Cyprus Airways suspends its operations

Cyprus Airways Airbus A319
Cyprus Airways Airbus A319 (© K.v.Wedelstaedt GFDL 1.2)

Following the decision of the European Commission for Competition on the application of the Republic of Cyprus of a Restructuring Plan for Cyprus Airways (Public) Ltd submitted in October 2013, the Board of Directors of Cyprus Airways on friday (9 Jan 2015) has decided to initiate the procedure for voluntary liquidation and to that effect all necessary measures will be taken.

In the context of the above decision all operations of the company suspended as of the close of business on 9 January.

European Commission said:

Following an in-depth investigation, the European Commission has concluded that a restructuring aid package of over €100 million for Cyprus’ ailing flag carrier Cyprus Airways gave the company an undue advantage over its competitors in breach of EU state aid rules. Cyprus Airways therefore needs to pay back all incompatible aid received, which according to the Commission’s information amounts to over €65 million plus interest. In particular, the Commission found that Cyprus Airways had no realistic perspective of becoming viable without continued state subsidies.

Commissioner Margrethe Vestager, in charge of competition policy, said: “Cyprus Airways has received large quantities of public money since 2007 but was unable to restructure and become viable without continued state support. Therefore, injecting additional public money would only have prolonged the struggle without achieving a turn-around. Companies need to be profitable based on own merits and their ability to compete and cannot and should not rely on taxpayer money to stay in the market artificially.”

The Commission found that Cyprus Airways had been in economic difficulties for many years and repeatedly benefitted from public support measures (for full details, see Chronology below):

In September 2007, the Commission authorised a restructuring aid package worth €95 million in favour of Cyprus Airways.
In December 2012, Cyprus notified to the Commission €73 million rescue aid for the airline. Several tranches of this loan amounting to in total €34.5 million were paid out in breach of Cyprus’ obligation to await the result of the Commission’s state aid scrutiny. In 2012, Cyprus also granted a capital injection worth €31.3 million to Cyprus Airways. The Commission opened an in-depth investigation into this measure and the 2012 capital injection in March 2013.

In October 2013, Cyprus notified to the Commission a €102.9 million aid package to restructure Cyprus Airways. The package included the €31.3 million capital injection mentioned above, a conversion of debts into equity amounting to €63 million and €8.6 million to cover the deficit of the company’s Provident Fund, an employee benefit scheme. The Commission opened an in-depth investigation in February 2014 to assess the measures.

Under the applicable EU guidelines on the rescue and restructuring of companies in difficulty, a company can only receive restructuring aid once over a period of ten years (“one time, last time” principle). This is to avoid that market players rely on public money instead of running an effective business and competing on the merits. Cyprus has provided no evidence that Cyprus Airways faced exceptional and unforeseeable circumstances that would justify an exemption from this principle.

The Commission also found that Cyprus Airways’ restructuring plan is based on unrealistic assumptions and does not sufficiently reflect different market scenarios.The proposed restructuring measures do not appear appropriate to address the circumstances that led to Cyprus Airways’ difficulties. Moreover, the proposed restructuring period is longer than what the Commission has authorised in other airline restructuring cases.

Finally, in order to avoid the moral hazard of bailing out inefficient players with taxpayer money, under EU state aid rules any company that receives restructuring aid has to sufficiently contribute itself to the cost of restructuring. The Commission found that Cyprus Airways’ own contribution is significantly below the level of 50% required by the guidelines.

For all these reasons, the Commission concluded that Cyprus Airways was unable to become viable in the long term without continued state support.

The repeated public support measures have already procured a considerable economic advantage to the airline that its competitors, who had to operate without such public money, did not have. In order to remedy this distortion of competition, Cyprus Airways now needs to return the aid received to Cypriot taxpayers. This will re-establish the situation that existed on the market prior to the granting of the aid, thereby cancelling out or at least alleviating the distortion of competition brought about by the aid. This is necessary to ensure a level-playing field in the internal market. The Commission’s recovery policy is set out in its 2007 Recovery Notice.

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