How state aid killed Estonian Air

The abrupt but expected end of Estonian Air on 8 November 2015 was due to serious breaches of state aid rules. By ‘rescuing’ the airline, the Estonian government instead committed several sins, which were easy to foresee for anyone who have even the slightest understanding of that area of EU competition law.

The aid was to rescue an airline that was not profitable for 10 years, it was given multiple times after several unsuccessful attempts at different business strategies. Sustaining a business which would fail under market conditions is a sin in a market economy. A healthy marketplace is one where innovative and efficient companies grow at the expense of obsolete uncompetitive ones. By giving aid, Estonian government helped a company that should have gone out of business years ago to remain operating. This means that the more efficient companies had no possibility to compete on a fair basis (hence the reason why Tallinn Airport has seen very little competition from other airlines). By giving this unfair advantage to Estonian Air, Estonian government impeded the normal functioning of the Tallinn flight passenger market, a distortion that is not in the interests of consumers.

This means that not only that Estonian taxpayers had to spend a huge sum as an illegal subsidy to a company with no viable business model (money that could have been better spent), but that also everyone flying to and from Tallinn Airport have had to pay significantly higher ticket prices (or not be able to enjoy lower prices). Lack of competition also meant lower interest in entering the market.

State aid is something that is given only in last resort, if nothing else works, but the company can still be viable. It was quite obvious that there is no way that Estonian Air could be viable (no such realistic business plan existed). However, by giving the company state aid, it created conditions where the company did not need to have realistic business plans. Instead, it sends the company a message that however crazy and unrealistic plans there are, the state will in the end cover the losses. This induces reckless and extreme risktaking behaviour (cf Taskila plans). This is why the ‘one time, last time’ principle is so important as it really means that the state aid is there for this one time.

State aid to a non-viable company is also unfair towards other Member States. What if all Member States behaved like Estonia? A subsidy run to the bottom in which all Member States start pouring public money into airlines that would never stand a chance in an open market would be a huge waste of resources. It also undermines the great achivement that is the single European aviation market, which has only existed for less than two decades and has brought so many benefits.

The establishment of a new company with the exact same routes, by the same owner, using again public money seems to me to be another attempt to flaunt these rules. If this company fails in a year or two, will there be another 40 million euros spent on another airline and then another? Why? This does not seem to be following the essence of these rules, and specifically the ‘one time, last time’ rule.

In my opinion, the European Commission has been too lenient in the Estonian Air case, by delaying the obvious decision for so long.

One more important thing.

EU state aid law does not have public enforcement mechanisms (i.e. the European Commission) only, there are also private mechanisms available. This means that there might be claims for damages against the Estonian state by other airlines that have suffered because of this illegal aid. This means that airlines that have had to compete unfairly against the one that has received illegal state aid (i.e. Air Baltic, Finnair, Lufthansa, Ryanair) could claim under national law damages from the Estonian government. Estonian Competition Act is brief on this, but states in § 78 that “[p]roprietary or other damage caused by acts prohibited by this Act shall be subject to compensation by way of civil procedure.” If I were any of these competing airlines I would seriously consider bringing a civil claim in an Estonian court for damages against the Estonian state for giving illegal state aid to Estonian Air. Because the breaches were fairly obvious and very grave, it could well be worth the effort.