3.4.2013   

EN

Official Journal of the European Union

L 92/1

(1)

After several unsuccessful attempts of privatisation, in 2007 the Hungarian State concluded a sale and purchase agreement with AirBridge Zrt. (hereinafter: "AirBridge") concerning 99,95 % of the shares of its national flag carrier Malév Hungarian Airlines Zrt. (hereinafter: "Malév"). AirBridge paid HUF 200 million (EUR 740 000 (3)) in exchange for the shares. The privatisation agreement was notified to the Commission in accordance with Article 108(2) TFEU but subsequently withdrawn (4).

(2)

Following the new owner's financial troubles, Russian Vnesheconohmbank (hereinafter: "VEB") gained a stake of 49,5 % in AirBridge and became Malév's indirect shareholder.

(3)

In March 2010, the Commission became aware through press reports about the Hungarian State's intention to re-nationalise Malév. By e-mail of 2 March 2010 the Hungarian authorities confirmed these press reports.

(4)

By e-mail dated 10 March 2010, the Commission received a complaint from Wizz Air, a Hungarian based low-cost airline and a main competitor of Malév in Hungary. This complaint alleged illegal and incompatible State aid to Malév by means of a number of different measures. By letter of 29 March 2009, the Commission forwarded a non-confidential version of the complaint to the Hungarian authorities together with a request for additional information. Hungary provided comments about the substance of this complaint on 30 April 2010 providing answers to the issues raised therein.

(5)

At a meeting on 5 May 2010, the Hungarian authorities indicated that they intended to restructure the airline. They also indicated however that they did not yet know how far-reaching this restructuring would be.

(6)

A second complaint (of a competitor which did not agree to the disclosure of its identity) dated 5 October 2010 was received by the Commission and forwarded to the Hungarian authorities by letter of 21 October 2010. The Hungarian authorities provided comments about the substance of this complaint on 19 November 2010.

(7)

Further requests for information were sent to the Hungarian authorities on 14 July 2010, 8 October 2010 and replies were received on 11 August 2010, 16 August 2010, 5 October 2010, 3 November 2010, and 23 November 2010.

(8)

Against this background, on 21 December 2010 the Commission opened a formal investigation procedure pursuant Article 108(2) TFEU (hereinafter: "the opening decision") concerning various alleged State aid measures implemented in favour of Malév.

(9)

Hungary submitted its comments to the Commission's opening decision on 24 February 2011.

(10)

The opening decision was published in the Official Journal of the European Union on 26 May 2011 (5). Comments were received from two interested parties: Wizz Air on 26 June 2011 and a competitor requesting for its identity not to be disclosed on 28 June 2011.

(11)

These comments were transmitted to Hungary by letter of 6 July 2011. Hungary submitted comments to the third party observations on 5 September 2011.

(12)

Following the opening decision, two meetings took place in Brussels between the Commission services and the Hungarian authorities: on 10 June 2011 and 19 October 2011 respectively.

(13)

The Commission requested further information from the Hungarian authorities on 26 September 2011, to which Hungary replied by letter of 25 October 2011.

(14)

Malév is based at Budapest Liszt Ferenc International Airport (hereinafter: "Budapest Airport") and currently operates a fleet of 22 aircraft (6) to destinations in Europe and the Middle East. In 2009, it transported 3,2 million passengers (7).

(15)

The Hungarian authorities have tried to privatise Malév on several occasions. In 1992, a 35 % stake in Malév was sold to an Italian State-controlled consortium of Alitalia and Simest. In 1997, Alitalia-Simest sold its stake to a consortium of two privately owned Hungarian banks (OTP & MKB). In 1999, most of the shares in private ownership were re-purchased by the State resulting in a 97 % state ownership.

(16)

Malév, along with many other airlines suffered significantly from the downturn in the aviation market which followed the events of September 2001 and became loss making (see Table 1 below).

(17)

It was against this background that the State decided once again to privatise Malév in 2007.

(18)

The company needed to be recapitalised and the State, as owner, was restricted in its ability to fund such investment. Offers were solicited for Malév and in early 2007 it was decided that a special purpose vehicle named AirBridge had made the most attractive offer. AirBridge offered an attractive and allegedly commercially viable business and restructuring plan.

(19)

Accordingly, on 23 February 2007, a sale and purchase agreement providing for the sale of 99,95 % of the shares of Malév to AirBridge was concluded. AirBridge was owned 49 % by Boris Abramovich (8), a Russian businessman, who held a majority stake in a number of Russian airlines (KrasAir, and the AirUnion alliance of Russian airlines) and 51 % by Hungarian individuals. AirBridge was therefore expected to bring industrial know-how and leadership to Malév, along with business and restructuring plans.

(20)

The most significant parts of this agreement were:

(21)

A new management was appointed and a number of cost saving and revenue generating measures were put in place. These included the discontinuation of long haul operations and staff cuts. According to Hungary, however, as these measures coincided with a massive increase in fuel prices they had no overall effect on the company's profitability.

(22)

Malév's financial position continued to deteriorate and, after 4 months, it lacked the necessary liquidity to make royalty payments for the use of the Malév brand name.

(23)

According to Hungary, payments for the B767 aircraft leased from MAVA have not been "stopped" once Malév had decided to suspend long haul routes as Malév is "recognising" those debts and there is merely a delay in payment on which interest is paid.

(24)

In the second half of 2008, the global financial crisis began to impact on Malév as well as on its Russian partners. Several of Mr Abramovich's airlines went bankrupt. AirBridge found itself no longer able to finance Malév and defaulted on its loan reimbursement to VEB. As the 49 % shareholding in AirBridge was pledged to VEB, VEB took over those shares. VEB indicated that it was willing to continue to finance Malév, but as a bank not as an owner.

(25)

As previously stated, Malév's financial situation had further deteriorated in early 2009. Its shareholders therefore approached the State Holding Company (Magyar Nemzeti Vagyonkezelő Zrt., hereinafter "MNV") with the proposal to sell to MNV Malév Ground Handling, Malév's 100 % subsidiary (hereinafter: "Malév GH").

(26)

According to Hungary, Malév GH was at the time and continues to be a financially sound undertaking.

(27)

A preliminary purchase agreement was signed in January 2009 (and amended in February) providing for advance payments of HUF 4,3 billion (EUR 16 million). MNV made advance payments to Malév in January and February 2009. These advance payments were to be repaid within 2 working days if, after the due diligence, MNV decided not to proceed with the signing of the final sale and purchase agreement. This potential repayment obligation was secured by collateral agreements. In July 2009, MNV eventually decided to abort the transaction and the repayment of the purchase price became due.

(28)

The advance payment was never reimbursed to MNV. Interest due on advance payments was never paid to MNV (11).

(29)

Between January 2007 and March 2010, the Hungarian Tax and Financial Control Administration (Adó- és Pénzügyi Ellenőrzési Hivatal, hereinafter: "APEH") permitted Malév to defer or reschedule payments for different types of taxes and social security obligations. APEH failed to enforce the overdue debt as from July 2008 and even granted the rescheduling of further amounts subsequently. In March 2010, Malév's tax and social security debt (principal and interest for late payment) totalled HUF 13,7 billion (EUR 51 million). With regard to the entire Malév Group, this figure is HUF 16,8 billion (EUR 62 million). On 11 March 2010, the remaining balance of Malév's current account with APEH was settled making use of part of the cash obtained through the February 2010 increase of capital mentioned further below.

(30)

In 2010 it was not possible to find private investors to take over Malév from AirBridge /VEB as main shareholder. In particular, VEB did not have the intention to finance the airline as a strategic investor. The airline's financial performance continued to be weak, as shown in Table 1 below.

Table 1

Malév's performance indicators 2003-2010 (HUF billion)

(31)

Rather than liquidation, the Hungarian authorities decided to negotiate with VEB and AirBridge so as to try to improve the commercial position of Malév in the medium to long term.

(32)

On 26 February 2010, VEB, AirBridge, MNV, Malév and the Hungarian government agreed to a capital increase of HUF 25,4 billion (EUR 94 million), partly realised by injecting fresh capital of HUF 20,7 billion (EUR 77 million) and partly through a debt to equity swap of the advanced payment for Malév GH (see section II.3.2 above) plus interest charged thereon, a total of HUF 4,7 billion (EUR 17 million). AirBridge also swapped HUF 1,5 billion (EUR 5,4 million) into equity. As a consequence, the claims against Malév disappeared and the former creditors became owners of part of the company.

(33)

Before the increase, the existing registered capital in Malév was reduced to almost zero to absorb part of the accumulated losses and to reflect the fact that the existing shares in Malév had become worthless. The registered capital of Malév was then increased by issuing new shares in the nominal amount of HUF 0,01 each. The development on Malév's equity situation is shown in Figure 1 below.

(34)

The HUF 20,7 billion (EUR 77 million) contributed by MNV in cash enabled Malév to reimburse all outstanding tax obligations (see paragraph (29) above) and to temporarily stabilise its operation.

(35)

After the capital increase, the State became a 94,6 % shareholder of Malév and AirBridge/VEB was diluted.

Figure 1

Development of Malév's equity situation

(36)

Between May and August 2010 the Hungarian State provided Malév with a number of "shareholder loans" through MNV totalling HUF 9,2 billion (EUR 34 million).

(37)

The first of these loans in May 2010 was in the amount of HUF 2,16 billion (EUR 7,9 million). It was described as a three-year shareholder's loan at an interest rate of 9,97 %. Repayment was by means of a single payment at the end of the maturity period and the security was a lien on the shares of Malév GH.

(38)

The second of these loans in June 2010 amounting to of HUF 1,34 billion (EUR 4,9 million) was again a three-year shareholder's loan at an interest rate of 9,97 %, repayment was again by means of a single payment at the end of the maturity period and the security was a lien on the shares of Malév GH.

(39)

In August 2010, a third shareholder's loan in the amount of HUF 5,7 (EUR 20,8 million) was granted. This was again a three-year shareholder's loan at an interest rate of 9,97 %, repayable by means a single payment at the end of the maturity period. In this case the security was a lien on an aircraft (HA-LNA - a CRJ jet).

(40)

On 24 September, these three loans which totalled HUF 9,2 billion (EUR 33,6 million) along with the interest owed thereon (making a total amount of HUF 9,4 billion or EUR 34,3 million) was converted from debt to equity in Malév in and the underlying guarantees were released.

(41)

On 24 September 2010, MNV also increased the capital of Malév by injecting a further HUF 5,3 billion (EUR 19,3 million) of cash into the company. MNV's (i.e. the State's) stake in Malév has thereby increased to 96,5 %

(42)

On the same date, the State granted Malév a further shareholder loan in the amount of HUF 5,7 billion (EUR 20,8 million) with a duration of 3 years at an interest rate of 9,97 %. The first interest payment is due 6 months from the date of disbursement while the repayment of principle is by means of a lump sum at maturity. The guarantees on this loan are a registered lien on the HA-LNA CRJ aircraft with an asset value of around HUF 1,8 billion and a lien established on international and Hungarian IATA-organised agent traffic revenue.

(43)

In the opening decision the Commission thus questioned whether the measures below constitute State aid in the meaning of 107(1) TFEU.

(44)

In the opening decision the Commission also questioned whether these measures, insofar they constitute State aid in the meaning of Article 107(1) TFEU, are compatible with the Internal Market in the light of the exceptions enshrined in the TFEU and, in particular, with the Community Guidelines on State Aid for Rescuing And Restructuring Firms in Difficulty (12) (hereinafter: "Rescue and restructuring Guidelines").

(45)

In its reply to the opening decision Hungary repeated the facts described above and explained further the reasons which led to the difficulties of the airlines. Hungary also confirmed that Malév qualified as a company in "permanent" difficulty in the meaning of the Rescue and restructuring Guidelines at least since the second half of 2006.

(46)

Prior to the opening of the formal investigation, the Hungarian authorities argued, in a nutshell, that all measures comply with the Market Economy Investor (hereinafter: "MEIP") and the Market Economy Creditor Principle (hereinafter: "MECP").

(47)

In relation to the measures accompanying the sale of Malév to AirBridge, the Hungarian authorities claimed that these measures are market conform because of the collateral put in place to secure the taking over of the loan by MAVA. As to the abortive sale of Malév GH they argued that no advantage was conferred on Malév as the late reimbursement of the sales price was correctly collateralised and that interest on the sales price had been calculated. With regard to the tax deferral they argue that there was collateral in place for these amounts, that all applicable interest charges and penalties had been applied and furthermore that such deferrals are general measures. Concerning the renationalisation of Malév, the Hungarian authorities state that they could have enforced their claims against Malév leading to the bankruptcy and liquidation of the company. If they had done this they are of the opinion that they would have recovered only a small part of their claims (other than a part covered by the VEB guarantee mentioned in paragraph (20) above). Moreover, they would have faced significant negative consequences for the national economy (13).

(48)

In relation to the shareholder loans and their subsequent transformation into equity in Malév the State is of the view that these conferred no advantage on Malév as at all times these loans were fully secured against assets, that market conform interest rates applied and that on transformation into equity full account was taken of all interest due.

(49)

The Hungarian authorities did not present any new elements after the opening decision. In fact, Hungary's reaction to the opening decision does neither contain new elements in support of the non-aid character of the measures nor information substantiating the compatibility of the implemented measures with the internal market, in particular with the Rescue and restructuring Guidelines.

(50)

Two competitors submitted comments (see paragraph (10) above), both supporting the Commission's investigation:

(51)

The competitor requesting for its identity not to be disclosed alleged that some private investors were interested in acquiring a controlling stake in Malév which demonstrates that there were viable options available for Hungary as an alternative to the 2010 renationalisation of Malév.

(52)

Wizz Air evaluated the aggregated market value of the assets which had been transferred to MAVA along with the MFB loan (measure 1), including the Malév trademark, a kerosene pipeline and one B767 aircraft, as not more than EUR 27 million which is substantially lower than the amount of the loan. Therefore, Wizz Air concluded that this transaction was not done on an arm's length basis and conferred a significant advantage to Malév.

(53)

As to the tax deferral (measure 3), Wizz Air alleged that under Hungarian law a private undertaking in a financial situation similar to that of Malév could neither automatically nor as a matter of exception be granted a similar tax deferral such as the one at hand.

(54)

After an extension of deadline to reply, Hungary reacted on these comments on 5 September 2011. Hungary maintains its position that the past measures are justified by the Market Economy Investor Principle test (see paragraph 59 below) and therefore do not constitute State aid. According to Hungary, the existence of public policy objectives does not affect the non-aid character of the measures.

(55)

Hungary stated that there were no viable options and that only the renationalisation permitted the Hungarian authorities to regain full operational control over Malév, allowing the national flag carrier to actually implement the restructuring procedure that it had pursued since 2007 in order to ensure commercial success of the company. As to measure 1, Hungary took the view that the value of the assets in question corresponded to the value of the loan. As to measure 3, Hungary stated that the Hungarian tax authorities treated Malév as any other tax payer in a similar situation.

(56)

In order to ascertain whether the measures under scrutiny constitute State aid, the Commission has to assess whether they fulfil the cumulative conditions of Article 107(1) TFEU. This provision states that "[s]ave as otherwise provided in the Treaties, any aid granted by Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".

(57)

In the light of this provision, the Commission will assess whether the contested measures in favour of Malév constitute State aid.

(58)

With regard to the cumulative criteria of State aid, in the current case, affectation of trade and distortion of competition are indisputable and were not even debated by the Hungarian authorities. Malév is in competition with other European Union airlines, in particular since the entry into force of the third stage of liberalisation of air transport ("third package") on 1 January 1993 (14).The measures in question enabled Malév to continue operating so it did not have to face, as other competitors, the consequences normally deriving from its poor financial results.

(59)

As regards State resources and imputability of the measures, this has not been disputed by Hungary either. APEH is the Hungarian Tax Authority and as such clearly imputable to the State. MNV is the State Holding Company. Its duties are set out in the most important framework rules of the State Assets Act. MNV executes the government's and the competent minister's decisions. With regard to MAVA, it is also 100 % State-owned (via MNV) and – as the Hungarian authorities explain – represents an "emanation of the Hungarian State".

(60)

Concerning selectivity, with the exception of measure 3 (the tax deferral) this was not disputed by Hungary. The measures were to favour a single company, Malév.

(61)

Whether an economic advantage in favour of Malév is present in the measures under scrutiny will be assessed hereunder.

(62)

Hereto, the Commission notes that according to well-established principles of Community law, if additional capital is made available to an ‧undertaking‧ on conditions better than normal market conditions this could fall within the remit of Article 107(1) TFEU as it would result in ‧favouring‧ the particular undertaking within the meaning of this Article. In order to determine whether such advantage is granted, the Commission applies the ‧Market Economy Investor Principle‧. According to this principle, where, in similar circumstances, ‧a private investor operating in normal market conditions of a market economy of a comparable size to that of the bodies operating in the public sector could have been prompted to make the capital contribution in question‧, no State Aid would be involved. The Commission must therefore assess ‧whether a private investor would have entered into the transaction in question on the same terms‧ (15). The attitude of the hypothetical private investor is that of a prudent investor (16) whose goal of profit maximisation is tempered with caution about the level of risk acceptable for a given rate of return. (17)

(63)

According to the jurisprudence of the European Courts, although the conduct of a private investor with which the intervention of the public investor pursuing economic policy aims must be compared need not be the conduct of an ordinary investor laying out capital with a view to realizing a profit in the relatively short term, it must at least be the conduct of a private holding company or a private group of undertakings pursuing a structural policy - whether general or sectoral - and guided by prospects of profitability in the longer term (18).

(64)

Moreover, ‧… [T]he comparison between the conduct of public and private investors must be made by reference to the attitude which a private investor would have had at the time of the transaction in question, having regard to the available information and foreseeable developments at that time‧ (19).

(65)

The Commission's analysis and assessment must include ‧all factors that are relevant to the transaction at issue and its context‧. This will include the financial situation of the beneficiary undertaking and the relevant market. Based on the abovementioned considerations, the main issue that the Commission wishes to explore is whether the undertaking received ‧an economic advantage which it would not have obtained under normal market conditions‧ (20).

(66)

The Commission also notes that according to established case law, the MEIP is also applicable to loans. When applied to the grant of a loan, this principle invites the question whether a private investor would have granted the loan to the beneficiary on the terms on which it was actually granted (21).

(67)

As already set out in the opening decision, the BP Chemicals judgement (22) is relevant for the assessment of the case at hand. In fact, the Commission considers that the measures are not autonomous and are linked through their chronology, the financial situation of Malév and their finality as they all aim at keeping the airline afloat and solving its liquidity needs and undercapitalisation due to its losses. In fact, Hungary also argues in its comments to the opening decision that the different steps of the "process" are "inseparable" and all measures were intended to pursue one objective, namely to ensure the airline's operation by finding a strategical investor.

(68)

From the submissions of Hungary it has become clear that the measures implemented by Hungary in favour of Malév are motivated by public policy considerations and not based on consideration about the future profitability of the company. Hungary underlined at several occasions the failure of the privatisation and Malév's importance for the national economy. It was acknowledged that, when undertaking the measures, the State took into consideration the "airline's role for the national infrastructure, labour market and the suppliers' interest". The Hungarian authorities also highlighted that there is no private investor which would be willing to take over the airline in its current form. Therefore, the Commission has to assume that no private investor would have acted like the Hungarian government in similar circumstances when undertaking the measures. Hereto, the Commission also recalls that in the Boch judgement the Court indicated that “the test is, in particular, whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional policy and sectoral consideration would have subscribed the capital in question” (23).

(69)

In the light of Malév's bad financial results over a long time period (see Table 1 and points (103)-(104) below) and the Hungarian authorities claim that the airline has been in a permanent difficulty at least since 2006, a return acceptable to a private investor could have be expected only if the company had undergone a drastic restructuring. However, neither Hungary nor Malév ever demonstrated that such a restructuring plan was at the basis of any of the measures under examination.

(70)

On the basis of the above the Commission considers that measures 1-8 taken together do not comply with the MEIP. This assessment is further confirmed by an individual analysis of each measure.

(71)

According to Hungary, MAVA's activities are limited to a one-time function, i.e. holding certain assets formerly owned by Malév and acting as a "conduit for certain payments between Malév and MFB". MAVA is created only for this very purpose.

(72)

With regard to debt amounting to EUR 76 million transferred to MAVA, this originates in a 2003 loan agreement between Malév and MFB. The loan was to be repaid in one single instalment at the end of the maturity and covered by a State guarantee. This 2003 loan was included in the list of existing aid measures of the Accession Treaty (24). However, in the 2007 agreement the loan's maturity was prolonged until 2017. Therefore, as of 2007, the measure cannot be regarded as an existing aid measure anymore. Indeed, the prolongation of an aid measure constitutes a new aid scheme as set out in Article 4(2)(b) of Commission Regulation (EC) No 794/2004 (25).

(73)

The investigation has shown that this transaction (i.e. prolongation of the maturity of the debt, creation of MAVA, transfer of the debt to MAVA, transfer of the assets to MAVA and the lease back agreements) solely aimed at restructuring Malév's debt. Hungary admitted itself that MAVA was never intended to make profit. As a result of this transaction, the debt (together with the assets) was taken off the Malév's balance sheet.

(74)

Hungary's argument that the financial obligations undertaken by Malév and AirBridge were sufficient to cover MAVA's costs, is not acceptable to demonstrate that the transaction is market conform, as no private market actor would have had the incentive to act in the same way. With regard to the collaterals offered, these were to enable MAVA to repay the debt at the end of the maturity of the loan, i.e. in 2017 (26). No private investor would have undertaken such risk, i.e. to take over assets of an uncertain future value against a certain payment obligation.

(75)

Although the Hungarian authorities have provided fairly comprehensible evaluations (27) for the B767 aircraft (28) and the kerosene pipeline (29), the evaluation provided (discounted cash-flow method) for the Malév brand (EUR 56 million) seems to be circular and highly dependent on the airline performance so that its result cannot be taken as the objective value of the Malév brand, especially considering the airline's state and performance. Given the fact that the State was aware of the probability that Malév would be not able to fulfil its royalty payment obligations, the discounted cash-flow method should have resulted in a value as low as zero. Under this specific contractual structure, the value of the brand cannot thus be accepted as sufficient collateral.

(76)

The contracting parties must have been aware that Malév, as a firm in difficulties already in 2007, was not realistically able to fulfil its royalty payment obligation sufficiently. In fact, in the aftermath of this transaction, MAVA's "costs" (i.e. the interest payment to MFB) could not be covered by Malév's royalty payments for the trademark. MAVA has never taken any steps to enforce the outstanding payments.

(77)

With regard to the EUR 32 million VEB guarantee, this was intended to cover not only the principal but also the regular interest payments MAVA has towards MFB.

(78)

Against this background and given the fact that no adequate equivalent was transferred to MAVA, taking off the debt from the company's balance sheet has to be regarded as an advantage in favour of Malév.

(79)

As regards the advance payment by MNV for the (later failed) sale of GH, according to the expert evaluation submitted by Hungary, GH had a net asset value of HUF 1,6 billion and an estimated market value of HUF 3,5 billion in 2009. In fact in January 2009 MNV paid to Malév HUF 1,6 billion as advanced payment. This payment was secured by a pledge on HA-LNA, a CRJ jet (estimated market value HUF 1,8 billion). In February 2009 the preliminary purchase agreement was modified and MNV paid an additional HUF 2,7 billion (total HUF 4,3 billion), and a second rank pledge was registered on the same aircraft.

(80)

In their comments to the opening decision, the Hungarian authorities admit that the advance payment was in fact undertaken in order to ensure Malév's liquidity during the negotiation phase of the re-nationalisation.

(81)

According to the preliminary purchase agreement, the repayment of this sum was immediately due (2 working days) in case the transaction failed. However, no steps were undertaken by MNV to recover this debt after MNV stepped back from the deal in July 2009. Ex-post interest was only charged - but never paid - when the debt was swapped into equity in 2010. Malév thus had this cash facility at its disposal free of charge.

(82)

The Commission is of the view that the measure transferred to Malév an advantage when the repayment of the advance was not enforced after it became due in July 2009. Moreover, an advantage occurred even before, at the moment when the preliminary purchase agreement was modified in February 2009 and the advanced payment increased (above the evaluated market price of the company) without being sufficiently collateralised.

(83)

Concerning the repeated granting of tax and social liabilities obligations deferrals by the tax authority, the Commission notes that on the basis of the submissions by Hungary it is clear that in the course of 2006-2007 a deferral of payment was requested by Malév on 12 different occasions (concerning different payments). The tax authority granted deferrals every time. According to the relevant Hungarian legislation, the granting of such deferrals is discretionary, and could have been refused. Therefore, the measure must be considered selective (30).

(84)

Until July 2008, the statutory interest was charged and paid by Malév according to the deferral schedules. In its decisions the tax authority reasoned by the difficult situation of Malév and the then envisaged restructuring.

(85)

As from July 2008, however, Malév stopped paying its tax and social security contributions and the interest (with the exception of one partial payment in December 2008), and no steps were taken by tax authority to recover this debt. Moreover, further payments were rescheduled also after Malév did not comply with the rescheduling agreements. As from April 2009, the tax and social liabilities due as from that moment (i.e. not the earlier already overdue payments) were not even rescheduled anymore without any concrete action taken by the APEH to enforce any of the debt.

(86)

The Commission is of the view that no private creditor would have behaved like the Hungarian State. Indeed, no concrete steps were ever taken to enforce the debt as from July 2008. Moreover, the company's financial situation, despite some restructuring efforts continued to be very weak (see Table 1 above), and there was only little or no prospect at all that the company will return to profitability. In similar circumstances, a private creditor would have pursued the enforcement of the agreement. Furthermore, after Malév failed to comply with the rescheduling agreements, no private creditor would have agreed to a further rescheduling.

(87)

Therefore, at latest as from July 2008, the non-enforcement of tax and social contributions liability by the tax authority and the further reschedulings transferred an advantage to Malév.

(88)

With regard to the February 2010 capital increase, by which the State re-nationalised the airline in which it had not held a stake since its privatisation, the most striking fact is that while 99,95 % of Malév was sold for a price equivalent of ca. EUR 740 000 in 2007, in 2010 the State de facto paid an equivalent of EUR 94 million to regain 94,6 % ownership (by means of the capital increase: partly realised by injecting fresh capital of HUF 20,7 billion and partly through a debt-to-equity swap of the advanced payment for GH of HUF 4,7 billion HUF)), i.e. 127 times the original sales price. This behaviour of the State, especially in view of the fact that in the meantime the airline accumulated losses, continued to have negative equity and no credible restructuring plan was present, is not market conform. In fact, the Hungarian authorities acknowledged themselves that the company has been in "permanent difficulty" and no private investor was willing to purchase Malév early 2010.

(89)

While the capital increase amounted to HUF 25,4 billion (i.e. this was the amount the Hungarian State paid to regain 94,6 % ownership of the airline), at the time of the swap, Malév had a negative equity of HUF 41 billion (EUR 152 million), accumulated losses in the amount of HUF 51 billion (EUR 189 million) and total debt of HUF 75 billion (EUR 278 million) (31). According to the 2010 financial accounts, at the beginning of 2010 "the airline's financing problems were serious, debt reached a dramatic level, funding sources were practically not present. […] Due to the absence of a strategic owner, no commercial funding was available." Indeed, the airline has been loss-making at least since 2003 without any realistic prospect to return to viability, not even the private owner had succeeded in turning around the company. Against this background it was clear that the capital increase would not be sufficient to return the company to viability and that after the re-nationalisation Malév would need further capital and liquidity in order merely to stay afloat.

(90)

As to Hungary's argument that the State was better off by nationalising the company than enforcing its claims against Malév the Commission notes the following. As Hungary acknowledges, in case of bankruptcy, they would have recovered a very small portion of their claims other than the one covered by the VEB guarantee. (In fact, Malév asset value was negative at the time of the transaction.) By contrast, the Hungarian State decided to keep the airline alive by swapping its debt and injecting fresh money in the amount of HUF 20,7 billion (ca. EUR 77 million). No private would have undertaken this further financial burden in a similar situation, especially without realistic chances to return the company to viability.

(91)

The Commission also notes that at the same time Hungarian State increased Malév's capital, AirBridge (indirectly VEB) also swapped its debt amounting to HUF 1,4 billion into equity. However, this amount is only 5 % of the new capital and, in addition the State, on the top of the debt converted also contributed a substantial amount of fresh capital. In fact, the injection of fresh money made up for 77 % of the capital increase. Moreover, given the bad financial conditions of Malév, the perspective for AirBridge to obtain the payment of that amount was very limited if not inexistent. Thus the behaviour of the private party in this case is materially different from that of the Hungarian State and it cannot take as a point of reference to consider that the State behaved as a private investor.

Table 2

The 2010 Capital increase

(92)

On the basis of the above the Commission concludes that under those circumstances the February 2010 re-nationalisation of Malév by means of the capital increase transferred an advantage to the company.

(93)

Concerning the measures after the re-nationalisation, it is apparent that the shareholder loans and capital injections were intended to finance Malév's current operations and to avoid its imminent insolvency. The State thus undertook these measures with the same objective: keeping Malév in business. Moreover, they are also closely linked by their chronology, as they took place within very short time intervals (i.e. from May to September 2010). Consequently, the Commission is of the view that, according to BP Chemicals, these shareholder loans cannot be assessed under the market economy investor principle and in particular, by applying the Reference Rate Communication (32), as they are all directly linked to measure 4 and hence their State aid character cannot be assessed in isolation.

(94)

It is clear from the Hungarian submission that no private actor was willing to finance Malév, its only funding sources were supplier credits and the liquidity provided by the State. At the time of granting the loans the State could not seriously count on Malév meeting its interest payment obligation and that it would redeem the loan. Moreover, it is also questionable that any private creditor would take the risk to grant a loan which has to be repaid in a lump sum at the end of the maturity to a company in a comparable state like Malév (i.e. permanent difficulty). Finally, in view of the credit history of the company vis-à-vis the State (e.g. non reimbursement of the advance payment for GH, repeated tax deferrals and non-payments), the State and any other investor could not realistically expect that Malév would meet its obligations.

(95)

On the other hand, even according to the Reference rate Communication the stipulated interest and collaterals agreed would not be sufficient to rule out the presence of State aid. The stipulated interest rate was 9,97 % whereas the HUF reference rate at the time of the granting amounted to 5,97 %. A mere 400 bps margin over the HUF base rate is insufficient in view of Malév's past performance and financial situation (a company continuously at the edge of bankruptcy). As regards the collateralisation of the loans, the market value of GH (HUF 3,5 billion) in case of Malév's failure is questionable, as Malév was the dominant partner of the ground handling operation: in 2009 63 % of the income was generated by Malév. Therefore, at least in the short term, its economic performance was dependent on Malév's existence and its market value would thus have decreased substantially in case Malév went bankrupt.

(96)

In the absence of a credible restructuring plan, it was clear from the beginning that neither the loans nor the capital increase would allow turning around the company which continued to be in a critical state with zero market value. These measures thus are practically equal to a straightforward grant, as the State had no perspective of recovering the "invested" funds.

(97)

Therefore the Commission considers that measures 5-8 conferred an advantage to Malév.

(98)

According to the foregoing assessment, all measures at stake (measures 1-8) confer an advantage to Malév. This advantage has been granted from State resources.

(99)

Moreover, Malév is an airline company and as such qualifies as an undertaking. It competes with other airlines which do not benefit from the same advantage. Hence, the measures distort competition. Furthermore, it is active in a sector (aviation) in which trade definitely exists between Member States; the criterion of the affectation of trade within the Union is also fulfilled.

(100)

Finally, the measures are specific and selective in that they favour only one undertaking (i.e. Malév).

(101)

On account of the arguments exposed above, the Commission concludes that measures 1-8 fulfil the criteria enshrined in Article 107(1) TFEU. Under those circumstances, they have to be considered State aid in the meaning of Article 107(1) TFEU.

(102)

Articles 107(2) and 107(3) TFEU provide for exemptions to the general rule that State aid is incompatible with the internal market as stated in Article 107(1).

(103)

The Commission is of the view that Malév has been in permanent difficulty at least since 2006. In particular, it has been loss-making at least since 2003 (see Table 1 above) and already in 2006 its equity was negative (Figure 1 above). In addition, the Hungarian authorities confirmed the airline's permanent difficulties and that since the second half of 2006 it qualified for collective insolvency proceedings and thus fulfilled point 10(c) of the Rescue and restructuring Guidelines. Consequently, the only basis for compatibility would be the Rescue and restructuring Guidelines.

(104)

With regard to eligibility and the "one time, last time" condition, the Commission notes that the measures under scrutiny do not form a "restructuring continuum". The airline changed owner twice in the relevant period (i.e. 2007-2010) as it was privatised and re-nationalised. It was under continuous "restructuring" but without a coherent plan. In fact some cost reduction initiatives (layoffs and route cuttings) were started after privatisation but the unit cost did not decrease enough. According to the Hungarian authorities, a new "strategic orientation" was elaborated in 2009, which was again revised by the consultancy Roland Berger in the context of the re-nationalisation. Therefore, the measures in questions are different restructuring measures, in principle violating the "one time, last time" principle.

(105)

The Commission notes that, even if Malév were to be eligible for aid under the Rescue and restructuring Guidelines (i.e. the "one time, last time" condition were met, quad non), the requirements for compatible rescue and restructuring aid would be not fulfilled, for the reasons set out below.

(106)

With regard to rescue aid, points 25(a)-(e) of the Rescue and restructuring Guidelines are not fulfilled. In particular, the measures at hand are not restricted to the minimum necessary, it is not demonstrated that they are warranted on the grounds of serious social difficulties and that they have no unduly adverse spill-over effects on other Member States. Moreover, with the exception of measures 5 and 8, the majority of them were not granted in the form of loans or guarantees.

(107)

With regard to restructuring aid, none of the compatibility conditions under the Rescue and restructuring Guidelines is met.

(108)

In particular, as regards points 34-35 of the Rescue and restructuring Guidelines, "restoration of long-term viability", the Hungarian authorities did not demonstrate the viability prospects of the airline and did not submit a restructuring plan complying with the requirements set by points 36-37 of the Rescue and restructuring Guidelines.

(109)

In addition, concerning the requirement of "avoidance of undue distortion of competition" (points 38-42 of the Rescue and restructuring Guidelines), the Commission notes that no compensatory measures were implemented.

(110)

Finally, as regards the condition of "aid limited to the minimum" (points 43-45 of the Rescue and restructuring Guidelines), no own contribution is present.

(111)

In view of the foregoing, measures 1-8 implemented in favour of Malév since 2007 are not compatible with the Rescue and restructuring Guidelines. As the measures were granted to a company in difficulty, no other basis for compatibility is applicable. Therefore, the measures are incompatible with the internal market.

(112)

According to the TFEU and the Court of Justice's established case law, the Commission is competent to decide that the State concerned must abolish or alter aid (33) when it has found that it is incompatible with the internal market. The Court has also consistently held that the obligation of a State to abolish aid regarded by the Commission as being incompatible with the internal market is designed to re-establish the previously existing situation (34). In this context, the Court has established that that objective is attained once the recipient has repaid the amounts granted by way of unlawful aid, thus forfeiting the advantage which it had enjoyed over its competitors on the market, and the situation prior to the payment of the aid is restored (35).

(113)

Following that case-law, Article 14 of Council Regulation (EC) No 659/1999 (36) laid down that “where negative decisions are taken in respect of unlawful aid, the Commission shall decide that the Member State concerned shall take all necessary measures to recover the aid from the beneficiary.”

(114)

Thus, given that the measures at hand are to be considered as unlawful and incompatible aid, the aid has to be recovered in order to re-establish the situation that existed on the market prior to the granting of the aid. Recovery shall be hence effected from the time when the advantage occurred to the beneficiary, i.e. when the aid was put at the disposal of the beneficiary and shall bear recovery interest until effective recovery.

(115)

The Commission acknowledges that "Malév" as the brand of the Hungarian national carrier operating over decades has a certain value on the aviation market. On the other hand the Commission is of the view that under the specific contractual structure, the value of the brand as claimed by the Hungarian authorities cannot be accepted. An objective value should have been based on an independent evaluation also taking into account Malév's overall financial situation.

(116)

On the basis of the foregoing, the aid element of measure 1 is thus calculated as up to EUR 56 million, i.e. EUR 76 million minus the value of the kerosene pipeline and the aircraft (amounting to EUR 20 million), minus the objective value of the Malév brand (37). The exact aid element must be calculated by Hungary. Should Hungary not present convincing arguments for an objective value of the brand at the time of the conclusion of the transaction on the transfer of the brand to MAVA, the entire amount of EUR 56 million is considered as aid element.

(117)

As set out above, the Commission is of the view that the measure transferred to Malév an advantage when the repayment of the advance was not enforced after it became due. Moreover, an advantage occurred even before, at least at the moment when the preliminary purchase agreement was modified in February 2009 and the advanced payment increased (above the evaluated market price of the company).

(118)

The Commission concludes that such a cash facilty would not have been granted by any private operator. In fact, no private market operator would have agreed to put these funds at Malév's disposal, in particular free of charge and no steps whatever taken to recover them. In fact, in their comments to the opening decision the Hungarian authorities acknowledge themselves that the advanced payment intended to secure Malév's survival (see paragraph (80) above). Therefore, the entire amount of the facility for the period it was at the disposal of the beneficiary is the aid element: between February 2009 and July 2009 HUF 0,8 billion (the difference between the "overpayment" in respect of GH's market value) and between July 2009 and February 2010 HUF 4,3 billion (the entire amount of the advanced payment). Recovery should thus take account of the fact that the amount was swapped into equity in February 2010 (see measure 4 below).

(119)

Concerning the deferral and non-enforcement of tax and social contribution, the Commission considers that, all overdue Malév debt from July 2008 to March 2010 towards APEH constituted State aid. Moreover, all rescheduled amount after this date (July 2008) amount entirely to State aid as well. Indeed, nothing suggests that a private creditor would have granted those deferrals and reschedulings. Recovery should take account of the fact that the overdue amounts were paid back in March 2010.

(120)

With regard to the capital increase, the Commission considers that, given Malév's financial state, the apparent need for further support following the capital increase, the lack of any realistic prospective to recoup the "invested" funds, no private investor would have put those funds at Malév's disposal. The injected capital of HUF 25,4 billion plus the debt to equity swap of 4,7 billion HUF for the advanced payments for Malév GH is the aid element.

(121)

As to the loans totalling HUF 9,2 billion, the Commission considers that in view of the debt history and situation of the airline at the moment of the granting of those loans, the State had no reason whatsoever to expect repayment and at the time of the granting of the loan it was even doubtful whether Malév would be able to pay the interest. In fact, the interest charged was not paid but converted subsequently to equity.

(122)

Therefore the Commission considers that the loan can be compared to a straightforward grant and hence the aid element is the entire loan amount of HUF 9,2 billion for the period it was at the disposal of the beneficiary, i.e. between the granting of the tranches (May, June, July 2010 respectively) and the conversion of the loans into equity (September 2010). Due and not paid interest should be included in the aid element. Recovery should thus take account of the fact that the amount was swapped into equity in September 2010 (see measure 6 below).

(123)

For the reasons set out above in paragraph (120) above, the Commission considers that total amount of the converted debt to capital can be considered as a straightforward grant and hence the entire amount of HUF 9,4 billion is the aid element starting September 2010.

(124)

For the reasons set out above in paragraph (120), the Commission considers that the aid element is the injected capital of HUF 5,3 billion starting September 2010.

(125)

For the reasons set out above in paragraphs (120) above, the Commission considers that total amount of the loan is comparable to a straightforward grant and hence the entire amount of HUF 5,7 billion is the aid element starting September 2010.

(126)

On the basis of the foregoing, the Commission concludes that measures 1-8 implemented by Hungary in favour of Malév constitute State aid in the meaning of 107(1) TFEU.

(127)

In addition, the Commission concludes that measures 1-8 are incompatible with the internal market.

(128)

This incompatible aid must be recovered from Malév as set out in section VIII.2 above in order to re-establish the situation that existed on the market prior to the granting of the aid. The exact total amount of recovery plus recovery interest has to be computed by the Hungarian authorities.

(a)

Measure 1: The taking over on 31 December 2007 by the state-owned MAVA of a loan granted to Malév by MFB, a 100 % state-owned development bank, in 2003;

(b)

Measure 2: The provision of a HUF 4,3 billion "cash facility" for one year in the context of a planned (subsequently failed) purchase by MNV of Malév's GH subsidiary;

(c)

Measure 3: All overdue tax and social security debt from July 2008 to March 2010 and the deferral of different tax and social security payments as from July 2008;

(d)

Measure 4: In February 2010, a capital increase by MNV of HUF 25,4 billion (partly realised by injecting fresh capital of HUF 20,7 billion and partly through a debt-to-equity swap of the advanced payment for GH of HUF 4,7 billion HUF);

(e)

Measure 5: From May to August 2010, three shareholder loans totalling HUF 9,2 billion granted to Malév by MNV plus interest due but not paid;

(f)

Measure 6: In September 2010, the conversion of the shareholder loans (along with the interest owed thereon) referred to in Article 1(e) from debt to equity in the amount of HUF 9,4 billion;

(g)

Measure 7: In September 2010, a further capital increase in the amount of HUF 5,3;

(h)

Measure 8: In September 2010, a further shareholder loan in the amount of HUF 5,7 billion, plus interest due but not paid.

(a)

the total amount (principal and recovery interests) to be recovered from the beneficiary;

(b)

a detailed description of the measures already taken and planned to comply with this Decision;

(c)

documents demonstrating that the beneficiary has been ordered to repay the aid.

3.4.2013   

EN

Official Journal of the European Union

L 92/16

(1)

By letter dated 12 May 2010, the Czech Republic notified the Commission of the restructuring aid to České aerolinie, a.s. (hereinafter referred to as "ČSA"). The Commission requested additional information by letters dated 6 June 2010 and 25 November 2010, to which the Czech authorities replied by letters dated 15 and 24 September 2010, 15 December 2010 and 28 February 2011.

(2)

By letter dated 23 February 2011, the Commission informed the Czech Republic that it had decided to initiate the procedure laid down in Article 108(2) of the TFEU in respect of the aid (hereinafter referred to as "the opening decision"). The Czech Republic provided comments on that decision by letter dated 28 April 2011. The Commission asked further questions by letters dated 26 July 2011, 15 March 2012, 7 May 2012 and 11 July 2012, to which the Czech Republic replied on 22 August 2011, 15 September 2011, 7 October 2011, 16 November 2011, 23 November 2011, 12 December 2011, 3 January 2012, 16 April 2012, 22 May 2012, 14 June 2012, 5 July 2012, 10 July 2012, 20 July 2012 and 10 August 2012.

(3)

The opening decision was published in the Official Journal of the European Union on 23 June 2011. The Commission called on interested parties to submit their comments.

(4)

The Commission received comments from two interested parties on 30 June 2011, 19 July 2011, 15 August 2011, 25 November 2011 and 13 December 2011. It forwarded them to the Czech Republic, which was given the opportunity to react; its comments were received by letters dated 31 August 2011 and 3 February 2012.

(5)

The total notified restructuring aid measures were (i) a CZK 2 500 million loan by the State-owned company Osinek, a.s. (in case it were to be considered state aid); (ii) the de-collateralisation and a debt-for-equity swap of the Osinek loan; and (iii) a guaranteed bank credit in the amount of EUR 20,8 million to finance the acquisition of an aeroplane. The total notified envisaged restructuring costs amount to CZK [8,9-10,5] (3) billion (4) (EUR [360–410] million).

(6)

On 21 March 2012, the Commission adopted a decision in case SA.29864 – Possible State aid implications of a loan provided by Osinek, a.s.. The conclusion of the investigation was that the Osinek loan did not constitute State aid and even if it did, such aid would be compatible with the Community Temporary Framework for State aid measures to support access to finance in the current financial and economic crisis (5) (hereinafter referred to as "the Temporary Framework"). Therefore, the present restructuring case no longer deals with that measure. The guaranteed bank credit in the amount of EUR 20,8 million was abandoned because ČSA was able to secure a financial lease provided by […]. Hence the only restructuring aid measure that remains to be assessed is the debt-for-equity swap of the Osinek loan preceded by the loan's de-collateralisation.

(7)

On 3 May 2010, the Czech Government adopted Resolution No 333 on the restructuring plan of ČSA (hereinafter referred to as "Resolution No 333") by which the Czech Government instructed the Ministry of Industry and Trade (6) to implement the release of pledges over some of the collaterals before the increase of ČSA's registered capital. The debt-for-equity swap was legally based on that Resolution and implemented on 30 June 2010.

(8)

ČSA has been the national air carrier of the Czech Republic since 1923. In 2009, it carried 37 % of passengers who started or finished their journey in Prague. ČSA is a State-owned company, with 95,69 % of its shares owned by the Czech Republic through its Ministry of Finance. Minority shareholders are Česká pojišťovna a. s. (2,26 %), the Capital City of Prague (1,53 %) and the Capital City of Bratislava (0,51 %). It is a member of the Sky Team Alliance and offers scheduled air transport services (104 destinations in 44 countries). In 2009 ČSA carried 4,7 million passengers and generated CZK 14,9 billion (EUR 96 million) in revenues.

(9)

Table 1 shows the development of ČSA's financial data from 2006 to the first half of 2011.

Table 1

Czech Airlines financial data (according to Czech Accounting Standards)

Table 2

Development of key criteria in 2009 (according to Czech Accounting Standards)

(10)

The numbers demonstrate that, despite certain negative developments, ČSA still made a profit in 2007 and 2008. However, the business result deteriorated significantly in 2009 due to the impact of the economic crisis. The turnover diminished slightly over the observed period whereas cash flow was declining considerably. The level of debt, calculated as the sum of long-term and short-term liabilities and bank loans, was more or less stable. The value of assets decreased significantly, notably in 2009.

(11)

Table 2 shows the quarterly development in 2009. It shows that the losses of the company increased considerably, especially between June and September – by CZK [705–785] million as opposed to CZK [470–520] million between March and June. The change in turnover equalled CZK [4,88–5,42] billion between March and June and CZK [5,04–5,59] billion in the June-September period. The change does not vary significantly, therefore it cannot imply that the situation of the company worsened particularly in the first half of the year. The debt of the company decreased in the period March-June and increased by CZK [0,89–1,05] billion in June-September. Finally, the total value of ČSA 's assets increased in the first observed period (March–June) and decreased by CZK [75–85] million in June-September.

(12)

The Czech authorities claim that, while ČSA's financial situation deteriorated as a consequence of the global economic recession as early as late 2008, it had reason to believe that significantly better results should be achieved in the 2009 summer season, when revenues in the airline industry commonly peak. Based on this prognosis, supported by its experience from previous years, ČSA expected that it would create sufficient reserves to enable it to stabilise cash flow and prevent further losses.

(13)

None the less, the 1st half 2009 results, reported to the management in mid-August 2009, showed a significant decline in average revenue in June. It became clear that the company was no longer able to run its business without immediate cost-cutting measures and financial assistance from external sources. The company’s Board of Directors thus established a working group, instructed to prepare the company’s restructuring plan. Therefore, in August 2009 ČSA's management adopted measures for the initiation of the restructuring process and the focus of ČSA moved from day-to-day operational measures to the overall restructuring of the company’s business.

(14)

The Czech authorities therefore submit that, in the light of the developments described above, ČSA can be considered a firm in difficulties within the meaning of the Community Guidelines on State aid for rescuing and restructuring firms in difficulty (7) of 2004 (hereinafter "the R&R Guidelines") starting from August 2009.

(15)

Upon completion of the restructuring process, the Czech Republic aims at finding a strategic partner for ČSA. The current time frame for the entry of a strategic investor in ČSA is November 2013 at the latest. In preparation for the planned privatisation, the Czech Government decided to create a new corporate structure under the umbrella of Český Aeroholding, a.s. (hereinafter referred to as "ČAH").

(16)

ČAH currently includes the following companies: ČSA, Prague Airport, a.s. (hereinafter referred as "Prague Airport") and ČSA's former subsidiaries, i.e. Czech Airlines Handling, a.s., HOLIDAYS Czech Airlines, a.s. (hereinafter referred to as "HCA"), Czech Airlines Technics, a.s. and ČSA Services, s.r.o. (see Figure 1). ČAH's purpose is to restructure the companies grouped within the holding company, to facilitate their access to commercial financing, and to prepare them for the upcoming privatisation.

(17)

Czech Airlines Handling, a.s. provides passenger and aircraft handling services, cleaning of aircraft and buildings as well as a ground transport service both for ČSA and other airlines operating scheduled flights to and from Prague. Czech Airlines Handling, a.s. is the only operator in the aircraft cleaning market at Prague-Ruzyně Airport. In ground handling, Czech Airlines Handling competes at Prague-Ruzyně Airport with Prague Airport and other ground handling companies such as Menzies Aviation.

(18)

HCA operates charter flights. In this market it competes with Travel Service, a.s. and a number of other smaller charter airlines operating from Prague-Ruzyně Airport, e.g. Grossman Jet, ABS Jet, Silesia Air and several others, which have only a small market share at Prague-Ruzyně Airport.

(19)

Czech Airlines Technics, a.s. carries out light and heavy aircraft maintenance on all Boeing B737 and Airbus A320 family aircraft. It also performs extensive checks on ATR 42/72 aircraft and has certificates to perform checks on Airbus A310 aircraft. This subsidiary mainly serves ČSA. However, [17,5–19,5]% of its revenue comes from services provided to third parties, e.g. Lufthansa Technik, SAS Norway, Air Berlin, Air France-KLM, Transavia Airlines, Travel Service, Ural Airlines and Aerosvit.

(20)

Czech Airlines Services, s.r.o. operates a call centre and a recruitment centre, [88-98]% of its services being provided to ČSA.

(21)

At the beginning of the restructuring period, ČSA also held a majority stake in a number of other companies, specifically:

Figure 1

Structure of Český Aeroholding, a.s.

(22)

The creation of ČAH was approved by the Czech competition authority on 25 October 2011 with a number of conditions which focus on potential threats to competition arising due to the merger of ČSA and Prague Airport from both vertical overlaps and horizontal overlaps (in particular in the ground handling area) of the activities of the merging parties.

(23)

The conditions are of both a behavioural and a structural nature and oblige ČAH to maintain transparent, non-discriminatory and equal access to airport infrastructure at Prague-Ruzyně Airport on commercially reasonable terms to all interested parties. In particular, the commitments deal with unbundling of the Prague-Ruzyně Airport operator from other activities run within ČAH, the exchange of commercially sensitive information between the entities involved in ČAH, slot allocation at Prague-Ruzyně Airport, the sale of Prague Airport's ground handling activities to an independent acquirer and transparent and equal access to services provided by entities within ČAH to all market operators interested in providing ground handling services and/or repair and maintenance at Prague-Ruzyně Airport (8).

(24)

In May 2010, the Czech authorities notified to the Commission the restructuring plan (hereinafter "RP") which was then updated in subsequent submissions of information. The RP concentrates on measures concerning ČSA 's core business, scheduled air passenger transport. Other business sectors are either scheduled to be sold or to be outsourced within the structure of the holding company.

(25)

The origins of ČSA's difficulties lie in an inflated network expansion in 2004-2006 and the entry of low-cost carriers at Prague-Ruzyně Airport. Furthermore, the company suffered from the historic operating inefficiencies of an old incumbent company as it entered into the global economic recession which brought lower passenger demand and high fuel costs.

(26)

The updated version of the RP dated 3 January 2012 aims to restore ČSA's long-term viability by 2014. The restructuring period spans the period from August 2009 to June 2014 (5 years in total).

(27)

In line with recent developments in the airline industry, the Czech authorities updated their assumptions for ČSA's projected path to viability and presented new scenarios for the base, best and worst case. ČSA considers the below estimates as a conservative basis for its future development. The estimates do not take into account the planned entry of a private investor which would probably have a positive effect on ČSA's performance and further strengthen its long-term viability.

(28)

The most important external factors affecting the performance of ČSA are the following: (i) increasing fuel price (increased by nearly 40 % compared with the scenarios included in the opening decision), (ii) significantly lower demand, (iii) intensified competition, and (iv) a drop in revenues from ticket sales.

(29)

The base-case scenario is built upon the assumption that the market will evolve according to the macroeconomic forecasts of the Czech National Bank and the International Monetary Fund. The entry of low-cost carriers is considered to be the main factor that will affect ČSA’s market share performance.

(30)

External factors include:

(31)

Internal factors include:

(32)

As a consequence of the restructuring, ČSA expects the following development of its return on capital employed (ROCE):

Table 3

Expected return on capital employed

(33)

The Czech authorities take the base-case scenario as a realistic prediction and argue that the ROCE achieved at the end of 2014 of [1,7–1,85]% is to be considered acceptable.

(34)

The best–case scenario considers that the fuel price will be reduced by 1–2 % (in 2012–2013) and 3 % in (2014–2015); it is further based on faster–than–predicted implementation of restructuring measures and a faster demand growth as compared with the base-case scenario. On the other hand, the worst-case scenario is based on an increased fuel price (3–5 % higher in 2012–2013) compared with the base–case scenario; it further factors in delays in implementation of the planned restructuring measures and lower benefits from revenue management initiatives (fully implemented only in 2014).

(35)

The plan assumes that it will be possible to return to profitability by financial year (FY) 2013. According to the base-case scenario, ČSA will make a net profit after tax of CZK [95–112] million ([3,8–4,3] million) in 2014 and achieve a return on capital employed (ROCE) of [1,7–1,85]% by 2014 and [2,1–2,4]% by 2015.

Table 4

Profit and loss 2008-2014 (in CZK million) (according to Czech Accounting Standards)

To achieve these results, ČSA proposes the following key actions:

(36)

Optimised network model and fleet rightsizing: At the beginning of its restructuring process, ČSA was flying to 67 destinations. This network will be reduced by [18–20]% and ČSA now focuses solely on markets within the range of its short–haul/medium–haul fleet. Flights to New York and Canada were discontinued back in 2009. The expected reduction in passenger traffic measured in revenues per passenger-kilometre as compared with 2009 is [22,5–25,5]%, while the revenue per available seat-kilometre ("ASK") is expected to increase by [3,8–4,4]%. Both profitable and loss-making routes were discontinued.

(37)

The aircraft fleet should be reduced by more than 50 %, resulting in 20 to 23 aircraft as opposed to 49 aircraft before restructuring. The overall number of flights will be reduced by [36–40]% and ASK by [21–24]%. Consequently the seat-load factor should improve and reach [66–73]% under the base-case scenario.

(38)

The fleet structure should be simplified and modernised by way of a gradual replacement of older aircraft types (Boeing B737-400 and B737-500) by Airbus planes only. The modernisation of ČSA's fleet will increase the competitiveness of ČSA, which will obtain more advanced and more reliable aircraft offering greater passenger comfort. Other benefits of this measure are the reduction of costs of fleet operation, including savings resulting from fleet unification and optimisation of transportation capacity.

(39)

Revenue initiatives: ČSA introduced a new revenue management system to optimise fare-setting and availability, aiming at an increase in revenue per ASK by [3–3,5]% in 2011. A further revenue increase is predicted in connection with the expected rise of sales through the website of ČSA – [20–22]% of tickets are to be sold online by 2012 against [7–8]% in 2009. This should be accompanied by revenues from sales of associated own products, such as second baggage fees, premium seat assignment fees and on-board sales, as well as products from third parties, such as hotels, car rentals and travel insurances. Revenue management is expected to contribute to profits in the amount of CZK [500–560] million by the end of 2012.

(40)

Cost reduction initiatives: In 2009, ČSA generated 3 200 jobs directly and more than 1 600 jobs through its subsidiaries. Under the restructuring, ČSA generates 1 730 jobs directly and 1 974 jobs in its subsidiaries, which amounts to a reduction of more than 1 000 jobs achieved by mid-2012. ČSA reduced the number of pilots and cabin crew to the regulated minimum. It further reduced catering costs in economy class, in-flight entertainment, the cost of irregularities and fuel consumption. Moreover, rental, IT and telecommunication costs should be reduced. Finally, the representation offices abroad and in the Czech Republic should be downsized. Cost reduction initiatives are expected to save CZK [275–310] million and contribute to revenues in the amount of CZK [650–725] million by the end of 2012. Costs of sales per passenger were already reduced by [14,5–16,5]% in 2010.

(41)

Organisational changes: The Czech Republic has twice attempted to privatise ČSA in the past (9); however, both of these attempts failed. The Czech authorities believe that the creation of ČAH constitutes an efficient way to sell ČSA and its subsidiaries to a new private investor. Firstly, non-core activities that were previously carried on by ČSA were transferred to its subsidiaries in 2010. This enabled ČSA to focus on its core business. Secondly, these subsidiaries were sold to ČAH on market terms. Finally, both ČSA and Prague Airport will be incorporated into ČAH.

(42)

This structure should not only make the companies more attractive to potential investors but also ensure a competitive pricing of intra-group services and stimulate the profit-making of all subsidiaries as well as their orientation towards external customers.

(43)

Sale of non-core assets: In addition to the sale of subsidiaries to ČAH, ČSA has sold a considerable number of other assets in the course of its restructuring, as shown in Table 5. All of these assets were sold either through an open, transparent and non-discriminatory tender or on the basis of independent appraisal reports.

Table 5

Sale of ČSA's assets in the course of restructuring

(44)

Given the total restructuring costs of CZK [8,9–10,5] billion (EUR [360–410] million) which include in particular the cost of fleet rightsizing and severance payments, the Czech Republic recapitalised the beneficiary with CZK 2 500 million of State aid in the form of a debt-for-equity swap (i.e. [23–26]% of the restructuring costs), according to Resolution No 333, on 30 June 2010.

(45)

ČSA proposes the remaining amount, i.e. the own contribution of [74–77]%, to be financed by the sale of assets set out in Table 5.

(46)

ČSA sold its duty-free business for CZK [760–840] million to Aelia Czech Republic, s.r.o. in February 2010. The business was sold following a two-round tender procedure organised by UniCredit Czech Republic, a.s.

(47)

ČSA swapped two slots at London-Heathrow Airport with British Airways Plc. ("BA") for a financial consideration in July 2010. The slot exchange agreement provides that ČSA and BA are to transfer to each other by way of exchange their respective slots (10) for a financial consideration of GBP [17–19] million (around CZK [450–530] million). The exchange of slots was carried out in 2010 and BA paid the consideration to ČSA in two instalments in November and December 2010.

(48)

ČSA sold 15 aircraft under the following conditions: In 2010, ČSA sold five Boeing B737-400s to BLF Limited, which is a special-purpose vehicle of the Russian carrier UTair, for the price of USD [54–60] million and two Boeing B737-500s to Mauritanian Airlines International for the price of USD [12,5–15] million. In 2011, ČSA sold three Boeing B737-500s to Mika Limited for the total price of USD [21–25] million. In 2011 ČSA sold two ATR72-202s to Helitt Lineas Aéreas S.A. for the price of USD [7,9–8,9] million, two ATR72-200s to EUROLOT S.A. for the price of USD [7,9–8,9] million and one ATR42-320 to Regourd Aviation for the price of USD [1,6–1,9] million. The total revenue from the sales of aircraft amounts to approximately USD [105–120] million, or CZK [1,950–2,2] billion (11).

(49)

On 30 September 2010, ČSA sold Slovak Air Services, s.r.o., a provider of air services in the Slovak Republic, to the company Skyport, a.s. for the purchase price of CZK [17,5–19,5] million. The bidder offered the highest price in an open tender procedure.

(50)

ČSA generated CZK [1,62–1,85] billion from the sale of land and buildings to the State-owned Prague Airport. A summary of the sales is described in Table 6 below.

Table 6

Sale of land and property of ČSA to Prague Airport

(51)

The Government of the Czech Republic has expressed its strategic interest in acquiring ČSA's airside properties. The Czech authorities justify these transactions with the use they will make of the properties. According to the Czech authorities, the property is strategically important for Prague Airport with a view to the new runway to be built at the airport. The Czech Republic also noted that Prague Airport is renting another hangar (Hangar E) to Travel Service, a.s. which shows the potential of obtaining revenues from marketing real estate no longer needed by ČSA.

(52)

The sale of the property described in Table 6 was not carried out by way of an open, transparent and non-discriminatory tender. However, in line with its general policy and the legal national requirements, all property acquisitions by a State-owned company have to be done at a fair open-market value which reflects the price that would be paid on an arm's-length basis by a private investor. The value of this property is based on an independent external valuation by court-registered experts which uses recognised standards.

(53)

The most important part of the company's own contribution comes from the sale of subsidiaries of ČSA to ČAH. These sales took place at the end of 2011/beginning of 2012 and consisted of the sale of Czech Airlines Handling, a.s. (CZK [700-800] million), the sale of ČSA Services, s.r.o. (CZK [25–28] million), and the sale of HCA (CZK [500–580] million) and Czech Airlines Technics, a.s. (CZK [1-1,15] billion). The sales were not carried out by way of an open, transparent and non-discriminatory tender; however, the value of the subsidiaries was established by independent appraisal reports provided by Deloitte Advisory, s.r.o. and PricewaterhouseCoopers Česka republika, s.r.o.

(54)

On 23 February 2011, the Commission opened the formal investigation procedure. In its opening decision, the Commission expressed doubts relating to several conditions of the R&R Guidelines. In particular, the Commission did not exclude that ČSA had been in difficulties according to the R&R Guidelines already before the second half of 2009, i.e. before the start of the restructuring process as claimed by the Czech authorities.

(55)

The Commission also expressed doubt regarding the point whether the difficulties of ČSA were too serious to be dealt with by ČAH. The Commission also wondered whether it would be possible under Czech law for Prague Airport to contribute financially to the restructuring process of ČSA and its subsidiaries. Also, the Czech authorities were invited to comment on whether the business transactions between ČSA and Prague Airport, as of the date of implementation of the merger, had taken place on market terms which excluded the transfer of possible State aid from a beneficiary of rescue or restructuring aid to another entity within ČAH.

(56)

Regarding the return to long-term viability, the Commission invited third parties to comment on the underlying assumptions concerning the external factors. The Commission also invited the Czech Republic to clarify whether all of the structurally loss-making activities would be abandoned after restructuring. Furthermore, the Commission questioned whether long-term viability could be achieved by the end of 2012, which was the notified end of the restructuring period, and whether the envisaged most likely scenario (which was also the "best-case scenario") was indeed the most realistic one to be achieved. Also, the Commission doubted whether ČSA would be able to secure (from its own financial means or from external resources) commercial loans and possible commercial guarantees for the planned purchase of 7 aircraft contracted for the years 2013 and 2014.

(57)

Regarding compensatory measures, the Commission expressed doubts as to whether the proposed measures were not merely closure of loss-making activities which would in any case be necessary in order to achieve viability. Such measures would then not qualify as genuine compensatory measures. The Commission also noted that only compensatory measures taking place within the restructuring period could be accepted. Therefore, the discontinuation of the Toronto and New York JFK flights would fall outside the proposed restructuring period, which was from the second half of 2009 until 2012.

(58)

Regarding the level of own contribution of ČSA, the Commission invited the Czech Republic to clarify the proposed ČAH structure. It also questioned whether the totality of the proposed own contribution could be considered real (in relation to the transactions that had not yet taken place at the time of adoption of the opening decision).

(59)

In its reply to the Commission's opening decision, the Czech Republic submitted comments and clarifications regarding all of the points raised in the Commission's opening decision, indicating that the notified RP complied with all the conditions imposed by the R&R Guidelines. Moreover, the Czech Republic also provided an update regarding the restructuring process, demonstrating that a number of restructuring measures had already been implemented and that significant progress had already been made.

(60)

As regards the point of time when ČSA entered into difficulties, the Czech Republic asserted that ČSA was in difficulties as of August 2009 because this was when management realised that even the usually profitable performance of the company in the summer season had been negatively impacted. The Czech Republic also provided quarterly results and additional information demonstrating why it considered that ČSA had entered into difficulty only in August 2009.

(61)

As regards the ČAH holding structure, the Czech authorities clarified that the purpose of ČAH was to "unbundle" the companies and to improve their access to commercial financing and prepare them for the planned privatisation. Relations between the companies within the holding company would be regulated by contract, on an arm's length basis, and in accordance with the applicable provisions of the Czech Commercial Code and the Income Tax Act governing relations between related parties.

(62)

As regards the impossibility of resolving ČSA's difficulties within the ČAH group, the Czech Republic clarified that all of the companies within ČAH were controlled by the State and therefore any assistance would be subject to State aid rules. Moreover, any financial assistance would also have to meet the requirements of the Czech Commercial Code and tax laws. Also, the problems ČSA faced arose before the creation of the ČAH structure and thus could not be the result of "arbitrary distribution of costs within the current ČSA group" and were hence intrinsic in nature to ČSA.

(63)

As regards any possible contribution to the restructuring of ČSA by Prague Airport, the Czech Republic asserted that the airport was not contributing to ČSA's restructuring in any way, and that the Czech Republic, as sole shareholder in Prague Airport, did not envisage any such contribution in the future either. Transactions between ČSA and Prague Airport were carried out on the standard terms offered by Prague Airport to its business partners. Rents and other pecuniary considerations were based on its applicable price lists.

(64)

Apart from compliance with legal statutory requirements, the companies within ČAH would enjoy substantial business autonomy in so far as the parent company, ČAH, would not interfere with the business management of its subsidiaries. Since all relations between the companies within ČAH would be conducted on an arm's length basis, in compliance with legal requirements, as stated above, the Czech Republic asserted that any transfer of the restructuring aid granted to ČSA by any company within ČAH was impossible.

(65)

Regarding the doubts about the return to long-term viability, the Czech Republic presented amended forecasts regarding the future scenario of viability of ČSA, presenting an amended base-case scenario. The new base-case scenario anticipated a slower growth rate following a revisited demand development as well as more conservative estimates of future oil prices. As regards the discontinuation of unprofitable activities, the Czech Republic confirmed that all subsidiaries with the exception of Czech Airlines Technics generated a profit, and as such could be sold as well-functioning and viable businesses. Czech Airlines Technics would also be sold to ČAH at the price of its assets, as evaluated by an independent external expert. As regards the financing of the aircraft to be delivered after the restructuring period, the Czech Republic believed that, upon implementation of the RP and the expected entry of a private investor, the company would be able to secure private financing for the contracted planes.

(66)

As regards compensatory measures, the Czech Republic asserted that the sale of assets (including its subsidiaries), the reduction of ASK and the reduction of ČSA's presence at Prague Airport constituted a sufficient compensatory measure in view of the fact that ČSA was a regional carrier with a small fleet and a limited number of destinations. It was exposed to competitive pressure from large companies and low-cost carriers and hence any further compensation could jeopardise ČSA's ability to become viable within a reasonable timescale. The Czech Republic asserted that the Toronto and New York JFK flights had been discontinued in November 2009, hence within the notified restructuring period.

(67)

The Czech Republic provided information about a private loan amounting to CZK [125–140] million granted by Komerční banka which was proposed as an own contribution of ČSA. The loan consisted of a credit line based on a framework agreement. The framework agreement providing for a credit line of CZK [480-540] million had already been concluded on 31 March 2009 and amended in June and December 2009.

(68)

Regarding the own contribution of ČSA to its restructuring, the Czech Republic presented proofs of sale of already divested assets. Furthermore, the Czech Republic confirmed that the notified State aid in the form of a guarantee would not be needed as ČSA was able to obtain private financing of the aircraft which was procured in the form of a financial lease that was provided by […]. The aircraft was delivered to ČSA in May 2011.

(69)

During the investigation procedure the Commission received only one substantiated comment from a competitor (12) and one comment from a local civic association (13). The competitor is Travel Service, a.s. and Icelandair Group hf (hereinafter referred to as "TS"), a company that competes with ČSA mainly in the charter travel market. TS argues that the aid to ČSA cannot be considered compatible because it does not fulfil the conditions of the R&R Guidelines.

(70)

Regarding the return to long-term viability of ČSA, TS criticizes the RP, stating that it lacks a clear business model (14) for the company and that several of the key assumptions of the best-case scenario are overly optimistic (fuel price, exchange rates, capacity utilisation). TS also criticises the compensatory measures offered on the ground that they constitute mere abandonment of activities necessary to the survival of the company. TS also claims that the sales of assets claimed as an own contribution were carried out and the funds spent before any restructuring process began and cannot thus be considered a real contribution to the costs of restructuring.

(71)

Also, TS claims that the State aid received by ČSA has enabled the expansion of its business and its subsidiaries. Allegedly, ČSA was able to (i) expand its charter business, although ČSA was going to abandon it because it was previously loss-making, and (ii) renew its fleet, which provides ČSA with a competitive advantage hardly to be gained by any comparable competitor at a time of financial crisis.

(72)

Indeed, TS claims that ČSA has used the State aid it received to expand its charter-business subsidiary HCA, which can offer flights at a price 20 % lower than the standard prices on the market (15). TS also claims that ČSA raised the registered capital of HCA by CZK 162 million in May 2010.

(73)

Further advantages allegedly granted to ČSA consist of the possibility of operating the Prague-Tel Aviv route. TS argues that this possibility was apparently negotiated by the authorities of the Czech Republic exclusively for ČSA in a way circumventing legal regulations and providing ČSA with an advantage over its competitors.

(74)

TS argues as well that, even before the creation of ČAH, a de facto concentration of Prague Airport and ČSA took place because joint management of the two companies was established. Indeed, TS claims that the chief executive officer (CEO) of ČSA has been remunerated by Prague Airport and that cross-subsidisation of IT services provided to ČSA takes place.

(75)

Furthermore, Prague Airport then bought assets (buildings and land) from the airline which it allegedly did not need and leased them back to the airline. Such a privileged relationship between Prague Airport and ČSA resulted in preferential treatment such as price discrimination regarding airport services and access to commercially sensitive information. Moreover, TS argues that the creation of ČAH has a negative impact on competition due to the vertical integration between the airport and the main carrier. According to TS, the main reason for the creation of ČAH is to enable the granting of State aid to ČSA through the acquisition of its subsidiaries by ČAH.

(76)

The Czech Republic addressed in detail all of the arguments raised by third parties in their comments. In particular, as to the return to long-term viability, the Czech Republic stressed that it had updated the RP (16) and thus addressed a number of comments in the updated assumptions. Furthermore, it noted that the State aid amount had decreased significantly in the course of the proceedings in view of the abandoned project for the State-aid-guaranteed purchase of an aircraft.

(77)

As regards the possible use of State aid funds for anticompetitive conduct of the charter division of ČSA, the Czech Republic stated that the charter business was already independent and separate from scheduled transport at the time when the State aid was granted. ČSA never made any monetary contribution to HCA's (17) registered capital. HCA's registered capital was increased by an in-kind contribution of a part of ČSA's business involved in the operation of charter transport. This part of the business was evaluated by an independent expert.

(78)

As regards the alleged advantage received by ČSA for operating the Tel Aviv route, the Czech Republic explained that, although TS was chosen (pursuant to an open tender; starting from the winter flight schedule for 2011/2012) as the sole air carrier with transportation rights for ten years for the provision of agreed services on the Prague–Tel Aviv route in accordance with applicable law (18), TS received no guarantee to the effect that no other carrier would be authorised to operate the route for the duration of that term. The Czech authorities stated that it was a general policy of the Ministry of Transport of the Czech Republic not to maintain existing restrictions but, on the contrary, to expand the opportunities for air carriers in terms of market access in order to liberalise the markets for air transport services.

(79)

As regards the opening of the Prague–Abu Dhabi route, the Czech Republic explained that this route was not operated by ČSA on its own but as a code-share flight (19) operated in cooperation with Etihad Airways. The route focused on transfer passengers who could use many different connecting long-distance flights from Abu Dhabi operated by Etihad Airways. This cooperation thus improved ČSA's sales options and contributed to the restoration of its long-term viability at very low additional costs.

(80)

The sale and lease-back of the APC office building was, according to the Czech Republic, a standard market practice which enabled the seller to obtain liquid funds, while the purchaser obtained a stable source of future rental income. Moreover, the land sold was of strategic importance in view of the construction of a new runway that was to be built at Prague Airport. For this reason Prague Airport was interested in purchasing the property. Also, according to the Act on the Ownership of Prague-Ruzyně Airport (20), Prague Airport, including any adjacent or related land, could only be owned by the Czech Republic or a legal entity domiciled in the Czech Republic and wholly owned by the State. This requirement limited the number of suitable purchasers to fully State-owned companies only. The operator of Prague Airport was such an entity and had, moreover, a strategic interest in acquiring the land.

(81)

The Czech Republic repeatedly stated that the commercial relations between ČSA and Prague Airport were and always had been in accordance with national and Union law (see recitals 61-64). As regards ČAH, the Czech Republic explained that, pursuant to Government resolution No 848 of 24 November 2010, ČAH did not represent permanent vertical integration of infrastructure and air carriers but merely a merger (between ČSA and Prague Airport) of limited duration and function, the objective of which was to sell ČSA and its subsidiaries on the best terms possible.

(82)

Finally, as regards the comments presented by the civic association Pro Hanspaulku, the Czech Republic commented that the civic association had not proved the existence of legitimate interest nor could such an interest be inferred from the objection submitted which related to completion of a new runway at Prague Airport which was allegedly to be used primarily by the restructured ČSA. To this, the Czech Republic answered that, in compliance with the RP, the presence of ČSA at Prague Airport would actually be reduced and thus the comments submitted by the civic association were not founded.

(83)

By virtue of Article 107(1) of the TFEU, any aid granted by a Member State or through State resources in any form whatsoever, which distorts or threaten to distort competition by favouring certain undertakings or the production of certain goods, shall, in so far as it affects trade between the Member States, be incompatible with the internal market.

(84)

The concept of State aid applies to any advantage granted directly or indirectly, financed out of State resources, granted by the State itself or by any intermediary body acting by virtue of powers conferred on it (21).

(85)

In this context, the notified capital injection in the form of the debt-for-equity swap of the Osinek loan has to be seen as State aid. The capital injection involves State resources and constitutes a selective advantage to ČSA, since it improves its financial situation.

(86)

According to the case law of the Court of Justice, aid to an undertaking is deemed to affect trade between Member States where that undertaking operates in a market open to trade at Union level (22). The mere fact that the competitive position of an undertaking is strengthened compared with other competing undertakings, by giving it an economic benefit which it would not otherwise have received in its normal course of business, points to a possible distortion of competition (23). Therefore, aid granted by a Member State to an undertaking may help to maintain or increase domestic activity, with the result that undertakings established in other Member States have less chance of penetrating the market of the Member State concerned (24).

(87)

The measure at hand affects trade between Member States and competition as ČSA is in competition with other European Union airlines, in particular since the entry into force of the third stage of liberalisation of air transport ("third package") on 1 January 1993. The measure in question enables ČSA to continue operating so that it does not have to face the consequences usually deriving from its poor financial results and therefore it distorts competition.

(88)

Therefore, the notified capital injection in the form of the debt-for-equity swap constitutes State aid within the meaning of Article 107(1) of the TFEU. This conclusion is not disputed by the Czech authorities.

(89)

Article 108(3) of the TFEU provides that a Member State shall not put an aid measure into effect before the Commission has adopted a decision authorising the measure. The Commission observes that the Czech authorities implemented the aid, i.e. the debt-for-equity swap of the Osinek loan, as of 30 June 2010. The Commission thus regrets that the Czech Republic did not comply with the stand-still obligation and has therefore violated its obligation under Article 108(3) of the TFEU.

(90)

Article 107(3)(c) of the TFEU lays down that aid can be authorised where it is granted to promote the development of certain economic sectors and where this aid does not adversely affect trading conditions to an extent contrary to the common interest.

(91)

The Commission considers that the present measure constitutes restructuring aid which must be assessed in the light of the criteria under the R&R Guidelines in order to establish whether it is compatible with the internal market pursuant to Article 107(3) of the TFEU.

(92)

Regarding eligibility, point 33 of the R&R Guidelines states that the firm must qualify as a firm in difficulty within the meaning of points 9 to 13 of those Guidelines.

(93)

According to point 9 of the R&R Guidelines the Commission regards a firm as being in difficulty when it is unable, whether through its own resources or with the funds it is able to obtain from its owners/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term.

(94)

Subsequently, point 10(a) of the R&R Guidelines clarifies that a limited liability company is regarded as being in difficulty where more than a half of its registered capital has disappeared and more than one quarter of that capital has been lost over the preceding 12 months.

(95)

The Czech authorities claim that ČSA, a joint-stock company under Czech law and therefore a limited liability company in terms of point 10(a) of the R&R Guidelines, entered into serious difficulties as of August 2009 when the financial crisis severely impacted even the high season – the summer flight schedule. At the time, operating cash flow sunk to CZK [– 2,4 – – 2,1] billion, which had a dramatic impact on the company’s assets.

(96)

Indeed, in August 2009 the company fulfilled the conditions of point 10(a) of the R&R Guidelines. The total registered capital of ČSA amounted to CZK 2 735 million. According to the Czech accountancy standard, ČSA's equity was negative by August 2009 (amounting to CZK [– 1 000–(– 900)] million at the end of July 2009) and more than one quarter of its registered capital had been lost over the preceding 12 months since the equity amounted to CZK [900–1 000] million in July 2008. Therefore, from August 2009 ČSA started its restructuring process. Hence, the company was indeed a firm in difficulty within the meaning of the R&R Guidelines at the time of granting of the restructuring aid in June 2010.

(97)

Point 12 of the R&R Guidelines states that a newly created firm is not eligible for rescue or restructuring aid even if its initial financial position is unsecure. A firm is in principle considered to be newly created for the first three years following the start of operations in the relevant field of activity.

(98)

ČSA was created in 1923 and cannot therefore be considered a newly created firm.

(99)

Point 13 of the R&R Guidelines states that a firm belonging to or being taken over by a larger business group is not usually eligible for rescue or restructuring aid, except where it can be demonstrated that the firm's difficulties are intrinsic and not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself. Where a firm in difficulty creates a subsidiary, the subsidiary, together with the firm in difficulty controlling it, will be regarded as a group and may receive aid under the conditions laid down in point 13 of the R&R Guidelines.

(100)

At the time of granting of the restructuring aid in 2010, ČSA formed a group with a number of companies that are active in air-transport-related fields (25). The accounts of the group show that the airline, despite being part of a larger group of companies, in fact accounts for the predominant part of the turnover (94 %) and therefore there is no possibility for any other part of the group to finance the restructuring of the airline. Furthermore, the accounts demonstrate that the airline’s losses are intrinsic to the airline itself and are therefore not attributable to any part of the group.

(101)

The Commission thus considers that the difficulties of ČSA are not the result of an arbitrary allocation of costs within the group but are mostly due to weak revenues in its core business. The difficulties are too serious to be dealt with by the group itself especially because the positive contribution by profitable subsidiaries is far too small to compensate for the losses in ČSA's core business.

(102)

The Commission notes that the creation of ČAH (end 2011/beginning 2012), which in principle constitutes a business group in terms of point 13 of the R&R Guidelines, was carried out after the granting of the restructuring aid and can therefore be regarded as a part of the restructuring which has no impact on the eligibility for restructuring aid. Furthermore, the Commission notes that all business relations between the member companies of ČAH will be carried out on an arm's length basis in compliance with the relevant provisions of Czech law (26), hence no contribution to the restructuring process of ČSA by other members of the group is possible.

(103)

First, according to point 35 of the R&R Guidelines, the restructuring plan, the duration of which must be as short as possible, must restore the long-term viability of the firm within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions.

(104)

Pursuant to point 36 of the R&R Guidelines the plan must describe the circumstances that led to the company's difficulties and take account of the present state and future market prospects with best-case, worst-case and base-case scenarios.

(105)

The plan must provide for a turnaround that will enable the company, after completing its restructuring, to cover all its costs including depreciation and financial charges. The expected return on capital must be high enough to enable the restructured firm to compete in the marketplace on its own merits (point 37 of the R&R Guidelines).

(106)

The Commission notes that the RP, as summarised in section 2.3 above, describes the circumstances that led to the company's difficulties. It takes into account present and future prospects on the main market of the ČSA, namely scheduled passenger air transport, and it presents scenarios based on best-, worst- and base-case assumptions, as well as ČSA' strengths and weaknesses. The Commission thus notes that the RP deals with all formal aspects required by point 36 of the R&R Guidelines.

(107)

The current RP assumes that a return to long-time viability will be achieved by June 2014. The revised restructuring period of five years is relatively long. However, according to the base-case scenario ČSA will generate profit already in 2013. Also, most of the restructuring measures have already been implemented, including the downsizing of the company and generating the own contribution. The Czech authorities have demonstrated that the strategy in the RP is set out over five years after a careful assessment of the shortest time required to restore the long-term viability of ČSA, keeping in mind possible future operating conditions. Furthermore, the Commission notes that, especially in the air transport sector in the current economic circumstances, the stabilisation of operational and services performance has to be achieved in order to ensure a long-term viability as a solid base for future growth and not only a short-term turnaround. This takes by its very nature several years. The Commission further notes that in previous cases a restructuring period of five years or more has been accepted (27). Therefore, on balance, the Commission considers the five-year restructuring period to be acceptable.

(108)

To enable a turnaround for ČSA, the RP envisages significant cost reductions, (especially through the reduction of capacity and staff and the downsizing of the company's fleet and the operated network) as well as a number of revenue initiatives.

(109)

The Commission notes that ČSA has significantly reduced the number of pilots and cabin crew – more than 1 000 jobs have already been cut. The cost reduction initiatives are expected to generate net proceeds of CZK [390–425] million by the end of 2012. The costs of sales per passenger were already reduced by [15,5–17]% in 2010.

(110)

The Commission further notes that the downsizing of both the fleet (by 30 %) and the network (by [18–20]%) is expected to result in an increase of the revenue per ASK by [3,9–4,3]%. Consequently the seat-load factor is to improve to [66–73]% under the base-case scenario. The renewal of the fleet as well as the replacement of Boeings by Airbuses will lead to lower operating and maintenance costs which will bring more efficient business management of the fleet. The network and fleet downsizing is expected to generate net proceeds of CZK [195–215] million by the end of 2012.

(111)

The Commission also notes that ČSA introduced a new revenue-management system aiming at an increase in revenue per ASK by [3–3,5]% in 2011. Coupled with revenues from sales of associated own products as well as products from third parties, the revenue management is expected to contribute to profits by CZK [500-560] million by the end of 2012.

(112)

The Commission, on the basis of its knowledge of the sector in other airline restructuring cases, considers these initiatives to be capable of enabling ČSA to reduce its costs and generate additional revenues in order to achieve a return to long-time viability by June 2014.

(113)

The forecast results are based on realistic assumptions, especially growth rates, inflation, fuel prices and USD/CZK exchange rates. In its comments on the opening decision, the Czech Republic addressed the Commission's doubts on the underlying assumptions by providing further clarifications, especially:

(114)

The Commission notes positively that, following the opening decision, the underlying assumptions for the internal and external factors have been revised, such as anticipating a slower growth rate in demand between 2010 and 2013 and higher fuel costs. The revision and the adaptation of a number of key assumptions has led to revised financial projections resulting in a drop in the predicted profit for 2013 from CZK [123–135] million to CZK [68–75] million. The adapted assumptions now give a more realistic and sound picture of ČSA's future development.

(115)

In addition, ČSA has provided a scenario analysis including, besides the above-mentioned most realistic assumptions (base-case scenario), a best-case and a worst-case scenario with modified assumptions on several key drivers.

(116)

Under the base-case scenario, ČSA forecasts achieving a positive operating margin from 2013. Even in the worst-case scenario ČSA would achieve profitability by 2014.

(117)

However, the company's ROCE should return only to modest levels (around [1,9-2,2]%) by 2015. Such returns are quite low but seem to be realistic in view of the fact that ČSA's peer group (AF-KLM, AA, Finnair, SAS, BA, Croatia Airlines, LH) reached a ROCE between [– 1,2 – 1]%–[5,4–6,3]% in the years 2003 to 2009. A positive ROCE in this group was achieved only by Lufthansa ([5,3–6]%), British Airways ([4,9–5,7]%) and AF-KLM ([2–2,3]%). On the other hand, the low-cost carriers achieved a ROCE of [5,5 – 6,5]–[15,5–17]% in the years 2004-2007 (28).

(118)

ČSA's targeted ROCE will thus stay below the most efficient low-cost carriers or large major carriers mentioned above that benefit from economies of scale. ČSA with its restructured fleet (20-23 aircraft) remains a small regional player whose long-term development can best be secured with the entry of a private investor.

(119)

In view of the fact that the Czech Republic as the owner of the company is well aware of the situation and in favour of timely privatisation, this modest return to viability appears to be acceptable. Moreover, the fact that ČSA has managed to obtain a privately funded lease for the new aircraft, instead of a State-guaranteed bank credit as originally envisaged, is a sign that the markets believe in the feasibility of the return to viability of the company.

(120)

Furthermore, the Commission notes positively that ČSA has made significant progress in its restructuring process up to now and that the implementation of the envisaged initiatives has already had a positive impact on ČSA in 2011: while [15,5–17]% of flights had been discontinued on a year-on-year basis, the year-on-year drop in traffic revenue was only [8–9]%. In the first quarter of 2012 there was a [7,9–8,4]% growth in the volume of point-to-point passengers which had in turn a positive impact on revenues per available seat kilometre (RASK), which increased by [12,5–14]%. In 2011, ČSA also managed to reduce its catering costs by CZK [115–130] million and the unit cost per passenger by [14,5–16]%. Due to the implementation of cost-saving measures, the costs related to the utilisation of the Global Distribution System dropped by CZK [68–75] million in 2010 and CZK [89–96] million in 2011 on a year-on-year basis.

(121)

ČSA has already implemented the envisaged reduction of staff and the sale of assets, as well as the spin-off of its non-core services into subsidiaries that were then sold to ČAH.

(122)

In view of the significant restructuring measures undertaken and the progress already made to date, the Commission considers that the revised RP will enable ČSA to restore its long-term viability within a reasonable timescale.

(123)

Secondly, according to point 38 of the R&R Guidelines, compensatory measures must be taken in order to ensure that the adverse effects on trading conditions are minimised as much as possible. These measures may comprise divestment of assets, reductions in capacity or market presence and reduction of entry barriers on the markets concerned (point 39 of the R&R Guidelines).

(124)

In this regard, closure of loss-making activities which would in any case be necessary to restore viability will not be considered a reduction of capacity or market presence for the purposes of the assessment of the compensatory measures (point 40 of the R&R Guidelines).

(125)

ČSA proposes the following compensatory measures:

(126)

In the opening decision the Commission expressed doubts concerning certain compensatory measures offered by ČSA in the sense that these seemed to be mere viability measures. The Czech Republic has clarified this point and provided a justification demonstrating the relevance of the measures listed above.

(127)

ČSA has planned to reduce its fleet by 50 %, which will in turn have an impact on the route network. The total capacity of the company in 2009 was [8–9] billion ASK. At the end of the restructuring process, ČSA plans to offer [6,2–7] billion ASK, i.e. the network will be reduced by [2–2,2] billion ASK (representing [20–25]%).

(128)

ČSA has also agreed that other measures should be considered mere viability measures such as the decision to cancel the routes to New York and Toronto. This decision was taken by the management board of ČSA in July 2009 (i.e. before the beginning of the restructuring period). The flights were discontinued as of November 2009. However, the fact that ČSA took the decision to discontinue the routes before the start of the restructuring period indicates that this business decision was taken in order to improve the viability of the airline rather than with the aim of minimising any distortive effects of the State aid on trading conditions.

(129)

In its revised RP, ČSA proposes to eliminate six profitable routes (29) and to reduce the ASK capacity of an additional 10 profitable routes (30) as compensatory measures. The discontinuation and proposed capacity reduction will lead to a reduction of offered capacity by [900–1 000] million ASK, which corresponds to a [10–11]% (31) capacity reduction of scheduled transport compared with 2009. ČSA has confirmed that it will maintain the reduced capacity offered as compensatory measures until the end of the restructuring period.

(130)

Routes are considered profitable if they had a positive C1 contribution margin in 2009. The C1 contribution takes account of flight, passenger and distribution costs (i.e. variable costs) attributable to each individual route. It is calculated as (route revenues-route variable costs)/route revenues. Therefore, all routes which have a positive C1 contribution generate sufficient revenues to not only cover the variable costs of a route but also to contribute to the fixed costs of the company.

(131)

From the Commission's point of view, the C1 contribution margin appears to be the appropriate figure since it takes into account all costs which are directly linked to the route in question. The Commission notes that a similar margin has been accepted in a comparable case (32).

(132)

As regards the argument of the third party (TS) which alleges that ČSA opened new loss-making routes such as the Prague-Abu Dhabi route, the Commission notes that, following the clarification provided by the Czech authorities, this route is a code-share flight operated in cooperation with Etihad Airways. In any event, although new routes might be opened, ČSA has committed itself to decreasing its total network by [20-25]% (in ASK) and to maintaining this reduced network until the end of the restructuring period. Moreover, ČSA has offered to eliminate or reduce its capacity on 16 profitable routes in order to compensate its competitors.

(133)

The Commission notes that, as a result of the changes in the network, a number of ČSA slots at coordinated airports (33) will be surrendered. The surrender of landing slots will enable other competing airlines to increase their capacity at those coordinated airports (regardless of the actual route that has been withdrawn) and thus represents a reduction of entry barriers on the market to the benefit of ČSA's competitors.

(134)

Moreover, ČSA claims that the sale of its non-loss-making assets such as the sale of slots at London-Heathrow (see recital 47) and of 15 aircraft (see recital 48) as well as the sale of its duty-free business (see recital 46) and the sale of subsidiaries to ČAH (see recital 53) should be also considered a compensatory measure. However, in view of the fact that the compensatory measures should take place in particular in the market where the firm will have a significant market position after restructuring, only the measures related to the passenger air transport market are relevant.

(135)

Hence, besides the [10–11]% capacity reduction on profitable routes and the surrender of slots at coordinated airports, only the sale of slots at London-Heathrow and of 15 aircraft can be taken into account as appropriate compensatory measures, whereas the sale of the duty-free business and the sale of subsidiaries of ČSA to ČAH cannot because they do not affect the position of ČSA in its core market.

(136)

When assessing whether the compensatory measures are appropriate, the Commission will take account of the market structure and the conditions of competition to ensure that any such measure does not lead to deterioration in the structure of the market (point 39 of the R&R Guidelines).

(137)

The compensatory measures must be in proportion to the distortive effects of the aid and, in particular, to the size and the relative importance of the firm on its market or markets. The degree of reduction must be established on a case-by-case basis (point 40 of the R&R Guidelines).

(138)

The Commission notes that, although ČSA still has a leading position in the Czech aviation market, ČSA's share of the entire European airline industry’s productive capacity and output (in terms of passengers) is only 1-2 %. For a relatively small carrier like ČSA, a further reduction of its fleet size might have a negative effect on its viability, without providing any meaningful market opportunities for competitors.

(139)

As to the most important part of the own contribution, the capacity reduction, the Commission considers a reduction of [10–11]% to be sufficient, in particular when compared with other airline restructuring cases (34).

(140)

Against this background, the Commission considers the above-mentioned compensatory measures to be sufficient under the R&R Guidelines in order to ensure that the adverse effects on trading conditions are minimised as much as possible.

(141)

Thirdly, according to point 43 of the R&R Guidelines, in order to limit the amount of aid to the strict minimum of the restructuring costs necessary, a significant contribution to the restructuring from the beneficiary's own resources is necessary. This can include the sale of assets that are not essential to the firm's survival, or external financing on market conditions.

(142)

For large firms, the Commission usually considers a contribution of at least 50 % of the restructuring costs to be appropriate. However, in exceptional circumstances and in cases of particular hardship, the Commission may accept a lower contribution (point 44 of the R&R Guidelines).

(143)

The own contribution must be real, i.e. actual, excluding all future profits such as cash flow (point 43 of the R&R Guidelines). Inherently, the own contribution must not include any further State aid.

(144)

In view of total restructuring costs of CZK [8 900–10 500] million, the proposed own contribution of ČSA is composed of

(145)

The own contribution of ČSA proposed by the Czech authorities would represent [70-80]% of the total restructuring costs. Furthermore, the Commission notes that ČSA obtained a private lease agreement for an aircraft (USD [25–30] million) which can also be regarded as an own contribution.

(146)

ČSA was able to obtain a privately financed lease agreement for the acquisition of an Airbus A319 aircraft and two engines in May 2011. The lease is granted under market conditions by […]. The lease agreement corresponds to a loan which amounts to USD [25–30] million (approximately CZK [520–600] million, or [5,3–5,9]% of the restructuring costs).

(147)

The lease company will provide the aircraft supplied to ČSA to be used under a financial lease for a period of 10 years; upon payment of all the instalments in full, ČSA will become the owner of the aircraft. In addition to the down-payment of [29-33]% of the price of the aircraft, ČSA will make quarterly lease payments to the lessor, such payments being calculated from the aircraft price plus the equivalent of the interest on the loan provided by the bank to the lease company (3 months London Interbank Offered Rate (LIBOR) plus margin). The payment of the lease payments, (or rather repayment of the loan granted by […] to the lease company) will be secured in particular by a pledge on the aircraft in favour of the bank, subsisting for the duration of the lease.

(148)

The Commission notes that that lease agreement demonstrates that ČSA was already able to obtain external financing on market conditions without any assistance from the Czech authorities. Such financing shows that the market believes in the feasibility of the envisaged return to viability. The Commission hence considers the CZK [520-600] million lease to be part of the own contribution.

(149)

The proposed loan granted by Komerční banka consists of a credit line based on a framework agreement. The Commission notes that the framework agreement providing a credit line of CZK [480–540] million was already concluded on 31 March 2009 and that, owing to the deteriorating financial situation of ČSA, the credit line has been reduced in subsequent amendments of the framework agreement. The latest amendment of the framework agreement of December 2009 provided a credit line of only CZK [200–220] million until 30 June 2010. The Commission understands that the proposed own contribution of CZK [125–140] million is the latest balance of this credit line.

(150)

The own contribution should demonstrate that the market believes in the feasibility of the envisaged return to viability. Since the relevant loan agreement was concluded long before the beginning of the restructuring period and given the fact that Komerční banka reduced the credit line successively, the Commission does not accept this private loan as an own contribution in terms of point 43 of the R&R Guidelines.

(151)

The sales of assets can be divided into three groups – (i) sales to private market operators, (ii) sales of immovable assets to Prague Airport and (iii) sales of subsidiaries to the Czech State (ČAH).

(152)

A part of these sales was carried out on the basis of an open, transparent and unconditional tender such as the sale of the duty-free business and the sale of Slovak Air Services, s.r.o.. Another part was sold after individual negotiations to private entities such as the aircraft and London-Heathrow slots which were sold to various airlines and British Airways respectively. These sales took place in July 2010 and generated CZK [3–3,5] billion ([31–35]% of the total restructuring costs).

(153)

The Commission notes that this part of the contribution to the restructuring costs comes indeed from the own resources of the company and is real and actual as required by point (43) of the R&R Guidelines. The Commission thus accepts these proceeds as an own contribution.

(154)

Land and property located in the perimeter of Prague-Ruzyně Airport was sold to Prague Airport on 9 December 2009, 2 February 2010 and 13 May 2010. The sale of these assets amounted to CZK [1 620–1 850] million ([15–17]% of the total restructuring costs).

(155)

The Czech Republic has enacted a law on the ownership of Prague-Ruzyně Airport by which all land and property in the perimeter of Prague-Ruzyně Airport must be owned by a State-owned company in view of their strategic importance. According to the Czech authorities, the property is strategically important to Prague-Ruzyně Airport in view of the new runway to be built there.

(156)

All of these assets were sold at a price established in appraisal reports written by independent experts from the Czech Republic (36) before the respective transactions took place. The Commission has analysed the submitted appraisal reports and found them to be sufficiently sound. The evaluations give no cause for concern since no errors have been detected, accepted methodologies are applied and the evaluations are based on credible assumptions. The Commission also notes that the appraisal reports were produced before the respective transactions took place and do not take into account the monopsony situation of the State as the only possible buyer. Therefore, the Commission considers that the results of the present appraisal reports are an appropriate approximation for the realistic market prices of the assets.

(157)

The appraisal report did not take into account any pledges or other forms of encumbrance. As to pledges, especially securing the Osinek loan, the Czech authorities have confirmed that all pledges were lifted before the sales took place. In two of the three sale contracts, dated 9 December 2009 and 2 February 2010, the parties agree that the property will be transferred without any encumbrances. Only the third contract, dated 13 May 2010, contains a provision under which the property transferred includes the encumbrances and easements listed in the land registry. The relevant encumbrances are the following:

(158)

The Commission considers that encumbrances and easements can in principle reduce the value of real estate. However, the Commission notes that the easement in point (a) in recital 156 ceased to exist at the time when the property was transferred as the easement was in favour of the buyer itself. The Czech authorities have confirmed that the easement in point (b) in recital 156 did not exist any more at the time when the property was transferred. The third easement, in point (c) in recital 156, is still in place but this easement is one of the conditions for connecting Prague Airport to the electricity distribution network operated by PREdistribuce, a.s.

(159)

In view of the vital nature of the only easement transferred with the property, the Commission considers that the above-described easements did not have an impact on the value of the assets sold.

(160)

In the light of the above, the Commission accepts the proceeds from the land sale amounting to CZK [1 620–1 850] million as an own contribution.

(161)

Another part of sales to the State consists of the sale of ČSA's subsidiaries to ČAH. These were HCA (CZK [500–580] million); Czech Airlines Handling, a.s. (CZK [700–800] million); ČSA Services, s.r.o. (CZK [25–28] million) and Czech Airlines Technics, a.s. (CZK [1–1,15] billion). The total value of these sales is CZK [2,35–2,6] billion ([24–26]% of the total restructuring costs).

(162)

The sales values were established on the basis of the appraisal reports by Deloitte Advisory, s.r.o. and PricewaterhouseCoopers Česká republika, s.r.o. referred to in recital 53. The Commission has analysed the submitted appraisal reports and found them to be sufficiently sound. The evaluations give no cause for concern since no errors have been detected, accepted methodologies are applied and the evaluations are based on credible assumptions. Therefore, the Commission considers that the results of the present appraisal reports are an appropriate approximation for the realistic market prices of the assets. The Commission also notes that the appraisal reports were produced before the respective transactions took place.

(163)

The creation of ČAH was the target of the comments by the competitor, stating that the purpose of such a structure is only to provide ČSA with additional funds. However, the Commission notes that the Czech Republic has declared that the creation of ČAH has reasons other than a mere transfer of capital to ČSA. The major objective of ČAH is to make the State-owned companies more attractive to potential investors. With the ČAH structure in place it will indeed be easier to privatise individual subsidiaries of ČSA to different investors separately. Furthermore, the creation of ČAH should ensure a competitive pricing of intra-group services and stimulate the profit making of all subsidiaries as well as their orientation towards external customers.

(164)

Finally, the creation of ČAH in its current form was approved by the Czech competition authority (with commitments) and, the sales of the subsidiaries were carried out on the basis of the above-mentioned appraisal reports.

(165)

In the light of the above, the Commission notes that the total own contribution including the sales of the subsidiaries would amount to [78–85]% of the total restructuring costs. In the present case, however, it is not necessary to take this measure into account as even without it ČSA has provided a sufficient own contribution to cover its restructuring costs (consisting of the sale to private market operators, the sale of land and property to State-owned Prague Airport and the aircraft lease), which amounts to CZK [5,2–5,8] billion or [55–60]% of the restructuring costs (37).

(166)

Therefore, the Commission considers that the requirements of point 43 of the R&R Guidelines have been fulfilled and hence the amount of aid is limited to the strict minimum of the restructuring costs necessary.

(167)

Finally, the aid must respect the condition that it is ‘one time, last time’. Point 72 of the R&R Guidelines provides that a company that has received rescue and restructuring aid in the past ten years is not eligible for rescue or restructuring aid.

(168)

In the opening decision the Commission had doubts about the possible State aid elements involved in the Osinek loan. However, in its final decision in case SA.29864 – Possible State aid implications of a loan provided by Osinek, a.s. the Commission concluded that the Osinek loan did not constitute State aid, and even if it did this aid would be compatible under the TF (38). Furthermore, the Czech authorities have confirmed that ČSA has not benefited from any rescue or restructuring aid in the past 10 years. The Commission therefore considers that the ‘one time, last time’ principle is respected.

(169)

In the course of the formal investigation procedure third parties raised a number of additional potential state aid issues, namely concerning the sale of HCA, cross-financing of the remuneration of the CEO of ČSA by Prague Airport, and a possible advantage granted to ČSA for the operation of the Prague-Tel Aviv route.

(170)

In its comments, TS claimed that ČSA has used the State aid it received to expand its charter business (conducted through its subsidiary HCA), which would offer flights at a price 20 % lower than the standard prices on the market.

(171)

The Commission has requested detailed information regarding the sale and future operation of HCA. The Czech Republic has clarified that no aircraft was contributed into HCA upon the transfer of the charter transport business and confirmed that all aircraft leases are carried out on market terms in accordance with either an expert opinion on transfer pricing (39) or lease rates set on the basis of the Lease Rate Digest published by the International Bureau of Aviation (40), which specializes in estimates of market rates of operating leases for individual types of aircraft and years of production.

(172)

Regarding any potential transfer of employees, the Czech authorities have clarified that a small number of administrative staff (approximately 20) were transferred to HCA from ČSA in 2010 in connection with the contribution of ČSA's charter business and in accordance with rules set out in the Czech Commercial Code. The majority of staff, including all pilots and cabin crew, has joined HCA following a new selection process. All staff that were previously employed by ČSA terminated their contracts and concluded new ones with HCA. No seniority rights were transferred with the new contracts.

(173)

Finally, the Czech Republic has confirmed that there is no diversion of a part of ČSA's fleet to HCA where it would be used to operate ČSA flights. HCA has not expanded since 2009 and is merely returning to the original volume of flights operated by ČSA's charter division in the years 2008 to 2009. It will not take over the operation of scheduled flights to destinations discontinued by ČSA, but will only offer charter flights.

(174)

In the light of the information provided, the Commission does not consider that any cross-subsidisation of activities between ČSA and HCA is taking place and that the selective advantage provided to ČSA has not been passed on to HCA.

(175)

ČSA's CEO was also the CEO of Prague Airport and received a salary from both in 2010 and 2011. As regards the claim concerning the potential advantage given to ČSA in the form of the salary of its CEO, the Czech Republic has explained that the remuneration of the CEO was set on the basis of two separate management agreements concluded between the CEO and ČSA and Prague Airport respectively. Furthermore, the Czech Republic has asserted that Prague Airport was not providing any compensation for the payment of remuneration for the activities of the CEO in ČSA. Under the two management agreements, the remuneration consisted of two components, a base salary and a performance-based bonus. The base component in the ČSA contract was reduced to CZK 1 per month until ČSA attains positive operating results. The amount of performance-related bonuses was, however, still set at twelve times the non-reduced base component per year.

(176)

The Commission has verified the CEO's salary overview which shows that, indeed, the salary and bonuses paid by ČSA to the CEO amounted to approximately […] of his annual income, the other […] coming from his employment with Prague Airport. This difference is justified in particular by the different performance of the two companies in the relevant period.

(177)

Since the CEO was remunerated for his work in both companies in a way that reflected their performance, the Commission finds that no State aid has been granted to ČSA by the way its CEO was remunerated for his work.

(178)

In its comments, TS alleges that the Czech Republic negotiated the possibility of operating the Prague-Tel Aviv route for more than one carrier especially for the benefit of ČSA. The negotiations, which involved a change in the bilateral Air Transport Agreement (hereinafter referred to as "the Agreement") between the Czech Republic and the State of Israel (41), took place shortly after the conclusion of an open tender to operate this route which was won by TS (see recital 73).

(179)

The Commission notes that the Czech Republic had the legal right to initiate negotiations with the State of Israel for extension of rights for access to the transportation market for air carriers of both parties until such time as a uniform European-Mediterranean Aviation Treaty is concluded between the EU and its Member States of the one part, and the State of Israel of the other part.

(180)

In the process of consultations preceding the conclusion of the Agreement, the aviation authorities agreed, inter alia, on a temporary extension of access to the transportation market by permitting “special flights” which was followed by amendment of the Agreement.

(181)

The Czech authorities have explained that the extension of access to the Czech-Israeli transport market was not negotiated solely for ČSA’s benefit and that the extension of access was undertaken in full compliance with domestic legal regulations and was not in conflict with the Decision of the Department of Civilian Aviation of the Ministry of Transport of the Czech Republic granting transportation rights for the operation of the route to Travel Service (42).

(182)

The Commission considers that it is indeed a right of the Member State to initiate a change in the bilateral Agreement at any time if the subject matter is not in conflict with the provisions of Union law. Furthermore, the decision by which TS was awarded the right to operate the Prague-Tel Aviv route does not provide that similar rights might not be awarded to another operator if this is in compliance with the provisions of the Agreement.

(183)

Finally, the Commission notes that Paragraph 1 of Article III of the revised Agreement lays down that "Each Contracting Party shall have the right to designate in writing to the other Contracting Party one or more airlines for the purpose of operating the agreed services on the specified routes." Therefore, ČSA is not the only air carrier that could benefit from the change of the Agreement. Indeed, the revision of the Agreement seems to constitute a market-opening measure which can be regarded as pro-competitive. It cannot therefore be concluded that this measure favours ČSA specifically and therefore constitutes State aid.

(184)

The notified measure constitutes State aid within the meaning of Article 107(1) TFEU. The Commission regrets that the Czech authorities did not comply with the standstill obligation under Article 108(3) TFEU. However, in view of the above, the Commission considers that the granted aid amounting to CZK 2 500 million and the RP are compatible with the conditions of the R&R Guidelines. The Commission therefore considers the aid to be compatible with the internal market under Article 107(3)(c) TFEU,