EN Official Journal of the European Union L 45/1

COMMISSION DECISION

of 14 September 2005

State aid measure C 11/04 (ex NN 4/03) — Olympic Airways — Restructuring and privatisation

(notified under document C(2005) 2706)

(Only the Greek text is authentic)

(Text with EEA relevance)

(2011/97/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the first subparagraph of Article 88(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above (1),

Whereas:

1. PROCEDURE

(1) In a letter dated 3 March 2003 (TREN A/26534, 25 July 2003) the Greek authorities underlined their commitment to privatise the State-owned airline Olympic Airways and described the steps they had already taken to that end.

(2) In the absence of a formal notification, the Commission issued an information injunction on 8 September 2003, which was notified to the Greek authorities on 9 September 2003 (C(2003) 3266). This required the Greek authorities to provide all the information necessary to enable the Commission to examine whether the measures for the restructuring and privatisation of Olympic Airways were compatible with Article 87 of the Treaty.

(3) On the same day the Commission wrote to the Greek authorities (TREN D/15287) insisting that they should notify the Commission of the law providing for the privatisation of Olympic Airways, which was adopted on 9 September 2003. By letter dated 17 September 2003 (TREN A/30881), the Greek authorities stated that they intended to submit this information in due course.

(4) On 25 September 2003 the Commission received an official complaint about the privatisation of Olympic Airways from a competitor, Aegean Airlines (TREN A/30589).

(5) The Privatisation Law and the reply to the information injunction were sent to the Commission by letter dated 29 September 2003 (TREN A/30866). Certain information was still missing, however, and the Commission advised the Greek authorities accordingly, by letter dated 31 October 2003 (TREN D/17821), a copy of which was also subsequently faxed to the Greek Permanent Representation on 4 December 2003.

(6) On 12 December 2003, before the Commission had completed its examination of the compatibility with Article 87 of the Treaty of the measures for the restructuring and privatisation of Olympic Airways, a new company came into being, under the name ‘Olympic Airlines’. The information injunction proceedings initiated by the Commission on 8 September 2003 were therefore now entered in the State aid register under case number NN 4/03.

(7) On 15 December 2003 (TREN D/22742), the Commission reiterated its request for information on the privatisation; the Greek authorities provided the information requested by letters dated 18 and 19 December 2003 (TREN A/38288 and TREN A/38258).

(8) On 15 January 2004, a new request for additional information was sent to the Greek authorities (TREN D/160), who replied in two letters both dated 16 January 2004 (TREN A/11076 and TREN A/11077)

(9) On 16 January 2004 the Commission wrote to the Greek authorities regarding Athens International Airport (‘AIA’), at Spata, and its ongoing relationship with Olympic Airways/Airlines. The Greek authorities replied by letter dated 23 February 2004. A further request for information on this subject was sent to the Greek authorities on 15 June 2004, and answers to that letter were received on 4 August 2004.

(10) By decision of 16 March 2004, notified to Greece by letter dated 16 March 2004 (SG(2002) D/228848), the Commission initiated the procedure laid down in Article 88(2) of the Treaty. The case was registered under number C 11/04.

(11) The Commission’s decision to initiate the formal investigation procedure was also published in the Official Journal of the European Union (2). The Commission there invited interested parties to submit their comments. Greece sent comments to the Commission by letter dated 11 June 2004.

(12) Within the time allowed by the notice announcing the initiation of the procedure the Commission received comments from two other interested parties. These comments were submitted to the Greek authorities for their observations. Greece’s observations were received on 3 November 2004.

(13) On 11 October 2004 the Commission sent a letter giving the Greek authorities formal notice that it intended to issue a suspension injunction if within ten days of receipt of the letter it did not receive satisfactory information demonstrating that Greece was no longer making aid payments to the beneficiaries. The Greek authorities were asked to submit their comments on the matter. The Greek authorities replied to this letter of formal notice on 28 October 2004. Greece argued that issuing an injunction at this stage would seriously jeopardise the intensive efforts Greece was making to find a solution, and would be disproportionate and unjustified.

(14) Since the submission of those observations the representatives of the Greek authorities have at regular intervals kept the Commission services apprised of developments with regard to this point (at meetings dated 17 December 2004, 19 December 2004, 3 February 2005, 7 February 2005 and 28 April 2005, and by letters dated 22 February 2005 and 19 April 2005) and with regard to the ongoing restructuring and privatisation of Olympic Airlines and of Olympic Airways Services.

(15) They have also provided the Commission departments with information on the following issues: — Law 3259/2004, granting Olympic Airways temporary immunity against enforcement proceedings brought by creditors (e-mail dated 22 December 2004), and — Law 3282/2004, whereby the State took over Olympic Airways’ obligations towards financial institutions in respect of the financing and leasing arrangements for Olympic Airlines’ Airbus A340-300 aircraft. (e-mails dated 22 December 2004 and 4 April 2005). These additional clarifications will be taken into consideration in the present Decision where they are relevant to the subject matter and shed light on the questions the Commission raised when it initiated the procedure.

2. THE FACTS

2.1. PAST COMMISSION DECISIONS REGARDING OLYMPIC AIRWAYS AND ITS SUBSIDIARIES

(16) On 7 October 1994 the Commission adopted Decision 94/696/EC (3) (‘the 1994 Decision’) declaring that aid granted or to be granted by the Greek State to Olympic Airways was compatible with the common market provided that Greece met a series of commitments listed in the Decision.

(17) Several of the conditions attached to the 1994 Decision were not observed, and on 30 April 1996 the Commission decided to reopen the procedure laid down in Article 88(2) of the Treaty and to initiate proceedings with regard to new and non-notified aid which had come to its attention (4).

(18) On 14 August 1998, the Commission adopted Decision 1999/332/EC (5) (‘the 1998 Decision’) declaring that certain aid granted or to be granted by Greece to Olympic Airways was compatible with the common market in the context of a restructuring plan covering the period 1998-2002. Once again the aid was authorised subject to a number of conditions.

(19) In July 2000 Greece notified the Commission that it intended to use the remaining authorised aid for a series of loan guarantees, to be contracted before the end of 2000, for the purchase of new aircraft and for investment necessary for the relocation of Olympic Airways to Athens International Airport at Spata. By letter of 10 November 2000 (SG(2000) D/108307), the Commission informed the Greek authorities that it had decided to amend part of the 1998 Decision with regard to the aid measure concerning the loan guarantees.

(20) On 6 March 2002 the Commission decided to initiate the formal investigation procedure laid down in Article 88(2) of the Treaty. It expressed concern that the aid allowed by the 1994 and 1998 Decisions might have been misused, that the company’s restructuring plan might not have been implemented, and that new illegal State aid might have been granted.

(21) On 9 August 2002 the Commission sent the Greek authorities a further injunction requiring them to provide the information previously requested. In particular, it sought accounts and figures relating to the payment of operating costs by the State. The replies provided by Greece were insufficient.

(22) On 11 December 2002 the Commission adopted a final negative decision concerning aid granted by Greece to Olympic Airways (Decision 2003/372/EC (6), ‘the 2002 Decision’). The Commission there found that aid previously granted by the State and authorised by the Commission was incompatible with the Treaty on account of the failure to comply with the relevant conditions, notably the failure correctly to implement the restructuring plan. In addition, the Commission found that Olympic Airways had received new aid that was illegal and incompatible with the common market, in that the Greek State had tolerated the non-payment or deferment of the payment dates of certain social security payments, value added tax on fuel and spare parts, rents payable to airports, airport charges, and a tax imposed on passengers departing from Greek airports known as spatosimo.

(23) The Decision required Greece to take the necessary measures to recover from the beneficiary the aid of GRD 14 billion (EUR 41 million) referred to in Article 1 of the Decision, and the new aid referred in Article 2; recovery was to be effected without delay and in accordance with the procedures of national law provided they allowed the immediate and effective execution of the Decision. The aid to be recovered was to include interest from the date on which it was at the disposal of the beneficiary until the date of its recovery.

(24) Greece was to inform the Commission within a period of two months from the date of notification of the Decision of the measures it was taking to comply with it. The Decision was notified to the Greek authorities by letter dated 13 December 2002 (SG(02) D/233148), and was published in the Official Journal of the European Union on 28 May 2003.

(25) On 11 February 2003, following on from the 2002 Decision, the Greek Government informed the Commission that it had received independent advice that Olympic Airways had not received preferential treatment, and that therefore the Government would not implement the requirements of the Decision regarding the recovery of the sums that the Commission had judged incompatible.

(26) On 24 February 2003 Olympic Airways brought an action challenging the Decision before the Court of First Instance (Case T-68/03). Greece did not ask to join the action, and did not bring a separate action challenging the Decision before the Court.

(27) On 6 March 2003 the Commission informed the Greek Government that it was under an obligation to comply with the 2002 Decision. On 26 June 2003 the Greek Government replied, saying that it was examining the legal effects of the 2002 Decision and of the procedure the Commission had followed in adopting it. It also assured the Commission that it intended to carry out the recovery. It did not carry out the recovery, nor did it provide the Commission with a timetable for doing so. The Commission was accordingly obliged to bring an action before the Court of Justice for failure to comply with the Decision, which it did on 3 October 2003 (Case C-415/03).

(28) The Court of Justice ruled in the case on 12 May 2005: it found in favour of the Commission (7). The Court (Second Chamber) declared that by failing to take within the prescribed period all the measures necessary for repayment of the aid found to be unlawful and incompatible with the common market — except that relating to the contributions to the national social security institution — Greece had failed to fulfil its obligations.

(29) On 23 May 2005 the Commission wrote to the Greek authorities regarding the measures to be taken by Greece to ensure compliance with the judgment of the Court of Justice.

(30) The Greek authorities replied by letter dated 2 June 2005, reiterating their willingness to cooperate fully with the Commission in the matter. That reply will be summarised below in so far as it relates to the matters raised when the procedure was initiated.

(31) The aid found to be incompatible in the 2002 Decision has not yet been recovered. The Commission may bring an action under Article 228 of the EC Treaty for failure to comply with the judgment.

(32) The present Decision, however, concerns only the decisions or measures taken by the Greek authorities for the benefit of Olympic Airways and its successors after the 2002 Decision was adopted.

3. THE INITIATION OF THE PROCEDURE

The Commission decided to initiate the procedure laid down in Article 88(2) on a number of grounds:

3.1. THE COMPANY’S CONTINUED FAILURE TO PAY TAX AND SOCIAL SECURITY CONTRIBUTIONS

(33) Olympic Airways has been loss-making since 2002. Its profitability continues to be negative. Its core business, rather than generating income, is reducing the overall value of the company year on year. It is difficult if not impossible to believe, therefore, that it has been able to continue in business only because it has not been paying its debts to the State. In the 2002 Decision this failure to collect debts was found to constitute illegal State aid.

(34) The Commission took the view, therefore, that the State was de facto if not de jure Olympic Airways’ principal creditor, and that if it were not for continued State intervention the company would long since have ceased operations.

3.2. THE STRUCTURAL REORGANISATION OF THE COMPANY

(35) When it initiated the procedure the Commission was aware of the existence of Law 3185/2003, which provided that the flight divisions of the various companies within the old Olympic Airways group, namely Olympic Aviation and Macedonian Airlines (‘Macedonian’), were to be hived off and regrouped into a single entity, the former Macedonian, now renamed ‘Olympic Airlines’. The non-flight divisions were to stay within Olympic Airways, now renamed ‘Olympic Air Services’. Law 3185/2003 provided that an identical procedure could be undertaken in respect of the ground handling and maintenance and engineering divisions, although to date this has not been done.

(36) When it initiated the procedure the Commission took the view that Greece, having failed to privatise the Olympic Airways group as a whole, had decided to divide it into separate units that would be more attractive to potential investors, and to dissociate the units from Olympic Airways’ liabilities.

(37) And indeed what appears to have happened after the restructuring of the Olympic Airways group is that since December 2003 all flight activities have been concentrated in the new Olympic Airlines, and all other activities, principally ground handling and maintenance and engineering, remain with the old company, now called Olympic Air Services. Olympic Air Services also retains a number of majority shareholdings in other aviation-related companies in Greece providing such things as catering, information technology and fuel services.

(38) The Privatisation Law specifies that the transfer of assets and liabilities and any other entitlements to the new company is exempt from any tax, levy or fee payable to the State, to any legal person governed by public law or to any other public body. Such transfers are also exempt from any charge, debt or claim on the part of third parties, whether natural or legal persons, with the exception of the obligations that are expressly mentioned in the conversion balance sheet. Additionally, Article 27 of Law 3185/2003 stipulates that in respect of debts that Olympic Airways contracted before the hive-off of the flight division the new company is exempted from the application of Articles 479 and 939 of the Civil Code (8) and Articles 537 and following of the Commercial Code. Following this measure, therefore, creditors will be able to bring claims only in respect of debts that are transferred to Olympic Airlines, and will not be able to bring claims against the new company in respect of debts remaining with Olympic Airways. Subsequently, on 15 October 2004, the Greek authorities enacted Law 3259/2004, which gave Olympic Airways temporary immunity against enforcement proceedings brought by creditors.

(39) In application of Law 3185/2003, the Greek State engaged consultants Deloitte & Touche to determine the value of the flight divisions of the Olympic Airways group. The consultants were also asked to prepare a restructuring plan and to draw up a report on the state of Olympic Airways and Olympic Aviation with a view to determining the number and type of employees to be transferred to Olympic Airlines. Deloitte & Touche indicated that they had not carried out an audit and that they were working solely on the basis of information provided by Olympic Airways and Olympic Aviation management. Additionally, Deloitte & Touche did not include in their evaluation the aircraft owned by Olympic Airways and Olympic Aviation; the value of the aircraft was calculated by another external consultant, Airclaims Ltd, at a market price of EUR 120 million.

(40) Public service obligations were transferred from Olympic Aviation to Olympic Airlines without a public tender. It appears that Olympic Aviation had secured the sum of EUR 10 million in debt to AIA airport on the earnings from these public service obligations, and that that loan remained with Olympic Aviation, notwithstanding the fact that the public service obligations were now to be performed by Olympic Airlines.

(41) Presidential Decree 178/2002, which transposes Council Directive 98/50/EC (9) into Greek law, stipulates that in the case of a transfer of an activity from one undertaking to another, by whatever method, employees connected with that activity are to be transferred to the new undertaking on the same terms and with the same rights as before. It was the intention of the Greek authorities, however, to change the status of the employees. For this to happen, Presidential Decree 178/2002 required that negotiations take place.

(42) At the time of the hive-off there were almost 300 specific laws, collective agreements or other provisions applying to Olympic Airways staff as a whole. The Greek authorities therefore considered it important to modify the legislative framework and to renegotiate the collective agreements, especially as the group employed 6 171 persons in June 2003 (approximately 1 850 staff moved to Olympic Airlines), and personnel costs represented 38 % of total revenue, when the average for the industry was around 22–26 %. Consequently, Article 27 of Law 3185/2003 envisaged a number of changes. Law 2190/1994, which concerns the administrative recruitment procedure for companies in the public sector, would not apply to Olympic Airlines. Employees who were entitled to retire in 2003 or 2004 under the applicable collective agreements would have their rights respected.

(43) In contrast to Olympic Airways, which had financed its operations exclusively from debt, it was intended that Olympic Airlines would use its own funds. Olympic Airlines began operations with little or no debt, and this was due in no small part to the choice of the items transferred to the new entity. As regards liabilities, when it began operations the new company inherited no financial debt from the parent company, which was indebted at that stage to the tune of EUR 207 million.

(44) Under the relevant provisions of Greek bankruptcy law (Law 2190/1920), when a division, sector or department is hived off and absorbed by an operational company, the shares in the operational company remain with the original company. What this means in this case is that the shares in Olympic Airlines ought to have remained in the ownership of Olympic Airways. However, Article 27 of Law 3185/2003 stipulates that within the framework of the privatisation procedure all the shares deriving from the hive-off of the various divisions of Olympic Airways are to devolve to the Greek State. Moreover, any monies resulting from the subsequent sale of these divisions will be used to discharge Olympic Airways’ debts and obligations. Greece has indicated that by this procedure the financial assets are transferred to the State at a value that cannot be called into question, in so far as it is the product of an evaluation carried out by auditors. Moreover, the Greek State considers that when they are sold by the State these assets will generate a price higher than they would have done if the shareholding had not been transferred to it.

3.3. THE ‘ADVANCE’ OF EUR 130 312 450 TO OLYMPIC AIRWAYS

(45) By Ministerial Decree 2/71992/A0024 of 22 December 2003, enacted pursuant to Article 27 of Law 3185/2003, the Greek State opened a special account at the Bank of Greece entitled ‘Greek State — Denationalisation account of the Olympic Airways group’. The account is to be credited with the proceeds of any sale, within the framework of the privatisation procedure, of companies within the Olympic Airways group whose shares have been transferred to the Greek State (the first being Olympic Airlines). Nevertheless, to cover expenditure necessary pending the privatisation of the companies within the group, the account was credited by the State with a sum described as an ‘advance’(prokatavoli) or ‘prepayment’(propliromi). This advance is equal to the nominal share capital of Olympic Airlines (EUR 130 312 450).

(46) Those parts of Olympic Airways’ liabilities which were not transferred to the new Olympic Airlines, and specifically the expenditure connected with the early retirement of certain staff, were to be financed out of the special account and from revenue generated by the supply of services to Olympic Airlines and to third parties.

3.4. SPATOSIMO AND PAYMENTS TO AIA

(47) By letter of 19 January 2004 a complainant, Aegean Airlines, forwarded to the Commission a copy of a letter from the Greek Civil Aviation Authority to the Auditor-General of the State, which had also been sent to the Athens International Airport company AIA (ref. DII/A/28751/11626 of 22 July 2003). It appeared from this letter that Olympic Airways owed the sum of EUR 26 001 473,33 in respect of the ‘tax for the modernisation and development of airports’, known as ‘spatosimo’, which was levied on passengers by air carriers and was to be forwarded by them to the State.

(48) It also appeared that the Civil Aviation Authority was seeking payment of this EUR 26 million to it. It therefore appeared that Olympic Airways, the main user of Greek airports, did not pay spatosimo, thus obliging the State to find means to aid AIA, which was newly established and was dependant on spatosimo. Although Olympic Airways was under an obligation to repay the sums it owed at some time in the future, the Commission suspected that in the meantime it was benefiting as a result of the forbearance of the State, which did not penalise it for late payment, but in fact set up mechanisms whereby the other Greek airports had to contribute in order to compensate for the losses occasioned by the late payment or non-payment by Olympic Airways of the money it owed in spatosimo.

4. COMMENTS RECEIVED DURING THE PROCEDURE

4.1. THE GREEK AUTHORITIES’ INITIAL COMMENTS

(49) On 11 June 2004 Greece submitted its response to the initiation of the procedure. It began by explaining that in its opinion the most appropriate solution for Olympic Airways was the privatisation of the various businesses and operations of the group. The privatisation would take place as quickly as practicable and in full compliance with all applicable rules and requirements of Greek and EC law; the Commission would be kept fully informed of developments. Greece explained that privatisation was the most economically advantageous solution for the authorities, as it would generate more money than could be expected if the company were to be liquidated. While acknowledging that the privatisation option would also have social and other non-economic benefits, the Greek authorities emphasised that the economic analysis was the only criterion for deciding on the most appropriate strategy.

(50) Greece referred to the progress that had already been made in the privatisation process, which had been communicated to the Commission in advance. Greece confirmed that the flight operations of Olympic Airways and Olympic Aviation had been hived off into an existing company, Macedonian, along with a number of intangible assets, such as slots, rights under bilateral agreements, the brand name and logo, and Olympic Airways’ goodwill. Macedonian had changed its name and had become Olympic Airlines. Ownership of Olympic Airlines’ shares (following a capital increase to accommodate the contribution in kind of the flight operations) had been transferred directly to the Greek State, thus taking Olympic Airlines out of the Olympic Airways group. The new company had been granted all necessary licences and had begun operations on 12 December 2003.

(51) The Greek authorities further explained that the strategic model for Olympic Airlines was the creation of a viable scheduled air carrier, operating with industry average labour costs, which would be able to take advantage of a number of factors including Olympic Airways’ strong brand image, Greece’s position as one of the world’s 15 favourite tourist destinations, and the 2004 Olympic Games in Athens. New management had been appointed to Olympic Airlines and a thorough review of the business plan was under way.

(52) Following Olympic Airlines’ commencement of operations Olympic Airways had ceased to be an EU licensed air carrier and had been renamed Olympic Airways Services. Olympic Aviation had also ceased flight operations, with the exception of limited general aviation and helicopter services, which were expected to be transferred to the new company.

(53) With respect to the non-flight operations now regrouped within Olympic Airways Services (ground handling, maintenance and engineering and aviation training), Greece indicated that it intended to privatise these activities also. This was provided for by Law 3185/2003. Any holdings in other companies, such as Olympic Catering and Galileo Hellas, were likewise to be sold. Olympic Airways also had interests in three fuel companies that operated at Athens International Airport, namely Athens Airport Pipeline, Olympic Fuel and Olympic IntoPlane, and it was anticipated that these shareholdings would be sold off in a timely and orderly manner. The sale of these companies would be relatively easy, as they had ‘clean balance sheets’ and their private shareholders had the right of first refusal to buy them.

(54) The Greek authorities wanted to clarify a number of issues relating to the restructuring that had been raised when the procedure was initiated.

(55) With regard to the agreements between Olympic Airways and Olympic Airlines, Greece asserted that all services were provided at market rates and were in accordance with Olympic Airways’ generally applicable commercial policy. The Greek authorities undertook to transmit these agreements to the Commission.

(56) With regard to aircraft leases, Greece stressed that the only aircraft transferred to Olympic Airlines were those fully owned by Olympic Airways. Aircraft leased by Olympic Airways were subleased to Olympic Airlines at market rates, because if the leases had been terminated early Olympic Airways would have had to compensate the lessors for their losses. The operating leases would be assigned directly to Olympic Airlines, thus taking Olympic Airways out of the lease.

(57) The leases of four Airbus A340-300 aircraft partially covered by State guarantees (up to 45 % of the financing value) would not be assigned to the new company. Olympic Airlines would operate these aircraft on a sublease basis, paying market rates to Olympic Airways. In this way the Greek authorities contended that no State benefit would pass to Olympic Airlines.

(58) On the State guarantees for these aircraft, it was the contention of Greece that although the 2002 Decision declared that restructuring aid granted to Olympic Airways in several forms (including State guarantees) was incompatible, the Commission had ordered the recovery only of the last tranche of the restructuring aid granted, equal to EUR 41 million (as well as the recovery of unauthorised new aid), on the grounds of legitimate expectation. Greece maintained that as the 2002 Decision did not provide specifically for the recovery (or cancellation) of State guarantees, it allowed their continuation.

(59) The Greek authorities argued that the transfer of public service obligations was lawful, because the operation of these routes formed an integral part of the flight activities of Olympic Aviation, and the routes continued to be operated with the same aircraft and same personnel as the rest of the network.

(60) Regarding the alleged new aid to Olympic Airways, the Greek authorities expressed some confusion as to what was meant by ‘tax obligations’. The Greek authorities said that the Commission had failed to show that the Greek authorities had ‘assisted’ Olympic Airways by tolerating the non-payment of certain obligations (not only tax obligations). They argued that it was for the Commission to discharge the burden of proving such an allegation, which it had failed to do. The Greek authorities reiterated that Olympic Airways was subject to the generally applicable Greek law and procedures applicable to all Greek companies in this regard.

(61) Concerning the alleged non-payment of the spatosimo tax, the Greek Government submitted that the relationship between the air carriers, who collected spatosimo, and the Civil Aviation Authority, to which they forwarded it, had to be distinguished from the relationship between the Authority and the airports in Greece (including AIA), which received funding from spatosimo calculated on the basis of the number of passengers flown. Air carriers collected spatosimo from passengers, and forwarded it to the State. Spatosimo levied but not paid to the State constituted a debt to the State and was subject to the general provision of the Code for the Collection of Debts owed to the State (KEDE). This was what had happened in the case of the sum of EUR 26 001 473,33 referred to, which Olympic Airways had not paid on time but had paid off subsequently, in instalments, with all the default interest and penalties applicable.

(62) The collection mechanism was separate from the disbursement mechanism whereby the Greek State (through the Civil Aviation Authority) paid money to the airports. Although the two mechanisms were intended to operate back-to-back, one financing the other, the obligation on the Greek State to pay the airports was not dependant on its ability to collect the sums due from the air carriers. As a result there had been situations where the State had been obliged to grant sums that had not yet been collected. While this was unsatisfactory for the State, it did not amount to State aid, as the air carriers were not released from their obligation to pay (with default interest and penalties). In the particular case referred to when the procedure was initiated, cash flow constraints had obliged the Greek State to alter the percentages of spatosimo allocated to particular airports, granting more to AIA (which resulted in a short-term reduction in the payments due to other airports). This was essential, as AIA’s financial situation was monitored by the European Investment Bank and commercial lenders; the step was irrelevant to the question whether Olympic Airways paid its dues.

(63) The Greek State said that this non-payment of the spatosimo tax was the only evidence cited by the Commission of the non-payment of Olympic Airways’ debts to the State.

(64) With regard to the special account provided for by Law 3185/2003, the Greek authorities submitted that the advance to Olympic Airways of the sum of EUR 130 312 450 was a measure of a temporary nature, and was something that any prudent market investor would do. When the time came to sell Olympic Airlines, any sums advanced would be repaid to the special account. The Greek authorities further explained that the shares in Olympic Airlines no longer belonged to the Olympic Airways group but to the State. As Olympic Airways had been deprived of the value of its flight division, however, provision for an advance to Olympic Airways which did not exceed the value of its ‘lost’ property was a proportionate and adequate measure for the purposes of restructuring and privatisation.

(65) In the event that revenue from the sale of Olympic Airlines was not enough to repay the advance of EUR 130 312 450, the shortfall would be made up from the sale of non-flight operations. Law 3185/2003 provided that the proceeds of the sale of these divisions were to be paid into the special account. In the event that the financial obligations of Olympic Airways exceeded the nominal value of the share capital of the companies to be sold, Greek insolvency law would apply, and creditors could make their respective claims accordingly.

(66) Any sums from the proceeds of the sale which exceeded the nominal value of the share capital of the companies sold would remain with the State, and could not be used by Olympic Airways. Olympic Airways would have access to the account only in order to meet its severance and retirement obligations and to cover the financial obligations of Olympic Airways and Olympic Aviation during the course of the restructuring and liquidation process.

(67) The Greek authorities submitted that Law 3185/2003 was an attempt to maximise shareholder value so as to maximise the recovery of the aid and the return on investment. Creditors would not be better protected by a bankruptcy.

(68) In the alternative, if the Commission were to take the view that the advance was not consistent with what a private market economy investor would have done to maximise recovery and return on investment, the Greek authorities asked the Commission to consider whether in the light of the rescue and restructuring guidelines the advance constituted rescue aid compatible with the common market under Article 87(3)(c). In that event the Greek authorities would submit that the conditions for the grant of rescue aid were met from December 2003 onward, and this would be substantiated by providing business plans and the like.

(69) On the question of possible aid to the future purchasers of any of the Olympic companies, the Greek authorities wanted to reassure the Commission that they intended to sell Olympic Airlines and any other divisions or businesses at market prices, and in accordance with the applicable Greek and Community law.

(70) The Greek authorities disagreed with the conclusion that in prohibiting any creditors of Olympic Airways from bringing actions against Olympic Airlines the Greek State was seeking to protect Olympic Airlines from the enforcement of the 2002 Decision. They contended that this was not the intention, which was rather to maximise recovery of investment. They explained that the operation of the special account was such as to ensure that amounts up to the nominal value of the shareholding of Olympic Airlines were available to Olympic Airways and its creditors, which ensured an adequate level of creditor protection. Greece emphasised that it was entitled to decide upon the most appropriate means of restructuring and privatisation, and that it was a legitimate step on its part to introduce a safeguard to ensure that Olympic Airways’ creditors had at least the same level of protection as they would otherwise have had. This protection of creditors should not be confused with the obligation to recover imposed by the 2002 Decision.

(71) Greece also disagreed with the Commission’s conclusion that the creation of Olympic Airlines was not a solution, as Olympic Airlines’ viability was not guaranteed: Greece stated that it was confident that Olympic Airlines would be successful.

(72) With respect to the proposed long implementation period for the overall restructuring and privatisation, Greece said that it noted the Commission’s concerns, and would try to accelerate the process where practicable. Greece intended to provide the Commission with a new timetable for the implementation of the restructuring and privatisation plan and the subsequent liquidation of Olympic Airways.

(73) On the question of other laws providing Olympic Airways with special exemptions or immunities, Greece reiterated that the provisions of Law 96/1975 granting special privileges to Olympic Airways (in the areas of payment of duties on transactions and exemption from payment of stamp and traffic duties and with regard to State guarantees) had been repealed, and that Olympic Airways was subject to all generally applicable taxes and duties and operated in the context of a free market economy.

4.2. COMMENTS SUBMITTED BY THIRD PARTIES

(74) Following the publication in the Official Journal of the European Union of the letter addressed to the Greek authorities, comments were received within the time allowed from two other interested parties.

4.2.1. AEGEAN AIRLINES

(75) The first set of comments was submitted by a Greek air carrier, Aegean Airlines (‘Aegean’). Aegean made the following observations.

(76) Aegean alleged that during the first year of operations at AIA, Olympic Airways had paid less than 30 % of its debts to AIA, that agreements had been reached between AIA and Olympic Airways (which was AIA’s largest individual customer, at 35 %), and that two preferred mortgages in favour of AIA had been registered on three Olympic Airways aircraft to secure payment of sums in excess of EUR 29 million plus interest and expenses. Olympic Airways’ overdue liability to AIA was estimated by Aegean to be of the order of EUR 70–80 million. Aegean alleged that AIA, which was 55 % State-controlled, had allowed Olympic Airways and Olympic Airlines to incur substantial liabilities, and that similar facilities were not available to other airlines. Aegean estimated that if it had been afforded the same facilities it could have had working capital of EUR 40–50 million at its disposal.

(77) Aegean stated that Olympic Aviation had recorded losses of EUR 32,2 million, corresponding to 39 % of its revenues of EUR 83 million, despite having received EUR 8,2 million in compensation from the Greek State for ‘early relocation’ of its activities from Ellinikon airport to AIA. Olympic Aviation’s debts to Olympic Airways had grown from EUR 68 million in 2000 to EUR 127 million at the end of 2002. Olympic Airways had not consolidated Olympic Aviation’s accounts in 2001 and 2002, and in Aegean’s view this was to make the parent company’s books look better.

(78) Aegean also advanced some indications of Olympic Airways’ profitability in 2003. According to publicly available traffic information, Olympic Airways’ traffic had declined by 8 % in 2003, while its load factor had declined by 5 %. The decline was most pronounced on its European network, where there had been a fall of 14,4 %; the number of business passengers had fallen by 26 %. In Aegean’s opinion this decline in passenger numbers together with an increasingly difficult market (fuel price increases, increased competition from low-cost carriers) meant that the Olympic Airways group’s financial position must have deteriorated through 2003.

(79) Aegean voiced its suspicion that the new company was not paying for the services that it received from Olympic Airways Services, or at least was not paying what it ought to pay.

(80) According to Aegean the advance of EUR 130 312 450 million lodged to the special account had been exhausted after eight months.

(81) A new law had been adopted (Law 3259/2004) protecting Olympic Airways Services and Olympic Aviation from having enforcement proceedings brought against them. Under this law no enforcement or interim relief proceedings could be brought inside or outside Greece in respect of the movable or immovable assets of Olympic Airways Services or Olympic Aviation before 28 February 2005. The law seemed to have been adopted because certain creditors had seized an Airbus 300-600 aircraft and were threatening to sell it to settle their claims.

(82) Aegean complained that the Greek State had awarded Olympic Aviation’s public service obligation routes to Olympic Airlines automatically, without a public tender. In addition, all of Olympic Airways’ rights in respect of traffic to non-EEA States had been taken over by the new company without any reassessment of the criteria for designation, although other airlines, including Aegean, had expressed an interest in being designated.

(83) Aegean was of the opinion that the transfer of assets to Olympic Airlines without the corresponding liabilities might be incompatible with both the Treaty and the Greek Constitution.

(84) According to press reports Macedonian had accumulated tax liabilities of GRD 3,5 billion before it was converted into Olympic Airlines; Aegean alleged that the Greek State had not made any claim against Olympic Airlines in respect of this sum.

4.2.2. RYANAIR

(85) Comments were also received from the Irish low-cost airline Ryanair. Ryanair made a number of general observations regarding the application of Community State aid rules in Member States other than Greece and in relation to airlines other than Olympic. With regard to the case in hand, Ryanair noted at the outset that it was unable to comment on the letter sent to the Greek Government, because no English translation had been provided.

(86) Ryanair went on to say that in the original investigation against Olympic Airways the amount of State aid found to have been received by Olympic Airways was over EUR 1 billion, and yet Olympic Airways had been required to repay only EUR 200 million to the Greek State. Other airlines had been forced to subsidise the failing national carrier through higher airport charges because Olympic Airways had been granted a ‘holiday’ from these charges. In Ryanair’s opinion the continued illegal support given to this failed national airline seriously undermined the potential for new and more efficient operators to enter the market. The creation of a new, debt-free airline was unacceptable; Ryanair wondered whether the procedures in force under Article 4 of Council Regulation (EEC) No 2407/92 of 23 July 1992 on licensing of air carriers (10) had been followed with regard to the application for an operating licence for the new company. In conclusion, Ryanair stated that the Greece should not be permitted to circumvent the rules once again and to continue to prop up its failed national airline.

4.3. GREECE’S REPLY TO THIRD-PARTY COMMENTS

(87) Greece took the view that the information contained in the comments submitted by third parties was inaccurate and contributed nothing new to the investigation. The Greek authorities repeated that the previous privatisation process for the airline had been terminated on 6 October 2004, and that a new group of advisers had been appointed for the privatisation of both Olympic Airlines and the other businesses or divisions. The new group of advisers had already commenced work, and progress was being made on the ‘proposal phase’. An indicative timetable for the privatisation had also been drawn up.

(88) On the specific comments made by the third parties, Greece replied as follows.

4.3.1. AEGEAN AIRLINES’ COMMENTS

(89) The issue of the alleged preferential treatment of Olympic Airways at AIA had been addressed before in the context of the present State aid investigation, before the Court of Justice (Case C-415/03 Commission v Greece), and in other State aid investigations (Case NN 27/1996 Construction and exploitation of Athens International Airport). Although AIA was 55 % State-owned, it was operated as a private business independent of State control in its day-to-day operations. It therefore had sole responsibility for the collection of airport charges and for the settlement arrangements for late payment. Of the nine directors of AIA, four were appointed by the State and four by the developers, and the remaining one was an independent. Greece reiterated that it had already clarified the issues relating to late payment of spatosimo.

(90) As regards the possible subsidisation of Olympic Airlines through non-payment of debts to Olympic Airways Services, the Greek authorities stated that all services provided by Olympic Airways Services to Olympic Airlines were provided on market terms and conditions. The Greek authorities provided some documentary evidence of payments made by Olympic Airlines to Olympic Airways.

(91) More generally, Greece provided documentation in support of its assertion that Olympic Airlines had no payments outstanding with any State entity. It supplied evidence of up-to-date payments to the tax authorities in respect of salaried persons tax (FMY), VAT, airport charges (at AIA and elsewhere), spatosimo and social security contributions (IKA).

(92) Greece stated that the sums in the special account were being used in accordance with Law 3185/2003. The advance paid into the account was a measure of a temporary nature that any prudent market investor would have taken. The advance had been used primarily for salaries in both Olympic Airways and Olympic Aviation, aircraft leasing costs, and early retirement of Olympic Airways and Olympic Aviation staff.

(93) Olympic Airlines had received no funds from the special account, either directly or indirectly. The Greek authorities also strenuously denied the allegation that when it was established Olympic Airlines had not inherited any liabilities.

(94) The sum of EUR 130 312 450 had been granted in instalments between 24 December 2003 and 13 May 2004 (a period of less than six months). It was paid out in this way so that if the Commission were to decide that it constituted State aid within the meaning of Article 87(1) of the Treaty, the conditions it needed to meet in order to qualify as rescue aid would all be met. In support of its contention that the advance would qualify as rescue aid, Greece drew attention to the following: — Olympic Airways was a company in difficulty within the meaning of the rescue and restructuring guidelines; — the advance to Olympic Airways constituted liquidity support; — the sums advanced in liquidity support were expected to be reimbursed over a period of not more than 12 months after disbursement of the last instalment to Olympic Airways; the last instalment was paid in May 2004, and the reimbursement was to be carried out after privatisation of Olympic Airlines in May 2005; — the grant of rescue aid avoided serious and severe social difficulties throughout Greece; — Olympic Airways would cease to be an air carrier, and would operate non-flight services only, so that the adverse effects in other Member States would be limited; — the amount of the advance was necessary to keep the company in business for the limited period for which it was granted; the amount was proportionate and was comparable to the amounts of rescue aid authorised by the Commission for other undertakings of similar size or undertakings operating in the same industry.

(95) In Greece’s opinion the new law protecting Olympic Airways Services and Olympic Aviation from enforcement proceedings (Law 3259/2004) was necessary to ensure the privatisation process. This temporary measure did not deprive creditors of their rights, but suspended enforcement proceedings for a limited period. The temporary protection from creditors that it provided did not apply against the Greek State or other public bodies, and applied only to Olympic Airways and Olympic Aviation. The measure did not constitute State aid, as it involved no transfer of State resources. (Under Law 3185/2003, following the hive-off creditors would be able to bring proceedings against Olympic Airlines only in respect of debts transferred to Olympic Airlines.)

(96) Greece took the view that the transfer to Olympic Airlines of public service obligations and bilateral designation rights had taken place by virtue of rights of succession in accordance with Greek corporate law. The routes in question had been operated either by Olympic Airways or by Olympic Aviation, and the flight divisions of these companies had been transferred to Olympic Airlines.

(97) With reference to the allegation that Macedonian had an outstanding tax bill of GRD 3,5 billion, Greece explained that an outstanding tax bill relating to the period 1993-1997 was the subject of litigation in the courts. Including charges and penalties, the amount at issue was EUR 9 106 481,75; the case was still ongoing. Pending the outcome of the proceedings the company had made appropriate provision for the liability in its accounts.

4.3.2 RYANAIR’S COMMENTS

(98) Greece rejected Ryanair’s comments completely: it said that Ryanair was not active on the Greek market, did not compete with Olympic Airlines, and was using the proceedings to advance arguments relating to its own ongoing debate with the Commission.

4.4. COMMENTS SUBMITTED BY GREECE FOLLOWING RECEIPT OF THE LETTER GIVING FORMAL NOTICE OF A SUSPENSION INJUNCTION

(99) On 11 October 2004 the Commission sent a letter giving Greece formal notice that it proposed to issue a suspension injunction requiring Greece to suspend any illegal aid until a decision could be taken on its compatibility. The letter informed Greece that it intended to adopt such an injunction if within ten days of the date of receipt of the letter it did not receive satisfactory information demonstrating that Greece was no longer making aid payments to the beneficiaries. Greece was asked to submit its comments on the matter.

(100) The Greek authorities replied to this letter of formal notice on 28 October 2004. Greece argued that issuing an injunction at this stage would be disproportionate and unjustified, and would seriously jeopardise the intensive efforts Greece was making to find a solution to the companies’ difficulties. With regard to the substantive issues raised in the Commission’s letter, they said that as Olympic Airways was no longer an air carrier it no longer collected the spatosimo tax. On the ‘special account’, and the payment of EUR 130 312 450 to Olympic Airlines from that account, they said this was the act of a prudent investor, or possibly a payment of rescue aid. They could not see the need for a suspension injunction at this stage of the investigation: there had been no significant change in the circumstances since the procedure had been initiated, and there was no evidence of substantial and irreparable damage that might warrant the adoption of such an injunction.

4.5. COMMENTS SUBMITTED BY GREECE FOLLOWING THE JUDGMENT IN CASE C-415/03 COMMISSION V GREECE

(101) As previously mentioned, the Commission wrote to the Greek authorities on 23 May 2005 seeking information on the measures to be taken by Greece to comply with the judgment of the Court of Justice in Case C-415/03 Commission v Greece.

(102) The Greek authorities replied by letter dated 2 June 2005; that letter was concerned primarily with the issue of recovery following the 2002 Decision, but it will be considered here in so far as touches on questions relating to the restructuring and proposed privatisation that form the subject matter of the current investigation.

(103) In the first place, the Greek authorities wanted to raise certain issues relating to the recovery of aid from Olympic Airways. The Greek authorities said that according to paragraph 33 of the Court judgment ‘the operation in issue transferred all the assets of the company Olympic Airways … to the new company Olympic Airlines’, but that that was not correct, and that several important assets remained with Olympic Airways, which continued to be active in several markets.

(104) The companies within the Olympic Airways group were in the process of being privatised, and details of this privatisation had already been given to the Commission departments. The Greek authorities intended to comply fully with the recovery requirement, and when the assets of Olympic Airlines had been sold the proceeds would go directly to the Greek State. If those proceeds were not enough to cover the sums that had to be recovered, use would be made of the proceeds of the sale of Olympic Airways group companies lodged in the special account in the name of the Greek State. Once all these avenues had been exhausted it was the intention of the Greek authorities to liquidate Olympic Airways.

(105) In the event that the sales from Olympic Airlines were not sufficient to meet the recovery requirement, Greece undertook that no general or special provision of Greek law would protect the ‘successor companies’ (expressly including Olympic Airlines) from the obligation to reimburse the aid as required by the 2002 Decision. More specifically, regarding the special provision of Law 3185/2003 which granted protection from creditors to Olympic Airlines in respect of debts incurred by Olympic Airways before the restructuring, the letter continued ‘not even the Greek State can bring a claim against Olympic Airlines for debts of Olympic Airways’, and repeated Greece’s view that the primacy of Community law meant that in respect of recovery this provision could not frustrate the application of the Commission Decision and of the Community rules on State aid.

(106) The Greek authorities said that the purpose of the provision was to protect Olympic Airlines during the restructuring process, rather than to protect it from a possible obligation to recover the aid in accordance with the 2002 Decision. In the event that full recovery could not be made at the level of the Olympic Airways group, a potential future liability for recovery resting with Olympic Airlines would in Greece’s opinion not be possible if the successor company was sold at a reasonable market price in the light of the Commission guidelines on privatisation.

5. RESULTS OF THE EXPERT STUDY REQUESTED BY THE COMMISSION

(107) Before the Commission could assess the points raised when the procedure was initiated, and the information supplied by the Greek authorities and the third parties, it considered it necessary to review the current economic and financial situation of Olympic Airways (Olympic Airways Services) and Olympic Airlines, and the progress that had been made with restructuring and privatisation.

(108) To this end the Commission engaged the services of independent experts, Moore Stephens, to carry out a study of the restructuring, operations and privatisation to date of the various companies in the Olympic Airways group and to submit its findings on what had happened since the restructuring.

(109) Moore Stephens (‘the experts’) carried out their study in Athens between 9 and 26 May 2005. They were facilitated by the Greek authorities and their advisers, and also by the fact that a data room had been prepared by the authorities and their privatisation advisers so that potential purchasers involved in the privatisation process could carry out their own research.

5.1. EXPERT CONCLUSIONS RELATIVE TO THE RESTRUCTURING

(110) The experts examined the restructuring operation and the way in which the assets and liabilities to be transferred to Olympic Airlines and to remain with Olympic Airways had been evaluated; they indicated that certain entries were not in accordance with either Greek or international generally accepted accounting principles (GAAP). They indicated that a figure of EUR 30 million for goodwill had been recognised on Olympic Airways’ balance sheet prior to the restructuring. This figure was a valuation, by management, of the Olympic brand name, the Olympic logo, the Olympic Airlines trademark, and slots and bilateral agreements. Neither Greek nor international GAAP allowed internally generated intangible fixed assets or goodwill to be recognised on the balance sheet.

(111) Another possible point of concern related to the valuation of aircraft. At the time of the hive-off, aircraft and aircraft engines owned by Olympic Airways and Olympic Aviation had been revalued at current market value. This exercise was carried out at 1 October 2003 by an international airline consultant, Airclaims Ltd, and resulted in an increase of approximately EUR 43,2 million over the existing written-down value.

(112) The experts pointed out that the opening balance sheet for Olympic Airlines contained no allowance for doubtful debts against trade receivables. Whilst Olympic Airlines management was confident that all the balances transferred would be collected, the experts felt that it was unrealistic to assume zero bad debts. A further figure of EUR 825 020 labelled ‘doubtful accounts receivable’ was included in Macedonian’s conversion balance sheet. The experts were of the opinion that it was imprudent to include this as an asset.

(113) Olympic Airlines’ opening balance sheet contained an asset of EUR 7,9 million from Olympic Airways, estimated by management, which had previously been a debt owed to Macedonian. The corresponding liability had not been transferred to Olympic Airlines because of the provisions of Law 3185/2003 that allowed liabilities to be retained by Olympic Airways.

(114) The opening balance sheet indicated a sundry debtor item of EUR 24,4 million, which related to a sum due from Olympic Airways in respect of the expected net proceeds of the sale of two A300-600 aircraft owned by Olympic Airways which remained on its balance sheet and which were leased to Olympic Airlines. The inclusion of this item was not in accordance with Greek or international GAAP, as it related to a sale that had not yet occurred of a fixed asset not owned by the company. As Olympic Airlines appeared to have borne the costs and enjoyed the benefits of these aircraft, the aircraft might have been transferred to Olympic Airlines with the other owned aircraft at their book value of EUR 19,2 million.

(115) The experts confirmed that the Olympic Airlines balance sheet excluded most of the flight operations liabilities of Olympic Airways and Olympic Aviation. Under Greek company law, when activities were hived off as part of a company restructuring all the related assets and liabilities had to be transferred. Whilst there was an inevitable degree of subjectivity in such an exercise, the legislation did not give management the option to be selective in the assets and liabilities transferred. Law 3185/2003, however, contained provisions that permitted the Olympic Airways group management to override the normal requirements of the legislation and selectively to exclude liabilities from the hive-off. Management had taken advantage of Law 3185/2003 to exclude from the hive-off all liabilities over one month old.

(116) The experts carried out a comparison between the liabilities transferred and those left behind by comparing extracts from the opening balance sheet of Olympic Airlines at 11 December 2003 with the year-end balance sheets of Olympic Airways and Olympic Aviation at 31 December 2003 (Olympic Airways and Olympic Aviation did not prepare balance sheets at 11 December 2003). BALANCE SHEET EXTRACTS Olympic Airlines Olympic Airways Olympic Aviation 11 December 2003 31 December 2003 31 December 2003 Provision for termination Provision for retirement benefits 33 922 469 82 035 663 10 534 535 Note 1 Other 7 616 89 230 530 709 865 Note 1 33 930 085 171 266 193 11 244 400 Long-term debt Bank loans — 148 036 005 — Note 2/Note 1 Other long-term debt — 1 018 427 — Note 1 — 149 054 432 — Short-term liabilities Suppliers 31 019 022 89 067 738 148 671 366 Note 1 Banks, short-term liabilities — 14 504 809 — Note 3/Note 1 Customers’ advances 824 482 — 392 413 Note 1 Taxes and duties payable (including airport duties) 4 045 699 373 549 262 719 901 Note 1 Social security, contributions payable 2 495 142 147 554 360 — Note 1 Current portion of long-term debt — 22 986 786 — Note 2/Note 1 Dividends payable 514 739 — — Amounts owed to affiliated undertakings — 4 745 844 — Note 1 Other creditors 7 009 156 65 838 943 617 392 Note 1 Prepaid tickets 32 288 005 — — 78 196 245 718 247 742 150 401 072 Accruals and deferred income Accrued expenses — 49 642 845 751 674 Note 1 Sundry accruals and deferred income — 57 328 943 17 664 167 Note 1 — 106 971 788 18 415 841 TOTAL LIABILITIES 112 126 330 1 145 540 155 180 061 313 Note 1: Liabilities retained in accordance with Law 3185/2003. Note 2: ABN Amro loan. Note 3: Emporiki Bank loan settled with proceeds EUR 130 million, February 2004.

(117) The experts showed that no long-term liabilities and less than 10 % of the short-term liabilities had been transferred to Olympic Airlines. The total liabilities transferred to Olympic Airlines (EUR 145 million) were just 9,9 % of the total liabilities of the three companies (EUR 1 471 million). The short-term liabilities transferred to Olympic Airlines (10 % of total short-term liabilities) were those less than one month old.

(118) The largest liabilities left behind with the Olympic Airways group were tax and social security liabilities to the State amounting to EUR 521 million. The experts reported that in leaving most of the liabilities behind in the Olympic Airways group, Olympic Airlines management’s stated intention was to enable the airline, in its new guise as Olympic Airlines, to continue trading and to proceed to privatisation. They concluded that if the Olympic Airways group management had transferred the full liabilities of the flight divisions to Olympic Airlines, the new company would have faced the same liquidity problems as the Olympic Airways group, which would almost certainly have led to the insolvency and closure of the airline. To put it another way, the restructuring exercise would have served no purpose if the full liabilities of the flight divisions of the Olympic Airways group had been transferred with the assets.

(119) In the case of Macedonian, a tax provision amounting to EUR 9,1 million, relating to the findings of a tax audit covering the years 1992-1997, had been excluded from the balance sheet. No tax provision had been made for Macedonian for the years 1998–2003. A tax department audit had not yet been carried out. Management had not made any provision because they believed there would be no tax liability on profits for the period. Macedonian had made a profit in 2001, 2002 and 2003.

(120) The experts concluded that the assets transferred to Olympic Airlines had been overvalued. They carried out their own valuation of the assets transferred, and concluded that the figure arrived at by the management of the Olympic Airways group (EUR 130 312 459), which had not been validated by an independent auditor, was significantly overvalued, in their opinion by more than EUR 90 million. Using accounting techniques recognised under Greek and international GAAP the experts restated Olympic Airlines’ balance sheet to reflect the issues described above, to the extent that they could be quantified: the result was that the value of the net assets transferred to Olympic Airlines was reduced from EUR 130 million to EUR 38 million. Even allowing for a certain level of subjectivity in the valuation, they said, it was difficult to explain the discrepancy between the two figures; they concluded that Olympic Airlines was overvalued (11). Item Opening balance sheet (EUR) Adjustment (EUR) Adjusted balance sheet (EUR) Explanation 1. Goodwill 30 000 000 (30 000 000) — Remove internally generated goodwill 2. Owned aircraft 124 599 144 (43 200 000) 81 399 144 State aircraft at written-down value 3. Trade receivables 51 336 137 Management estimate Management estimate Remove doubtful trade receivables 4. Amount due from Olympic Airways 7 904 245 (2 904 245) 5 000 000 Restate Olympic Airways debt at actual amount 5. Receivables (Macedonian) 825 020 (825 020) — Remove doubtful receivables (Macedonian) 6a. Sundry debtors 24 674 196 (24 674 196) — Remove debt relating to future disposal of aircraft 6b. Owned aircraft — 19 175 961 19 175 961 Include aircraft to be sold at book value 7. Payables > 1 month — Management estimate Management estimate Include payables > 1 month 8. Tax provision 1992–1997 — (9 106 482) (9 106 482) Include tax provision (Macedonian) 1992–1997 9. Tax provision 1998–2003 — Management estimate Management estimate Include tax provision (Macedonian) 1998–2003 Total (91 533 982)

(121) The experts reported that Olympic Airlines’ opening balance sheet and the conversion balance sheets had been compiled by the company’s accountants, Deloitte and Touche, from information provided by management, but had not been audited or otherwise independently assessed. Under ordinary Greek company law independent auditors would have to provide an opinion with words to the effect that the figures in the conversion balance sheets were properly extracted from the company’s underlying accounting records. However, Law 3185/2003 allowed Olympic Airlines to forgo this exercise, and required only that the auditors draw up the balance sheets, without having to provide an opinion on them.

(122) The experts could not say whether Deloitte and Touche had indeed drawn up the balance sheets, or whether they had been drawn up by management. Deloitte and Touche’s report on their work was a descriptive report explaining the make-up of the balance sheets, in which they emphasised that ‘no audit or other independent examination was carried out by ourselves’ and that the conversion balance sheets remained ‘the full, absolute and exclusive responsibility’ of management.

(123) The experts concluded that in addition to the questions of proper accounting treatment set out in the previous finding, there was an overall lack of assurance over the opening balance sheet figures, because of the absence of an audit or other independent control over the exercise. In support of this conclusion, the experts also referred to the auditors’ report on the financial statements of Olympic Airlines for the year ending on 31 December 2003, two and a half weeks after the opening balance sheet, where the auditors expressed reservations in respect of the company’s opening balances. The auditors stated that they were not in a position to confirm the value of goodwill, fixed assets at valuation and the debtors and creditors transferred from the component companies to Olympic Airlines, and therefore did not express an opinion on them.

(124) Law 3185/2003 provided for a cash advance from the Greek State to cover the financial obligations of Olympic Airways and Olympic Aviation in the course of the conversion and liquidation procedure; this sum was based on the nominal value of the shares of Olympic Airlines. The experts concluded that it was in the interests of the Olympic Airways group […] (12) to maximise Olympic Airlines’ opening share capital by maximising the value of transferred assets and minimising the value of transferred liabilities. The value of the net assets transferred and, in turn, the nominal value of the share capital of Olympic Airlines was EUR 130 million. The Greek Government had paid this sum to Olympic Airways in accordance with Law 3185/2003.

(125) The experts concluded that if recognised accounting practices had been applied, Law 3185/2003 would have permitted the Greek Government to make only a much smaller contribution to Olympic Airways. Considering the cash position of Olympic Airways and Olympic Airlines at the time of the restructuring, such a reduction in the cash available from the Government would have had significant implications for the ability of Olympic Airways and Olympic Airlines to continue trading.

(126) They further concluded that the final outcome of the hive-off, privatisation and asset sale process was that the Olympic Airways group would be left with no trading activities, with minimal assets and with debts amounting to hundreds of millions of euro. The insolvency rules in Greek law were likely to be applied to Olympic Airways and Olympic Aviation, which would be placed in liquidation. The costs would be borne by the creditors, principally the Greek State.

5.2. EXPERTS’ CONCLUSION ON OLYMPIC AIRWAYS (OLYMPIC AIRWAYS SERVICES) AFTER RESTRUCTURING

(127) The experts examined the situation of Olympic Airways (Olympic Airways Services) following on from the Decision of 11 December 2003. The company had continued to make losses, which had eaten away at its capital and reserves and had severely hampered its borrowing possibilities.

5.2.1. OLYMPIC AIRWAYS’ (‘OLYMPIC AIRWAYS SERVICES’) TAX AND SOCIAL SECURITY SITUATION

(128) The experts found that Olympic Airways’ balance sheet contained large tax and social security liabilities. These had been increasing year on year, as payments to the tax authorities had not matched annual liabilities. The tax liability related mainly to employee payroll tax dating back several years and also included airport tax, VAT and profits tax liabilities. Under the hive-off of flight operations to Olympic Airlines, only one month’s tax and social security liabilities had been transferred to the newly created entity. The social security liability related primarily to the company’s main pension fund. In 2003 and 2004 the liability had increased by a total of EUR 137 million. In this period the company made payments of EUR 7,7 million under an agreement to settle debts for years prior to 2003. (EUR million) 2002 (13) 2003 (13) 2004 (14) Taxes 219 374 431 Social security 54 148 196 Total 273 522 627 Note: Figures for 2005 are not available, as Olympic Airways’ accounting records have not been updated beyond 31 December 2004.

(129) The experts noted that the Olympic Airways audit report for 2003 stated that the company’s books and records had to a great extent failed to comply with the provisions of tax legislation. The audit report also stated that the tax audit for the years 1998 and 1999 had concluded that the books and records were inadequate, and that since the company had not been audited by the tax authorities for the years 2000 to 2003 inclusive, its tax obligations for the years 1998 to 2003, inclusive, were not final.

(130) The experts concluded that Olympic Airways had a history, going back several years, of not paying its taxation and social security liabilities in full. At the end of 2002 the total liability was already large, at EUR 273 million, and it had continued to grow significantly over the period since then. The estimated liability at the end of 2004, at EUR 627 million, was over 75 % of the combined annual turnover of Olympic Airlines and the Olympic Airways group for 2003. They added that the underpayment of tax liabilities by Olympic Airways had provided a cash flow benefit to Olympic Airways both before and after restructuring.

5.2.2. THE EUR 130 312 459 TRANSFERRED TO OLYMPIC AIRWAYS (OLYMPIC AIRWAYS SERVICES)

(131) The Greek Government made cash transfers totalling EUR 130 312 459 to the Olympic Airways group in seven instalments between 24 December 2003 and 13 May 2004. These were examined by the experts to see how they were paid and what they were subsequently used for.

(132) The money was paid under Law 3185/2003, and was based on the nominal value of the share capital in the newly established Olympic Airlines. According to the Law, the sum was ‘to cover severance payments and other expenses for the retirement, in whatever manner, of the employees, and to cover the financial obligations of Olympic Airways and Olympic Aviation in the course of the conversion and liquidation.’

(133) The experts found that the transfers had been made at times when Olympic Airways’ bank account was short of funds. A pattern was evident in which the State transfers were utilised gradually over a period of weeks as cash receipts from other sources fell short of cash payments out. At the point that the bank account was close to running out of funds, another transfer was made and the process was repeated. Date of transfer EUR 24 December 2003 32 960 288 14 January 2004 10 091 143 30 January 2004 35 356 335 13 February 2004 10 000 000 8 April 2004 8 000 000 22 April 2004 12 000 000 13 May 2004 21 904 693 Total 130 312 459

(134) Using this payment schedule and information provided by Olympic Airways. management […]. The experts ascertained that Olympic Airways management appeared to have interpreted the concept of retirement and other restructuring expenses in the broadest possible sense, so as to cover any kind of spending by Olympic Airways in the period between the hive-off of Olympic Airlines and the completion of privatisation. It was not easy to verify the analysis of the purposes for which Olympic Airways had used the money, because the funds from the special account were not differentiated from any other funds received into the company’s main bank account, but Olympic Airways management indicated to the experts that the funds had been spent as follows: Expense category EUR Aircraft leasing 51 012 257 Retirement payments 29 953 077 Payroll 34 407 994 Repayment of loan — Emporiki Bank 14 939 131 Total 130 312 459

5.2.3. REPAYMENT BY GREEK STATE OF PART OF ABN AMRO BANK LOAN TO OLYMPIC AIRWAYS

(135) On 9 February 2001, Olympic Airways entered into a loan agreement with ABN Amro Bank for a loan of EUR 182 198 160 to finance the relocation of Olympic Airways to the new Athens International Airport.

(136) The loan was repayable in 16 six-monthly instalments of EUR 11 387 385 each, plus interest, between 9 August 2003 and 9 February 2011, and was backed by a State guarantee that entitled ABN Amro to demand fulfilment of Olympic Airways’ payment obligations directly from the State.

(137) Under the terms of the hive-off of flight operations to Olympic Airlines on 11 December 2003, the loan remained as a liability in Olympic Airways’ accounts. By 31 December 2003, Olympic Airways had paid one scheduled instalment of the loan, and the liability in Olympic Airways’ balance sheet was EUR 170 810 775.

(138) In their review of Olympic Airways’ accounting records the experts found that ABN Amro had invoked the Government’s guarantee in respect of the second, third and fourth instalments of the loan. As a consequence the Greek State had paid the following instalments on behalf of Olympic Airways: Date of payment Amount paid (EUR) 10 May 2004 12 390 090 (15) 8 October 2004 12 288 017 (15) 9 March 2005 12 267 250 (15) Total 36 945 357

(139) The experts also found that the Government had asked the Greek tax authorities to recover the money from Olympic Airways. The tax authorities had submitted debit notes to Olympic Airways requesting payment. The amount was recorded in Olympic Airways’ books as a liability to the tax authorities, but had not yet been repaid.

5.2.4. FINANCE LEASING OF AIRCRAFT (A340s)

(140) In their review of Olympic Airways’ accounts the experts found that on 24 September 2004 the Greek State had made lease payments totalling EUR 11 774 684 as guarantor under two finance lease agreements with Crédit Lyonnais for two A340 aircraft. The payments related to the six-monthly instalment due on 29 July 2004 under the lease contracts for the aircraft.

(141) The experts found that the Government had asked the Greek tax authorities to recover the money from Olympic Airways. The tax authorities had submitted debit notes to Olympic Airways requesting payment. The amount was recorded in Olympic Airways’ books as a liability to the tax authorities, but had not yet been repaid.

5.2.5. DIRECT CASH FUNDING OF OLYMPIC AIRWAYS BY THE STATE

(142) The experts also found that on 9 August 2004 the Greek State had made a cash payment of EUR 8,2 million to Olympic Airways. This sum had been paid by the State as an advance to Olympic Airways against money that Olympic Airways had paid into an escrow account, as a guarantee for finance lease payments to Crédit Lyonnais for two A340 aircraft. Crédit Lyonnais had agreed to allow the money to be released from the escrow account upon completion of the transfer of the aircraft lease contracts from Olympic Airways to the State (by novation), which was due to happen in December 2004. The transfer of the contracts to the State was indeed completed in December 2004.

(143) When Olympic Airways had recovered the money from the escrow account in December 2004, it had not repaid the advance from the State. On 23 March 2005 the State wrote to Olympic Airways requesting repayment of the amount, plus interest. At the date of their final report to the Commission, on 14 June 2005, the experts confirmed that Olympic Airways had not repaid the amount to the State.

5.2.6. OTHER EXPENSES

(144) In their review of Olympic Airways’ books, the experts found that the creditor balances at 31 December 2004 showed a sum of EUR 8 million owing to the State-owned Greek Telecommunications Organisation (OTE). Olympic Airways’ general ledger showed that Olympic Airways had not paid OTE for services at some locations in 2003 and 2004. Of the balance, EUR 4,5 million related to periods before 2003.

5.3. EXPERTS’ CONCLUSIONS ON OLYMPIC AIRLINES AFTER RESTRUCTURING

5.3.1. OLYMPIC AIRLINES’ RESULTS IN 2004

(145) The experts found that Olympic Airlines had experienced a difficult trading year in 2004, resulting in an operating loss of EUR 94,5 million on turnover of EUR 616,7 million, and a net loss for the year, before tax, of EUR 87,1 million. Even in terms of gross operating profit (turnover less direct costs of services) the company had achieved a profit of just EUR 4 million. The 2003 profit-and-loss figures included a provision of EUR 13 million as an extraordinary item, of which EUR 12,6 million had been released back to income in 2004. It was therefore more appropriate to view the loss for 2004 as EUR 99,7 million, rather than EUR 87,1 million.

(146) The experts pointed out that the net assets of the company, at EUR 24,3 million, had fallen to 18,6 % of the share capital of EUR 130,4 million at the end of 2004. Furthermore, if the goodwill of EUR 18 million were to be written off, the net assets would be reduced to 4,8 % of share capital. Law 2190, which governed public limited companies, required that when the net worth of a company fell below 50 % of its share capital a shareholders’ meeting had to be convened to take measures to restore the company’s balance sheet and hence the protection of creditors. That had not happened in the present case. Under the same law, if the net worth of a company fell below 10 % of share capital, the Ministry of Commerce had power to withdraw the company’s licence to trade. But the experts said that this measure was a last resort and was rarely taken in practice.

(147) The principal reasons advanced by Olympic Airlines management for this result were: — a negative response by the tourism market to the restructuring of the Olympic Airways group, resulting in lower bookings in the Christmas 2003/New Year 2004 holiday period; — cabin crew strikes between December 2003 and February 2004 that resulted in cancelled flights, lower bookings and increased costs during that period; — additional costs relating to the restructuring, including the need to employ significantly more pilots than envisaged, and higher lease costs and more wet leases than expected.

(148) As Olympic Airlines did not have cash reserves to finance these losses, the experts concluded that its only options were to borrow money or to obtain extended credit terms from its suppliers. The experts carried out an analysis of the company’s cash flow of the company in 2004, and showed that the company had followed the latter course, with creditors increasing by EUR […] million in the year. Among the most significant increases in the suppliers account there was a sum of EUR […] million owed to AIA, up from EUR […] million in 2003. In April 2005, Olympic Airlines entered into a settlement agreement with AIA for the payment of EUR […] million of the EUR […] million debt outstanding at that date. The terms of the agreement were for fixed monthly payments to be made between 30 April 2005 and 30 November 2005. Another significant component in the debt owed by Olympic Airlines at 31 December 2004 was a balance of EUR […] million owed to Olympic Aviation; this had increased from EUR […] million at 31 December 2003.

(149) As regards the activities of Olympic Airlines in 2005, the experts observed that financial statements were not available for periods after 31 December 2004, but from other financial records and discussions with management they concluded that Olympic Airlines had incurred further losses in the first quarter of 2005. As in previous years, this had resulted in a squeeze on cash flow and had forced management to seek short-term financing solutions. Additional positive cash flow had been generated by the delayed payment of charges to Athens International Airport, and security had been provided in the form of mortgages on aircraft totalling EUR 36 million.

(150) The experts concluded that Olympic Airlines’ business was heavily cyclical, as evidenced by the negative cash flow in the months of October to March, which was compensated for by positive cash flow in the months of April to September. This cycle repeated itself each year. The net inflows in the summer months did not compensate in full for the net outflows in the winter months, so that overall there was an ongoing need for additional facilities. It was not clear when the company would become cash-flow positive year on year, but management hoped that under new ownership this would happen in 2006 at the earliest or 2007 at the latest.

5.3.2. TAX (INCOME TAX, CORPORATION TAX, SOCIAL SECURITY AND VAT)

(151) The experts reviewed the accounts, books and records of Olympic Airlines in relation to employee income tax, social security contributions and VAT for the period from December 2003 to May 2005. They observed that under the terms of the hive-off of flight operation to Olympic Airlines, only one month’s tax and social security liabilities had been transferred to Olympic Airlines in respect of Olympic Airways staff transferred to the new company.

(152) The total tax and social security bill owed by Olympic Airlines to the Greek State had increased by EUR 20,2 million between December 2003 and December 2004. This formed part of the EUR 94,4 million owed by Olympic Airlines.

(153) Employee and employer social security contributions (IKA) were accounted for and paid to the State on time up to October 2004. Between October 2004 and February 2005, payments were not made. In March 2005, the company entered into a settlement agreement with the tax authorities to pay the outstanding debt of EUR […] million in 18 monthly instalments starting in March 2005; this effectively converted the balance owed into an 18-month loan facility. Since March 2005 the company has complied with this arrangement and with its ongoing monthly obligations.

(154) The experts found that Olympic Airlines had properly accounted for and paid VAT in the period.

5.3.3. AIRCRAFT

Aircraft type Number […] Number of seats Ownership Airbus A340-313 4 […] 295 Leased Airbus A300-65 3 […] 269 Leased Boeing 737-400 14 […] 150 Owned 7/leased 7 Boeing 737-300 2 […] 136 Leased Boeing 717-200 3 […] 100 Leased ATR-72-320 7 […] 68 Owned ATR-42-320 6 […] 50 Owned 4/leased 2 DHC-8 4 […] 37 Leased Total 43

(155) The experts reported that Olympic Airlines had commenced operations with a fleet of 43 aircraft, 18 owned and 25 leased. Since that time the number of aircraft owned by Olympic Airlines had remained the same, and the number it leased had fallen by three. Two Airbus A300-600 aircraft owned by Olympic Airways and leased by Olympic Airlines had been sold in February 2005, and the lease of one Boeing 737-3000 had not been renewed when it expired in March 2005.

5.3.3.1. Operating leases

(156) Olympic Airlines subleased aircraft from Olympic Airways, Olympic Aviation (Olympic Airways Services) and, in the case of four finance leases, direct from the Greek State (see Section 5.3.3.2). Eighteen aircraft were currently leased on operating leases, either direct from the lessors or subleased from Olympic Airways or Olympic Aviation (Olympic Airways Services). As the leases between the lessors and Olympic Airways and Olympic Aviation (Olympic Airways Services) expired, Olympic Airlines entered into new lease contracts directly with the lessors.

(157) The experts found that where aircraft were subleased from Olympic Airways or Olympic Aviation (Olympic Airways Services), the sublease charges were lower than those due under the head lease. When they asked Olympic Airlines management why this was and how it could be justified, they were told that the subleases were at market rates. According to Olympic Airlines management, Olympic Airways (Olympic Airways Services) benefited from the arrangement because it had a lessee for its aircraft. Olympic Airlines stressed that it could source its leased aircraft from elsewhere if Olympic Airways did not offer market rates. Olympic Airlines benefited because it was able to lease the aircraft at what it considered to be current market rates rather than the higher rates that had obtained under the original contracts.

(158) The experts carried out a comparison of the head-lease and sublease rates, and found that for the year to 31 December 2004 the total charges for subleases from Olympic Airways to Olympic Airlines amounted to EUR 29,7 million, whereas the total head-lease costs paid by Olympic Airways for the same aircraft over the same period amounted to EUR 67,3 million. The lease cost ultimately borne by Olympic Airways was EUR 37,6 million (55 % of the total lease cost).

5.3.3.2. Finance leases

(159) The experts reported that following the initial hive-off, four Airbus A340-300 aircraft, the lease for which had been guaranteed by Greece, had initially been subleased by Olympic Airways to Olympic Airlines. However, because of the perceived uncertainty over the future of Olympic Airways and Olympic Airlines at the time of the hive-off, the financial institutions involved (the lessors) had imposed more onerous payment and security conditions for the leases. In order to alleviate those conditions, both for Olympic Airways and for itself as guarantor, the Greek State decided to step into Olympic Airways’ shoes, and the head leases for all four aircraft were transferred from Olympic Airways to the State (by novation), two in December 2004 and two in April 2005. The experts observed that in order to be able to do this legally it was necessary for the Greek Parliament to pass new legislation (Article 53 of Law 3283/2004). Aircraft Reg. No Price of head lease Olympic Airways/State - lessor Price of sublease Olympic Airways/Olympic Airlines Price of sublease State/Olympic Airlines (after novation) Airbus A340-300 MSN 280 SX-DFC EUR 789 648 USD 600 000 USD 600 000 Lease agreement date 8.10.1999 27.5.2004 27.4.2004 Airbus A340-300 MSN 292 SX-DFD EUR 770 599 USD 600 000 USD 600 000 Lease agreement date 8.10.1999 27.5.2004 25.4.2004 Airbus A340-300 MSN 235 SX-DFA EUR 744 509 USD 525 000 EUR 395 000 Lease agreement date 8.10.1999 12.12.2003 17.12.2004 Airbus A340-300 MSN 239 SX-DFB EUR 744 509 USD 525 000 EUR 395 000 Lease agreement date 8.10.1999 12.12.2003 17.12.2004 Note 1: Head lease payments are half-yearly in arrears. Note 2: Sublease payments are monthly in advance. Note 3: All payments shown in the table are on a monthly basis. Monthly head-lease payments are based on annual payments for 2004 divided by 12. Note 4: All figures exclude interest.

(160) The experts also carried out a comparison between the head-lease rates and the sublease rates in respect of these four aircraft. They found that the head-lease charges paid by the State amounted to approximately EUR 750 000 per month, whereas the sublease charges ranged from approximately EUR 400 000 to EUR 500 000 per month. In effect the Greek State lost between EUR 250 000 and EUR 350 000 on each of these four aircraft each month.

(161) The experts also indicated that between December 2004 and the end of March 2005, Olympic Airlines had made no payments to the State for the two A340s the State was subleasing to it. At the end of March 2005, Olympic Airlines’ liability to the Government in respect of these two subleases was EUR 5,1 million. Olympic Airlines paid this sum in April 2005, along with the lease cost for that month.

5.3.4. SPATOSIMO

(162) The experts reported that between December 2003, when Olympic Airlines commenced operations, and 31 December 2004, the airport tax collected by Olympic Airlines from its customers amounted to EUR […] million, and the amount paid to the tax authorities amounted to EUR […] million. In March 2004, and from June to September 2004, payments to the tax authorities had been made on time (by the 20th of the month following collection). For the other months between December 2003 and March 2005, payments had been made between one and five months late. The balance at 31 December 2004 was EUR […] million, which represented about three months’ collections. At 31 March 2005, the amount of airport tax due was EUR […] million, which represented about two and a half months’ collections.

5.3.5. CHARGES PAID BY OLYMPIC AIRLINES TO OLYMPIC AIRWAYS SERVICES FOR GROUND HANDLING AND TECHNICAL SUPPORT

(163) As Olympic Airlines comprises only the flight divisions of Olympic Airways and Olympic Aviation, it is unable itself to carry out the ancillary functions essential for the running of an airline (line maintenance, refuelling, ground handling etc.), and has to pay to have these things done. The Commission asked the experts to verify the claim made by the Greek authorities that Olympic Airlines paid market prices for these services, and that the contracts had thus been concluded at arm’s length.

(164) The experts reported that a series of seven contracts had been concluded between Olympic Airlines and Olympic Airways Services (including Olympic Aviation and Olympic Catering) for a range of services including ground handling, technical maintenance, cargo and mail handling, storehouse management, accounting support and consulting, human resources training and general flight itinerary programming services, information technology and telecommunications services, and catering. The experts found that in 2004, companies within the Olympic Airways group had provided Olympic Airlines with services to a value of approximately EUR […] million. The main service contracts between Olympic Airlines and the Olympic Airways group were for ground handling and maintenance services. Olympic Airlines used the Olympic Airways group for […] % of its ground handling services and for all of its maintenance. The contracted fees for 2004, based on scheduled flight activity, were EUR […] million for ground handling and EUR […] million for maintenance.

(165) The Commission’s experts examined the rates charged by the Olympic Airways group to Olympic Airlines and to other airlines. The rates charged for ground handling services were lower, but this was attributed by Olympic Airlines management to commercial factors, as Olympic Airlines was the largest customer and received volume discounts. For the catering services it received Olympic Airlines appeared to pay market prices, and for technical maintenance services Olympic Airways charged Olympic Airlines on a basis different to the system it applied to other customers, making meaningful comparison impossible. Olympic Airlines management had stated that, in their view, the rates for all the services supplied by Olympic Airways had been negotiated at arm’s length and represented fair market value.

5.3.6. AIA CHARGES

(166) AIA is a 55 % State-owned company responsible for the construction, operation and development of Athens International Airport. Although majority State-owned, the company is run as a private-sector company under the Airport Development Agreement, and is not subject to the laws on Greek State-controlled entities.

(167) AIA was and is Olympic Airways/Olympic Airlines’ largest creditor, with annual charges of approximately EUR 60 million. As AIA costs form such an important component of Olympic Airlines’ cost base, it was necessary for the experts to examine the relationship between Olympic Airlines and AIA to determine whether the airline received favourable terms that might amount to indirect State support. The experts determined that Olympic Airlines’ liabilities and payments to AIA for the period since it began operations up to 19 May 2005 were as follows: […] […] […] […] […] […] […] […] […] […] […] […] […] […] […] […] […] […] […] […]

(168) The experts reported that AIA imposed charges on airlines for a range of services provided by the airport, including aircraft landing and parking fees, security, and ground handling infrastructure. The charges were levied at standard rates, which were detailed in a document published by AIA in June 2003 setting out guidelines for customers, terms and conditions of use, and a schedule of traffic charges. Standard payment terms were 20 calendar days. Late payment interest was payable at 3 % above Euribor.

(169) The experts learned that in late 2004 Olympic Airlines had entered into a financial settlement agreement with AIA under which Olympic Airlines was entitled to settle invoices from AIA within a period of 45 days instead of the 20 days applicable under AIA’s normal payment conditions. The extended payment terms applied from 1 July 2004 to 28 February 2005. As a condition for receiving these extended terms, Olympic Airlines was required to provide security in the form of a mortgage in favour of AIA on two […] aircraft, up to a maximum amount of EUR […] million. The liability at 31 December 2004 represented approximately four months’ charges, and in May 2005 it represented approximately five months’ charges, which is clearly in excess of the 45-day payment terms to be allowed under the financial settlement agreement.

(170) On 22 April 2005, Olympic Airlines entered into a settlement agreement with AIA for the payment of EUR […] million of the EUR […] million debt outstanding at that date. This agreement provided for a further EUR […] million in security. Under this agreement variable monthly payments were to be made between 30 April 2005 and 30 November 2005. Of the EUR […] million, EUR […] million would come from revenue from public service obligations. Security of EUR […] million was provided in the form of preferred mortgages on two […] aircraft and four engines.

(171) On the basis of this information, the experts were of the opinion that allowing Olympic Airlines to build up debts of EUR […] million over the winter season, and then to convert them into an 18-month short-term loan to be paid over the summer season, in practice amounted to providing Olympic Airlines with seasonal working capital financing. This financing, together with continued tolerance of late payments, suggested that Olympic Airlines was receiving treatment from AIA that would not be available to other airlines.

6. ASSESSMENT OF THE AID

6.1. LEGAL BASIS OF THE ASSESSMENT

(172) Article 87(1) of the EC Treaty states that ‘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 Member States, be incompatible with the common market’.

(173) The concept of State aid encompasses any advantage, direct or indirect, which is financed out of State resources and is granted by the State itself or by any intermediary body acting by virtue of powers conferred on it.

(174) The present Decision relates only to aid granted after the 2002 Decision. It is not concerned with any possible State aid element in any future transaction or transactions in respect of the shares or assets of any of the companies involved.

(175) Article 228 of the EC Treaty provides that ‘If the Court of Justice finds that a Member State has failed to fulfil an obligation under the Treaty, the State shall be required to take the necessary measures to comply with the judgment of the Court of Justice.’ In the case under consideration, the aid was found by the 2002 Decision to be illegal and incompatible with the common market. In its judgment in Case C-415/03 Commission v Greece, delivered on 12 May 2005, the Court of Justice found that the Member State had not taken the necessary measures.

(176) Article 228(2) of the Treaty provides that ‘If the Commission considers that the Member State concerned has not taken such measures it shall, after giving that State [by letter of formal notice] the opportunity to submit its observations, issue a reasoned opinion specifying the points on which the Member State concerned has not complied with the judgment of the Court of Justice’.

6.2. EXISTENCE OF AID

(177) The Commission has made an in-depth analysis of the comments received in the course of the procedure, the observations submitted by Greece, and the experts’ study of the restructuring of Olympic Airways and of the behaviour of Olympic Airways and Olympic Airlines since restructuring. The Commission has decided to consider the question whether State aid has been granted under four main headings: (i) the restructuring itself; (ii) whether any other State aid has been given to Olympic Airlines since 2003; (iii) the grant of EUR 130 million to Olympic Airways; and (iv) whether any other State aid has been given to Olympic Airways.

(i) What was the nature of the restructuring of the Olympic Airways group carried out in December 2003?

(178) In drawing up and implementing Law 3185/2003 the intention of the Greek authorities seems to have been to enable the flight divisions of the Olympic Airways group, now absorbed into Olympic Airlines, to continue trading and to proceed to privatisation. The Commission must therefore examine the relationship between Olympic Airways and Olympic Airlines. Olympic Airlines was established out of the flight divisions of Olympic Airways and continues Olympic Airways’ core flight operations; it initially took over all of Olympic Airways’ aircraft, and currently operates 40 aircraft, compared to the 43 previously flown by Olympic Airways, with the same crews on the same routes. Olympic Airlines has succeeded to the route network, the public service obligation contracts and the rights under bilateral agreements with non-EU countries governing routes previously operated by Olympic Airways. As previously mentioned, Olympic Airlines was established under Law 3185/2003, which deals specifically with the case of Olympic Airways/Olympic Airlines, and confers exemption from the provisions of Greek company law that would ordinarily apply.

(179) Olympic Airways was heavily indebted, and had previously been found by the Commission to have received illegal and incompatible State aid; the hive-off has removed Olympic Airways’ revenue-generating flight divisions, while very few of the corresponding liabilities have been transferred. All long-term debt has been left with the predecesso