EU grants State aid cushion for Riga International Airport with strict conditions

On March 8, 2021 the European Commission (“EC”) approved Latvia’s notification of its sizeable financing plans to recapitalize Riga International Airport (“RIX”), in the exceptional situation caused by the coronavirus pandemic.

The EC held the recapitalization measures notified by Latvia are in line with Article 107(3)(b) TFEU and the conditions set out under the State aid Temporary Framework (“Temporary Framework”).  The EC further held, the measures are “necessary, appropriate and proportionate to remedy a serious disturbance in the economy of the Member States”, while maintaining the necessary safeguards to limit competition distortions.

RIX is fully owned by the Latvian State, with its business activities ranging from the provision of aviation services (handling of aircraft, passengers and cargoes), to the provision of nonaviation services (e.g., the lease of premises and land, as well as car parks).  RIX is also an important hub for the connectivity of Latvia (and the Baltics) with the rest of Europe and third countries.

The approved aid measure under the Temporary Framework, results in RIX receiving up to EUR 39.7 million, specifically in the form of:

  • EUR 35.2 million capital injection; and
  • EUR 4.5 million waived dividend payment for the 2019 financial year.

The conditions under which the recapitalization is granted are as follows:

  1. Conditions on the necessity, appropriateness and size of the State intervention: The approved aid measures will not: (i) exceed the minimum needed to ensure the viability of RIX; and (ii) go beyond restoring its RIX’s capital position before the coronavirus outbreak occurred.
  2. 2. Conditions on the State's entry, remuneration and incentives to exit from the capital of RIX:  Accordingly, the aid measure will maintain the viability of RIX, whose insolvency would have serious consequences on Latvian employment and the economy.  The State (Latvia) will receive appropriate remuneration for the recapitalization investment, with mechanisms in place to incentivize RIX to recover the State's investment.  In its notification to the EC, Latvia submitted financial projections until the fiscal year 2026 (prepared by RIA) to effectively demonstrate the impact of the recapitalization instruments. Notably, RIX has committed to work out a credible exit strategy within 12 months of the aid measure being granted, unless the State's intervention is reduced below the level of 25% of equity.  If after seven (7) years from receiving the aid, the State's intervention has not been recovered, an additional restructuring plan for RIX will be notified to the EC.
  3. Conditions regarding RIX governance:  Until the Latvian State has entirely removed itself, RIX is subject to bans on dividends and share buybacks, other than in relation to the State.  Pending the redemption of at least 75% of the aid measure, a strict limitation of the remuneration of RIX's management is imposed (including a ban on bonus payments), incentivizing a swift and quick exit of the State’s intervention.
  4. Acquisition ban of RIX:  Pending the redemption of at least 75% of the aid measure, RIX is strictly prevented from acquiring a stake of more than 10% in competitors or other operators in the same line of business.
  5. Public transparency and reporting by RIX:  RIX must publish all information re the use of the aid received, including how the aid supports the RIX’s activities (in line with EU and national obligations linked to the green and digital transformations).

Following approval of the Latvian aid measure, EC Executive Vice-President Margrethe Vestager, in charge of competition policy, highlighted: “Airports are among the companies that have been hit particularly hard by the coronavirus outbreak. With this measure, Latvia will contribute up to €39.7 million to reinforce Riga International Airport's equity and support the company face the economic effects of the outbreak. At the same time, the State aid will come with strings attached to limit undue distortions of competition. We continue working closely with Member States to ensure that national support measures can be put in place in a coordinated and effective way, in line with EU rules”.

The non-confidential version of the decision will shortly be made available under the case number SA.57756.

Similar to airBaltic, RIX is witnessing heavy financial bleeding due to ongoing coronavirus outbreak, travel restrictions and a significant drop in travel demand.  With no apparent certainty as to when normality will indeed present itself, these aid measures are necessary to avoid a financial collapse of RIX.  In light of the current outlook, the aid measure may need restructuring after 12 months if the ongoing global travel restrictions do indeed continue with no foreseeable end.  The strict restrictions imposed on the aid measure are expected, given the EC’s careful approach to maintain a competitive marketplace during and after the coronavirus pandemic.  With the sizeable amount of aid being pumped in by EU Member States, it will be very interesting to whether the EC has indeed managed to strike a competitive balance in the marketplace.  We will likely see many more notified aid measures by EU Member States to assist airports (important connectivity hubs) in maintaining economic viability until the return of normality.  While the EU travel industry desperately awaits a decision on “vaccine passports”, the travel restrictions limit any form of viable financial recovery for the foreseeable future.

While undoubtably welcomed, the significant increase in the size of the aid scheme signifies the ever piling impact of the coronavirus pandemic in Latvia.  The ever increasing aid scheme notifications under the Temporary Framework rules is slowly evidencing the extent of the economic cost of the pandemic across the Member States.  It is without a word of doubt, we will continue to see the modification and extension, as well as the introduction of additional aid schemes in the months to come.

On 28 January 2021, the European Commission announced its decision to extend the validity of Temporary Framework rules, as well as the previous scope to assist the European bloc in its fight against the ongoing economic strains caused by the coronavirus outbreak.  The Temporary Framework rules will now apply until 31 December 2021.

If you have any questions concerning the recently approved scheme(s) or any other State aid related questions, please contact a member of our competition team.

by Charles Clarke, Expert Counsel, Latvia

Team

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