The European Commission on September 10 has taken two decisions concerning the aviation sector in Italy.
In the first, we have found that two loans that Italy granted to Alitalia in 2017, for a total of 900 million euros, are illegal under State aid rules. Italy must now recover this amount from Alitalia.
In the second decision, the Commission has reached two important conclusions:
- First, we have found that the new state-owned airline, called Italia Trasporto Aereo – or ITA, is not the economic successor of Alitalia and is therefore not liable to repay the illegal State aid received by Alitalia.
- Second, the Commission has found that Italy’s capital injections of 1.35 billion euros into ITA are in line with market conditions, and therefore do not amount to State aid.
Both decisions are important to help restore a level playing field in the European aviation sector, while ensuring air connectivity in Italy and protecting consumer rights. This is especially important in an industry that has been hard hit by the coronavirus pandemic.
The negative decision on Alitalia
Let me now go through the details, starting with the decision concerning Alitalia.
Alitalia’s financial difficulties go back a long time. There have already been a number of attempts to restructure the airline. Since 2008, when a group of private investors purchased a controlling stake, the company has made losses every year.
In 2017, Alitalia was in urgent need of liquidity. However, it had lost access to credit markets due to its financial situation. So Italy gave two state loans to the company worth 900 million euros. At the same time, Alitalia was placed into special bankruptcy proceedings.
In 2018, the Commission opened a formal State aid investigation, following a notification from Italy of the two loans as rescue aid for Alitalia. We also received a number of complaints from other airlines concerned about the impact on fair competition.
Alitalia’s financial position remained unsustainable, and at the end of 2019 the company was again in urgent need of cash. This is when Italy granted the airline another loan worth 400 million euros. Also in this case, the Commission received a number of complaints and opened a second formal investigation in early 2020. This investigation is ongoing, and we expect to be able to adopt a final decision soon.
With respect to the 900 million euros loans, the in-depth investigation has shown that first, the loans amount to State aid for Alitalia, and second that they are illegal under State aid rules.
First, we found that, when Italy granted these loans, it did not act as a private investor. It did not make a prior assessment of how likely it would be that the loans would be repaid by Alitalia, with interest. Our assessment of Alitalia’s financial situation in early 2017 showed that repayment was very unlikely – and, as a matter of fact, the loans have not been repaid to this day. Since no private lender would have granted the loans to Alitalia at the time, they amount to State aid in favor of the company.
Second, the loans could not be approved as rescue aid in line with State aid rules for companies in difficulty. That’s because the loans were not reimbursed within six months, and there was no restructuring plan to return the company to viability nor a liquidation of the company.
Our conclusion is therefore that the two loans gave Alitalia an unfair advantage over its competitors on national, European and world routes. Hence, they constitute illegal State aid, and must now be recovered by Italy from Alitalia.
Economic discontinuity between Alitalia and ITA
I now turn to the second decision we have adopted today.
In 2020, Italy established a new air carrier ITA. ITA plans to take over parts of Alitalia’s business.
Under our rules, a new company is not liable for past aid received by the seller, if the two companies are sufficiently different from one another. In other words, if there is a clear break between them, so-called “economic discontinuity”.
Our second decision concludes that there is economic discontinuity between ITA and Alitalia. This means that ITA will not be liable for the 900 million euros that Alitalia has to repay following today’s decision.
In line with established case law, this is based on a global assessment looking at a number of different factors:
First, looking at the aviation assets transferred, ITA will take off with a significantly reduced perimeter of activities. It will operate less than half of Alitalia’s aircraft, fly to fewer destinations and drop a number of loss making routes.
ITA will also only use a limited number of Alitalia’s take-off and landing slots that corresponds to the number of aircraft that it will operate. The other slots previously used by Alitalia, including at congested airports in Rome and Milan, will be released.
Second, ITA will not take over significant parts of Alitalia’s non-aviation businesses: Alitalia’s ground handling and maintenance businesses will be sold in open and competitive tenders. In these tenders, ITA will only have the opportunity to bid for the ground handling business in Rome Fiumicino Airport, and for a minority stake in the maintenance business.
Third, Alitalia’s brand will also be sold in an open and competitive tender to the highest bidder.
Fourth, ITA will have a more sustainable cost structure, especially in terms of labor and fleet costs. It will hire a significantly reduced number of staff from the market, including from Alitalia, but under new labour contracts, based on market conditions. It will also gradually modernize its fleet with new-generation fuel-efficient aircraft.
Finally, in order to be sure that there is no direct transfer of customers from Alitalia to ITA, ITA will not bid for Alitalia’s loyalty program.
ITA will therefore be a different company from Alitalia. It will take off as a streamlined airline. This is crucial for the long-term viability of ITA.
The launch of ITA
As part of the second decision adopted today, we have also assessed capital injections worth 1.35 billion euros that Italy intends to grant to ITA. These will be injected over the next three years, with an initial 700 million euros this year.
State aid rules are neutral on public versus private interventions. That’s why the State can invest in companies, on terms that a private operator would also have accepted, without it being State aid.
Our assessment of ITA’s business plan has shown that Italy is investing in ITA in line with market conditions. This is also confirmed by three independent expert reports submitted by Italy.
And this is a crucial difference compared to the two loans in favour of Alitalia, on which we have adopted a negative decision today.
The business plan foresees that ITA will be a viable airline, with sustainable costs and staffing, flying to a limited number of destinations with a focus on the profitable routes. Moreover, the business plan assumes future cost reductions stemming from the modernisation of ITA’s fleet, which will result in lower maintenance and fuel costs.
On this basis, the expected returns from Italy’s investment in ITA are estimated to be higher than the cost of equity. We therefore concluded that the Italian intervention in ITA does not constitute State aid under EU rules.
Today marks a fresh start for Italy’s air transport, which had to overcome many challenges. I want to stress one point that was important to us, the interests of passengers: Italy will fully refund Alitalia customers, in case Alitalia fails to honor tickets when it stops flying.
Once ITA takes off, it is for Italy and the management of ITA to make use of this opportunity, once and for all. To establish an airline that is viable, operates on an equal footing with its competitors, lives up to sustainability ambitions, and that will be successful for a long time to come.
The right groundwork has been laid. And we will continue to do our part to ensure fair competition in the European aviation sector.