Estonian Air shot down by EU state aid ruling

By bne IntelliNews November 9, 2015

bne IntelliNews -

Estonian Air was grounded on November 8, a day after the European Commission ruled it must return nearly €85mn in state aid. 

The ruling from Brussels effectively bankrupts the flag carrier, as it has a couple of other CEE airlines in recent years. Tallinn is already launching a successor. However, that is unlikely to answer the riddle of how best to operate a successful airline out of the tiny Baltic markets. 

Estonian Air joins Lithuania’s short-lived Air Lithuanica - which went under in May - on the scrap heap. Latvia’s airBaltic has seemingly averted disaster for the time being, and even posted a profit in 2014 after years of restructuring, but its plight is also precarious enough to have sparked a mini-crisis in Riga.

Estonian Air has been loss-making since 2006, the EU executive noted in a statement on November 7 as it ordered the company to return funds it has recieved from the government since 2010. It says a probe, started in 2013, shows the airline repeatedly benefitted from public support measures, including a capital injection of €17.9mn in November 2010, another injection of €30mn in late 2011 and early 2012, as well as a rescue loan facility of €37mn provided by the state between December 2012 and November 2014.

The Baltic company is the third airline to be derailed by such an order from Brussels.Hungary's Malev crashed in early 2012 after the EU said it must hand back around €340mn in state aid. Cypriot Air was grounded early this year facing a tab of €65mn in illegal aid. 

“Companies should compete based on a sustainable business model rather than relying on continued support by the state to stay in the market," European Commissioner Margrethe Vestager insisted. "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.”

Tallinn has been waiting for the verdict for a couple of years, and had clearly noted events in Hungary and Cyprus. It announced the same day that it has earmarked €72mn for the creation of two state transport companies in the event of such a ruling.

As Estonian Air ceased operations on November 8, successor Nordic Aviation Group was waiting in the wings. It will set up a new aviation group that will take over key routes, funded by €40mn from the state.

However, the long term prospects of a new venture look open to question. The challenge of budget airlines has airlines across the EU struggling, let alone in such small markets. Latvia has suggested its neighbours could invest in airBaltic to make it a de facto regional flag carrier. However, as is common with regional projects, the trio of tiny states find it tough to work together.

Although airBaltic looks more stable for the meantime, Riga is still pushing to find stable investment. The company has been at the centre of scandal for years. The latest deal sees a German investor said to have ties to the Russian aviation industry invited in, while the state will put in €80mn, presumably with a wary eye on Brussels.

Estonian Air shot down by EU state aid ruling

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