Lack of communication and far-flung ambitions to blame for Estonian Air fail (7)

Tero Taskila Photo: Estonian Air
11/9/2015 1:57 PM
Category: Politics

The European Commission ruled on Saturday that state aid given to national carrier Estonian Air from 2009 was not in line with EU regulations, leading to the bankruptcy of the company.

“The problem is that the Estonian government gave large sums of state aid between 2009-2012, part of which was not even declared to the Commission, let alone consulted,” Former Estonian PM and EU Transport Commissioner Siim Kallas said, adding that already by 2013 it was clear the aid was not in line with fair competition rules.

Kallas said the Estonian government should have consulted the Commission first. “What I can say for certain is that part of the state aid was very badly organized and communicated,” he added.

Johannes Tralla, the ERR correspondent in Brussels, also pointed to bad communication. He added that mistakes in leadership, unrealistic ambitions to conquer the market and the restructuring plan were also noted as problems by the EC.

Tralla said the company changed its strategy on a number of occasions since 2006, to escape losses, but there was no cooperation with the European Commission. “The keyword, which describes today [November 7 - ed.] is the Estonian government's bad communication with the European Commission – the first cash injections which the state made into the company, were made alone, without a deal with the Commission,” Tralla said.

Tralla added that talks with the Commission came too late, and by then the trust was gone.

Economy Minister Kristen Michal said one can argue for years about who is to blame. He said he was sorry for Estonian Air folding, adding that what is now important, is to offer support to people.

Michal said the Estonian state can appeal the European Commission's decision, but this would not stop Estonian Air from halting all activities at least for now.

Former Estonian Air chief Erki Urva said Estonian Air fell due to ambitions of politicians. “Realistic scenarios were brushed aside as too unambitious and talks began on how we should fly to all possible destinations, and do this while making a profit, which in an Estonian-sized market is impossible,” Urva said.

Juhan Parts, economy minister at the time, said in 2007 that the company has failed in changing CEOs and was making a loss. The company then embarked on an expansion plan, acquiring three more Boeing jets and three Bombardiers.

The state injected money into the company in 2009 and two years later Tero Taskila was hired to carry on the expansion. The state also harbored dreams of intercontinental Estonian Air flights.

Taskila's plan did boost passenger numbers but in 2012, the company made around 50 million euros in losses. He was sacked soon after and Jan Palmer was brought in to restructure the company, cutting fleet, routes and staff by roughly half.

Kallas said rules are strict, but that they are there to stop abuse by airlines from larger nations.

On November 7, the Commission ruled that the around 90 million euros given by the Estonian government to the company, gave the company an competitive advantage over others. This means the government must demand the full amount, plus interest, back from Estonian Air. The state had also earmarked a further 40 million euros, which would have been given to Estonian Air in case of a positive decision. That money will now go to the Nordic Aviation Group.

Commissioner Margrethe Vestager, in charge of competition policy, said: "Companies should compete based on a sustainable business model rather than relying on continued support by the state to stay in the market. 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. It would not be a good use of taxpayer money to keep Estonian Air in the market artificially – nor would it be fair to competitors, which have to compete without such support."

The crunch question for the Commission was whether a private investor would have acted the same was as the Estonian state, pouring in as much money on the same conditions – if the state aid corresponded with market conditions.

The Commission ruled that Estonian Air received support three times, although EU regulations allow state aid to be given only once a decade. The Commission also ruled that the company did not have a credible restructuring plan and that measures aimed at limiting the distortions of competition were not sufficient.

AirBaltic, the Latvian-owned airline, received a positive decision from the Commission. Tralla said AirBaltic lined up private investors and communicated about funding for the company from the start. He said the company also handed over a number of lucrative routes to the competition to level the playing field after receiving a boost from the state.

No repeats

Erik Sakkov, the head of Nordic Aviation Group, Estonian Air's successor, said the new company will not share Estonian Air's fate.

“Our company does not have loans and this makes our financial situation far better and the situation easier for us. What we do not have is historic contracts, which could be bad and expensive. We have not signed them, we have not yet made mistakes,” Sakkov said.

J.M. Laats

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