The Estonian National Audit Office believes Nordica's plight shows the Estonian state's lack of skill and interest in its role as owner of a company in such a complex business field as the aviation industry.
According to the Estonian National Audit Office, even before the serious financial difficulties faced by Nordica became apparent in July, reasons to justify the company and [Aviation assets managers] OÜ Transpordi Varahaldus remaining under state ownership were lacking. The results of an ongoing special audit suggest that it would be reasonable for the Estonian state to sell both Nordica and Transpordi Varahaldus.
"For many years, people have been asking the same question, which the National Audit Office has repeated in its latest report – 'Should the state own an airline company in order to ensure flights to and from Estonia?'" Auditor General Janar Holm said.
"Life itself has provided an answer to this. The dream of flying under one's own flag might not be possible amid the tight competition of the aviation market without continuous financial support from the state and without violating the European Union's rules for granting state aid."
The National Audit Office found that there had been attempts to stop unprofitable flights from Tallinn. However, the necessary agreements to do so were not reached at the level of the owner and the representative of the owner did not respond to serious issues, which had been pointed out by the company.
Nordica was founded in the fall of 2015 at a cost of €40.7 million, with the aim of ensuring a necessary air service for Estonia and service a route network similar to that previously provided by AS Estonian Air.
However, three years later, the funds provided by the state had essentially run out.
Since its foundation, Nordica's management board had been searching for other earning opportunities in order to cover the loss of flying from Tallinn. It had also begun wet leasing its aircraft and crews to other airlines. The management board repeatedly raised the issue of updating this strategy with the company's supervisory board as it was economically challenging to both meet the owner's expectation of continuing to fly from Tallinn and also remain profitable while competing with other international airlines.
However, neither Nordica's supervisory board nor the minister of economic affairs and communications in charge of the holding went along with the request to consider the sustainability of flying from Tallinn until the economic reality forced the closure of those routes.
Nordica's management board had requested a review of the business plan on almost ten occasions to no avail, before the minister of economic affairs and communications finally agreed to end regular flights from Tallinn in 2019, preventing the company from collapsing.
"This is an example of a situation where a politically established goal, which turned out to be unsuitable due to changes in the environment, does not allow for a response to the actual situation. Time and money was lost," Holm said.
Following the termination of regular flights, a legitimate question which arose, was what the public service performed by Nordica is, having transitioned from providing scheduled flights to outsourcing its services. The question of why the Estonian state should bear the risks of the company's economic activities also became pertinent.
Nordica was an airline, with, at that time, a working business model, which the Estonian state had no clear reason to own.
Starting in the summer of 2019, questions regarding whether the state needs an airline that does not fly from Estonia were repeatedly raised in the Estonian government. However, those discussions later died down.
Between August 2019 and July 2021, two different ministers of finance, on a total of four occasions, asked the government to consider whether owning Nordica was justified. No visible actions resulted from these appeals.
Nordica was, much like aviation companies throughout the rest of the world, badly hit as a result of the coronavirus pandemic. By fall 2020, Nordica was practically insolvent. In October 2020, the airline received €22 million from the Estonian state and the opportunity to borrow an additional €8 million from KredEx. The European Commission approved state aid granted to Nordica on the condition that the company must not operate unprofitable routes.
However, the situation was difficult for Nordica even prior to the coronavirus pandemic. The company's liquidity problems increased after its failed cooperation with the Adria Airways ended in Nordica having to write off €4.6 million.
According to the National Audit Office points Nordica provides a clear example of how the state should not govern a company that it owns.
Neither the company's activities nor the decisions made by its management appeared to have been permanently monitored as a lot of documents are either missing or have not been retained.
The owner's guidelines were also deemed to be contradictory.
Nordica was tasked by the minister of economic affairs and infrastructure with ensuring a necessary air service for Estonia even after the termination of its flights from Tallinn. However, precisely what was meant by a necessary air service for Estonia remained unclear.
The minister of economic affairs and communications, as the representative of the company's owner, did not determine the circumstances under which Nordica ought to have begun operating on the Estonian aviation market again. Therefore, several other issues also remained unclear, including the length of the delay period, costs and under which conditions Nordica would be able to open fights from Tallinn again on top of its other existing obligations.
Nordica's aircrafts were then and are still in use, having been wet leased to other airlines. Finding new ones would most likely take several months or cost an unreasonable amount of additional funds.
According to Nordica representatives, the competitive situation would have to change considerably for the company to have both the need and opportunity to begin running flights from Tallinn again. It is also necessary to consider that the European Commission's state aid permission regulations would not permit Nordica continuing to operate at a loss.
In July 2023, it became apparent that Nordica's economic situation had, since May this year, deteriorated sharply. The chair of the company's management board resigned, and international experts were hired to restructure Nordica's economic activities. The Estonian Minister of Climate also decided to sanction a special audit of Nordica. According to the minister, the results of the audit be available within three months, with the company given six months to achieve stability.
Nordica barely made a profit in 2021 and 2022, and although from August 2019, various ministers of finance raised concerns on a number of occasions regarding the expediency of owning the airline company, discussions surrounding the issue stalled and eventually died down. Ultimately the Estonian government has yet to reach a decision on Nordica's privatization.
Now, due to the deterioration of Nordica's financial situation, the circumstances have changed drastically.
According to Auditor General Janar Holm, Nordica's story provides an example of a situation where the political risk of making a decision is high, while letting things carry on as they are appeared to be a safe option, at least initially.
"A decision was finally made only once the crisis has become extremely serious," Holm said. "By that point, the political and economic price was already very high. We can see that Nordica has increasingly moved away from its original goal – to ensure an air service for Estonia. This goal has not been achievable, commercially and as a result of the European Union's rules on state aid, which is why the public interest – to keep the company under state ownership following the termination of regular flights from Estonia – was questionable."
The National Audit Office was unable to identify any significant reasons to suggest that it was strategically necessary for the Estonian state to retain ownership of Nordica and Transpordi Varahaldus now, nor were there any arguments in favor of the company being state-owned prior to July, when Nordica's financial difficulties were made public.
The audit additionally found nothing to suggest there was any clear and understandable public interest in the state's need, as the owner of the two companies, to bear any risks related to their economic activities.
The National Audit Office therefore recommends that after the results of its special audit of Nordica have been released and the company's economic activities have been stabilized, the Estonian government decides which method of sale best suits the interests of the state. This may mean either privatizing Nordica and Transpordi Varahaldus together or separately, either partially or in full.
If the government still decides to continue as the owner of Nordica and Transpordi Varahaldus, the National Audit Office recommends clearly defining why the companies are strategically necessary for the state and which public interest function(s) they fulfil. In the event of an aviation market failure, which Ministry of Economic Affairs and Communications officials consider highly unlikely, the state would have other options besides owning Nordica, to ensure the maintenance of a necessary air service.
In this overview, the National Audit Office has focused primarily on Nordica, however it also deals with the activities of the state enterprise Transpordi Varahaldus, which was founded at the same time as Nordica. Transpordi Varahaldus is an important business partner to Nordica. The entirety of its economic activities are the leasing of aircrafts to Nordica and services that support it.
The National Audit Office analyzed whether the Estonian state, as the companies' owner for over seven years, has directed the activities of AS Nordic Aviation Group (brand name Nordica) and OÜ Transpordi Varahaldus, what the expectations of the companies have been, whether Nordica and Transpordi Varahaldus have succeeded in meeting the goals established by the owner, and whether the it is justified for the state to operate in the aviation sector.
The entire report is available in Estonian (link to pdf.) here.
Editor: Michael Cole