94/698/EC: Commission Decision of 6 July 1994 concerning increase in capital, credit guarantees and tax exemption in favour of TAP (Transportes Aéreos Portugueses) (Text with EEA relevance)

• Articles: 5

Article 1

The aid in favour of TAP, to be granted during the period 1994 to 1997, in the form of a capital increase of Esc 180 billion, to be paid in four tranches, borrowing guarantees up to a maximum of Esc 169 billion, and tax exemption, aimed at its restructuring in accordance with the plan and the commitments given by the Portuguese Government, including its partial privatization are compatible with the common market and the EEA Agreement pursuant to Article 92 (3) (c) of the Treaty and

Article 2

This Decision is addressed to the Portuguese Republic.

Done at Brussels, 6 July 1994.

For the Commission

Marcelino OREJA

Member of the Commission

(1) OJ No C 163, 15. 6. 1993, p. 5.

(2) OJ No C 93, 30. 3. 1994, p. 12.

(3) The rate of 10 % represents TAP's marginal cost of borrowing. The Portuguese authorities informed the Commission that, in the last financial transactions entered into by TAP with Portuguese banking institutions; the Portuguese airline succeeded in obtaining an interest rate of around 9,8 %.

(4) OJ No L 240, 24. 8. 1992, p. 8.

(5) See Commission communication of 17 September 1984 concerning public authorities holdings op. cit.; Court of Justice, Joined Cases 296 and 318/82, The Netherlands and Leeuwarder Papierwarenfabriek v. Commission, [1985] ECR 809, paragraph 17, p. 823.

(6) See Case C-305/89, Italy v. Commission, [1991] ECR 1603, paragraph 20, p. 1641.

(7) See the judgment of the Court of Justice in Case No 730//79, Philip Morris BV v. Commission, [1980] ECR 2671.

(8) OJ No L 240, 24. 8. 1992, p. 1.

(9) OJ No L 240, 24. 8. 1992, p. 8.

(10) OJ No L 240, 24. 8. 1992, p. 15.

(11) See Commission Decision 94/118/EC of 21 December 1993, Aer Lingus; OJ No L 54, 25. 2. 1994, p. 30.

Article 61

(3) (c) of the Agreement, provided that:

(a) the payment of the second, third and fourth tranches is subject to TAP's achieving the forecast operating results;

(b) the tax exemption in favour of TAP is abolished at the end of the restructuring period (31 December 1997) and the borrowing guarantees comply with the condition laid down in the Commission's letter to Member States of 5 April 1989;

(c) TAP does not increase its supply beyond the figures provided to the Commission (see Chapter VIII, point 3), to be adjusted on an annual basis should the real growth of the relevant EEA market be lower than TAP's growth;

(d) the Portuguese Government will submit annual reports on the restructuring of TAP at least four weeks before the date of the payments in 1995, 1996 and 1997. Should the Commission decide, after consultation with the Portuguese Government, to appoint an independent expert to examine the progress of the restructuring plan and compliance with the conditions attached to the approval of the aid, the Portuguese Government will postpone the date of the payment by another four weeks in order to allow the Commission to make comments if necessary;

(e) the Portuguese Government fulfils its commitment to apply Article 4 of Council Regulation (EEC) No 2408/92 to the Atlantic Islands of Madeira and the Azores as of 1 January 1996 at the latest, publishing public service obligations for the individual routes in question (see Chapter VIII, point 3);

(f) the Portuguese Government honours its commitments that the liberalization of non-scheduled transports between all Community airports and the Azores refers to all services, as expressed in Regulation (EEC) No 2408/92, including the 'seats-only' and 'one-way charter';

(g) the aid is used only for the restructuring purposes and not to acquire additional shareholdings in other carriers of the EEA;

(h) the Portuguese Government refrains, in accordance with Community law, from granting any further aid to TAP.

Article 92

(3) (a) and (c) of the Treaty and Article 61 (3) (a) and (c) of the Agreement provide for exceptions in respect of aid to promote or facilitate the development of certain regions. The Portuguese authorities maintain in their notification that the aid could be considered compatible with the common market as regional aid because aid to air transport is fundamental in the context of regional development. Portugal, which is a peripheral, less-favoured country in the context of the Community, would be left, as a consequence of the disappearance of its flag carrier, highly dependent on carriers based abroad and this would seriously compromise the strengthening of economic and social cohesion. Moreover, the disappearance of TAP would add to the increase in the number of unemployed people in Portugal at a time when the protection of employment is a priority policy of the Community itself. The Commission cannot accept the Portuguese Government's arguments, because the aid in favour of TAP is not an open regional scheme which is accessible to every undertaking operating in Portugal. The capital increase and the guarantees are ad hoc measures aimed at financing the restructuring measures. The same is true for the tax exemption which does not have any regional character.

As regards the derogations pursuant to Article 92 (3) (b) and (d) of the Treaty and Article 61 (3) (b) of the Agreement, it is apparent that the aids are neither intended to promote the execution of an important project of common European interest nor to promote culture and heritage conservation. Indeed, the Portuguese Government has not invoked these provisions in the notification.

VIII With regard to the exception pursuant to Article 92 (3) (c) of the Treaty and Article 61 (3) (c) of the Agreement for aid to facilitate the development of certain economic activities, the Commission may consider some restructuring aid to be compatible with the common market if it meets a number of conditions (see the Eigth Report on Competition Policy (1978), point 176). Those conditions must be seen in the context of the two principles enunciated in the abovementioned Articles: the aid must be required for developing the activity from the standpoint of the Community and the aid may not adversely affect trading conditions to an extent contrary to the common interest (7).

Those criteria have been interpreted in a sectoral (aviation) context in memorandum No 2 of 15 March 1984 on the development of Community policy on air transport (COM(84) 72 final), which stipulates that the Commission may, in certain cases, decide in accordance with Article 92 that aid may be granted to individual airlines which have serious financial difficulties, provided certain conditions are met:

(a) the aid must form part of a programme, to be approved by the Commission, to restore the airline's commercial viability, so that it can, within a reasonable short period, be expected to operate viably without further aid;

(b) the aid in question must not transfer the difficulties from that Member State to the rest of the Community;

(c) any such aid must be structured so that it is transparent and can be verified.

Taking into account increased competition, and in particular progressive liberalization of air transport, following the adoption of the third liberalization package (Council Regulations (EEC) No 2407/92 (8), (EEC) No 2408/92 (9) and (EEC) No 2409/92 (10), the Commission must follow a strict policy of controlling State aid in order to avoid its having effects contrary to the common interest.

As regards Article 92 (3) (c) the Portuguese Government maintains that the aid might qualify for this derogation because the plan is a programme aimed at restoring the viability of the company. The company would at the end of the restructuring be financially autonomous and would then be partly privatized. The plan would not transfer TAP's difficulties to its competitors because it would be impossible for it to pursue a policy of expansion. In addition, the company would decrease its supply as a whole because it would reduce its fleet and abandon a number of routes in Europe.

TAP's problems are mainly caused, was explained by the Portuguese Government, by inefficient management in the past, as well as the obligation of the airline to comply with onerous public requirements conflicting with its commercial interests. A well-structured restructuring programme could restore the airline's viability in the medium term and help it to adapt to the new competitive environment created by the achievement of the Community liberalization process.

The Commission verified whether the conditions laid down in Article 92 (3) (c) of the Treaty and Article 61 (3) (c) of the Agreement are fulfilled, to asses whether the aid is compatible with the common market.

1. The Commission verified the present situation of the civil aviation industry.

In the first half of 1994, the civil aviation industry appears to have virtually recovered from the economic crisis triggered by the Gulf war in the second half of 1990. Passenger traffic increased by 14 and 9 % in 1992 and 1993 respectively (source AEA). This strong growth trend had been confirmed by the results recorded in the first months of 1994 (January to March), when passenger traffic grew by 9,1, 9,9 and 14,1 %, respectively, over the corresponding period last year. Despite these positive results some of the European airlines are still loss-making. One of the main causes of the losses lies with the worldwide economic recession, which has amplified the effects of the Gulf crisis and has had tremendous effects in the air transport sector, which is particularly sensitive to changes in the general level of economic activity. Many passengers travelling in business class, which is traditionally a high-yield sector of activity, are seeking lower tariffs and this contributes to the poor financial results of the airlines. Another factor which has negatively affected the results of the companies is represented by investments in aircraft at the end of the 1980s on the basis of optimistic commercial programmes. The delivery of those aeroplanes has caused overcapacity because the important increase in supply has not been matched by a corresponding increase in demand. For many airlines load factors are still not sufficient to achieve commercially viable operation and thus, in order to fill the aircraft, they are obliged to offer promotional fares even in the winter season.

However, the prospects for the European aviation industry in the medium term are (1994 to 1997) quite positive. (The forecast annual increase in traffic is around 6 %; see IATA annual report for 1993.) Overcapacity would appear to be, in the light of these dates, a temporary phenomenon that might be overcome by 1995. (See communication from the Commission, the way forward for civil aviation in Europe, COM (94) 218 final, p. 7). This is confirmed by the steady increase in load factors during the first months of 1994.

In the light of the above, the Commission considers that the European air transport market is not affected by a structural over-capacity crisis and that the state of the aviation industry does not require general capacity cut-backs.

2. The Commission assessed the plan pursuant to Article 92 (3) (c) of the Treaty and Article 61 (3) (c) of the Agreement.

On the basis of the further evidence provided by the Portuguese authorities (see Chapter VI), the Commission considers that the restructuring of TAP will contribute to the development of the air transport activity in a peripheral area of the EEA.

In this respect the Commission fully understands TAP's role as the largest Portuguese air carrier, which is entrusted, among others, with the operation of the routes between Portugal, the rest of the EEA, and the former Portuguese colonies.

On the basis of the information and clarifications provided by the Portuguese authorities in the course of the Article 93 (2) procedure, the Commission has reached the conclusion that the plan is sufficiently well structured and, if correctly implemented, could bring about a genuine restructuring.

This is substantiated by the fact that as regards the efficiency and productivity targets the Commission is of the opinion that the productivity target of 366 000 ATK/employee (excluding the employees responsible for the third-party maintenance and ground-handling activities) is an objective that is both necessary and realistic and represents a very acceptable figure. In this respect it should be recalled that TAP's handling and maintenance departments are very large and that TAP provides maintenance and handling services, in particular to third parties, to a very large degree. On the basis of information on third-party work done by other European airlines in the maintenance and handling sector, it is possible to compare the efficiency of TAP's aviation business (excluding all maintenance and handling) with the same core business of other European airlines, using averages. In fact, TAP aims at increasing its efficiency (measured in ATK/employee, excluding handling and maintenance) to 625 000. This appears to be a very acceptable target compared with the average level of efficiency of major European airlines who achieved in 1992 about 400 000 ATK/employee (again, excluding maintenance and handling). Even if one assumes that these airlines will considerably increase their productivity in the next four years TAP's efficiency target compares favourably with the developments to be expected in other Community carriers.

The Commission acknowledges that the plan presented by the Government and the scenario examined by the consultants are based in part on different, but not necessarily incompatible, assumptions. In particular the plan is based on the assumption of no yearly wage increase in 1993 and 1994 and an average yearly increase of 3 % in the period 1995 to 1997, while the consultants assumed an average wage increase of 5 % per year. Another important factor is represented by the savings from TAP's pre-retirement scheme, which are not taken into account by the consultants. The pre-retirement scheme will entail a cost of only Esc 21 billion, which is Esc 7,9 billion lower than the cost forecast by the consultants (Esc 28,9 billion). The paper drawn up by the consultants must be regarded as a preliminary study which has been taken into account by the Portuguese authorities when drafting the plan.

The company will greatly improve its operating results, which reflects the real operating performance, over the restructuring period. The operating result, which was negative in 1993, shows steady improvements during the period of restructuring to become positive in 1996. The fact that the net result reaches a positive value only in 1997 is mainly explained by the financial charges that TAP will bear in the first three years of the plan. A successful implementation of the plan will allow TAP to wipe out its short-term liabilities and achieve an interest cover ratio (operating result/financial charges) of 1,72 by 1997. This figure appears to be acceptable under the terms of the restructuring which will only be finalized by the end of that year.

The overall aid under examination is to be granted to restore the financial balance and enable the airline to achieve a financial situation credible to financial institutions. It cannot be doubted that the recapitalization of a company which because of its negative net worth cannot borrow on a stand-alone basis, is an essential element of any restructuring plan. The Portuguese Government considers that the aid is proportional to the needs of the restructuring and is sufficient to finance return to commercial viability. Moreover, the tax exemption will be abolished by the end of the restructuring. The Commission takes note of this statement and points out that the aid must be the last for the duration of the plan (11). As regards the guarantees the Commission notes that they will allow TAP to raise part of the funds necessary to its restructuring and requires that the terms and conditions of its letter of 5 April 1989 be adhered to.

The Commission notes the commitment from the Portuguese authorities to initiate in 1997 the procedures leading to the partial privatization of TAP. The Portuguese Government has provided figures which show that TAP has already successfully implemented its plan during the first months of 1994 (for example: according to the plan the operating result for the first quarter of 1994 should have been minus Esc 7 985 millon, whereas the actual operating result was minus Esc 6 944 million. As regards the implementation of the social measures of the plan, the Commission notes that there is steady progress on job reduction as well as discussions with the unions.

On the basis of the above the Commission considers that it can positively assess the plan in question. However, the Commission needs to be assured that the plan will be correctly implemented in accordance with the abovementioned objectives. To this end, the Portuguese Government has agreed to report to the Commission on the progress of TAP's restructuring programme; this report will be submitted to the Commission at least four weeks before the payment of the second, third and fourth instalments in 1995, 1996 and 1997, in order to give the Commission the opportunity to comment if necessary.

With regard to the method for calculating compensation of the deficit on the routes to the Atlantic islands, the Portuguese authorities have shown that this method involves compensation which is equal to or slightly lower than the deficit incurred. Consequently, the chosen method cannot lead to substantial losses and jeopardize the success of the restructuring.

In the light of the foregoing the Commission considers that TAP's restructuring contributes to the development of the air transport sector from a European point of view.

3. The Commission verified whether the aid does not affect trading conditions to an extent contrary to the common interest.

In the light of the state of the European air transport industry (see above) and the characteristics of the plan, the Commission has concluded that the possibility that the aid might adversely affect the competitive position of TAP's competitors is more speculative than real, as is explained below. The clarifications and assurances provided by the Portuguese Government (see Chapter VI.3) have enabled the Commission to rule out the possibility that the aid might have adverse effects on competition. With regard to commercial strategy, the Commission notes that TAP has no market share expansion objectives; it does not intend to open any new European routes, its only objective being to rationalize its network. Furthermore, by abandoning a number of European routes, the airline should reduce its total market share, and capacity (measured in terms of seats) for the European market will be considerably reduced (from 3 499 seats in 1993 to 3 168 seats in 1997). This reduction reflects a decrease of 9,5 % in the supply on the European market at a time when this market is expected to grow by over 6 %. This is further substantiated by the fact that TAP, whose supply was 4 688 million APK in 1993, forecasts for the European market in increase in capacity of only 11,4 %:

- 1994: 4 877 million APK,

- 1995: 4 949 million APK,

- 1996: 5 085 million APK,

- 1997: 5 225 million APK.

This growth, which is well below the forecast increase in traffic for the industry (according to the statistics of AEA/RB4-County Forecasting Models of 16 June 1993, traffic should increase by 6,8 % per year, which represents 30,1 % over the restructuring period), will be readjusted on an annual basis, in case the real growth of the relevant EEA market is lower than TAP's growth indicated above.

The Commission takes note of TAP's forecast of supply and considers that the abovementioned ceilings must be adhered to, so as to avoid any risk of the aid's being detrimental to the position of TAP's competitors.

Moreover, the Commission has obtained assurances from the Portuguese Government that the aid will be only used for the restructuring purpose and not to buy additional shareholdings in other EEA airlines.

The Commission takes duly note of the assurances and commitments given by the Portuguese Government regarding the implementation of the rules on access to the common aviation market and the interpretation to be given to certain provisions. The Commission is of the opinion that the removal of constraints protecting TAP from competition represents an appropriate compensatory justification for the granting of the aid, which serves the common interest pursuant to Article 92 (3) (c) of the Treaty and Article 61 (3) (c) of the Agreement. In particular, the Portuguese Government has:

- confirmed that the liberalization of the non-scheduled transport between all Community airports and the Archipelago of the Azores, refers to all the services, as expressed in Regulation (EEC) No 2408/92, including the 'seat-only charter' and 'one-way charter'. This means that these types of air services will be authorized notwithstanding that the Azores are temporarily excluded from the application of Regulation (EEC) No 2408/92,

- reaffirmed its determination and willingness to follow in 1995 a public tender procedure for the connections between the Portuguese mainland and the islands of Madeira and the Azores in accordance with Article 4 of Regulation (EEC) No 2408/92. Moreover, it is the intention of Portugal to inform the Commission during the first half of 1995 about the contents of the obligations of these public services, in order that they may be published in the Official Journal of the European Communities. In that respect the Commission recalls that Article 4 of that Regulation means that the contents of the public service obligations are to be separately published in the Official Journal of the European Communities. Following publication, should no European carrier declare its readiness to fulfil these public service obligations, the right to operate such services shall be offered by public tender either singly or for a group of such routes to any European air carrier entitled to operate such air services.

With regard to TAP's monopoly on ground-handling, the Commission, given the lack of liberalization measures at a Community level, is satisfied with the fact that every airline may self-handle at Portuguese airports.

IX In the light of the above, the aid to be granted by the Portuguese Government to TAP in the form of increase in capital, borrowing guarantees, and exemption from taxation over the restructuring period may benefit from an exemption pursuant to

Article 92

(3) (c) of the Treaty and Article 61 (3) (c) of the Agreement, provided that certain conditions are fulfilled,

HAS ADOPTED THIS DECISION: