (2012), and better communication later on would probably have not changed the decisions made about state aid either.
Despite the opinion of the Ministry of Finance that giving further loans to AS Estonian Air, which was verging on bankruptcy, was prohibited state aid and the opinion of the Ministry of Economic Affairs and Communications that the prospects of getting a positive decision from the Commission and successful restructuring of the airline were poor, the Government formed a principal decision in early 2013, which was based on the Prime Minister’s clear position in the matter, that it would not let AS Estonian Air go bankrupt and instead give it the financing it needs to at least continue operating until the Commission makes its decision.
The Government continued paying out new loans even when the Ministry of Finance no longer believed that earlier loans would repaid and recognised them as doubtful debts. For example, the last loan instalment in the amount of 12.1 million euros was transferred to the company in 2014, although the 24.9 million euros granted to the airline earlier had been written off by that time with the decision of the Secretary General of the Ministry of Finance.
The materials of the audit indicate that the Government made its decisions to finance AS Estonian Air unreasonably quickly and on the basis of superficial information even in situations where it had the opportunity and time to carry out the necessary analyses and commission expert opinions in the issues where officials are unable to answer all questions. Since 2010 the Government financed four different strategies of AS Estonian Air, none of which could be successfully implemented. The reasons of the failures have not been consistently analysed and the only sanction that was implemented is the removal of a CEO and two members of the supervisory board.
The Government has discussed the issued related to Estonian Air 25 times in the last five years and every time as an urgent matter, usually getting the material either on the sport or the day before, which made it impossible to study them thoroughly. When the materials that were the basis of the decisions were prepared, the relevant minister and the Prime Minister failed to be as demanding as necessary with their officials and Government members, respectively.
Auditor General Alar Karis said: “I would like to believe that the manner in which the Government made its decisions about Estonian Air is just a one-off bad example. An exception, an accident that does not illustrate the shortcomings in the process of making choices in general. But I’m afraid that this is not the case. Therefore, this audit does not just speak about aviation, but there is more to learn from it than is necessary for the next decisions concerning the field of aviation.”
In the audit, the National Audit Office also expresses its concern about the manner in which the materials that are the basis for the management decisions of public undertakings are preserved. For example, there is no clarity about a lot of important materials concerning AS Estonian Air. The materials of the supervisory board meetings of AS Estonian Air from 2010 to May 2012 have only been preserved in a private company. Also, the data of the Ministry of Economic Affairs and Communications and the Government Office about the materials that were submitted to the Government for decision-making are different.
In September 2015 the Government established two new public aviation companies even before the operations of AS Estonian Air had been terminated: one of them is currently operating under the trademark Nordica and the other is OÜ Transpordi Varahaldus. In total, the Government allocated 72,700,000 euros to the two new aviation companies.
The National Audit Office is of the opinion that the Government made the decision to establish two new aviation companies predominantly in compliance with the principles of the State Assets Act. Complete business plans of the companies that forecast profits were submitted to the Government. Attention was also given to the issue of state aid and export opinions were commissioned, which stated that the Government’s decision is in compliance with the rules of state aid. However, the final opinions of the independent expert were completed after the Government’s decision, which means that the Government could not have had reasonable assurance that it was being a ration investor at the time the decision was made. Also, the supervisory boards of the companies as the representatives of the owners have not approved the business plans of the new public aviation companies. The time it will take Nordica to become profitable has changed in comparison to the forecast given to the Government and in the airline’s own opinion, the economic performance of Nordica should become clear in June 2016.
In order to organise the management of public undertakings better and support the well-considered decisions of the Government, the National Audit Office advised to agree on the kind of information that must be submitted to the Government when the latter decides to make a capital contribution or give a loan to a new or operating public undertakings, and to stipulate this by law.
The proposal of the National Audit Office is that the materials to be submitted to the Government should definitely include the complete business plan of the company for at least the next four years as well as its financial forecasts; the opinion of an independent expert who did not participate in the preparation of the business plan about the economic feasibility of the business plan and an their opinion on whether the assumptions made in the business plan are realistic; an analysis prepared or commissioned by the Ministry of Finance of whether or not the decision complies with the state aid rules of the European Union; and confirmation in the materials submitted to the Government that the decision complies with the common market rules in the opinion of the Ministry of Finance.
The National Audit Office also finds that the state should have a centre of excellence in state aid issues, which would advise public authorities about state aid irrespective of the field and in the case of decisions concerning state aid, would give the Government of the Republic an opinion on whether or not the intended decision complies with the common market rules of the European Union. The proposal of the National Audit Office is to establish such a centre of excellence in the Ministry of Finance.
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